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4. Economic Integration Theory and Practice

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4. Economic Integration Theory and Practice 4.4. EconomicEconomic IntegrationIntegration TheoryTheory andand PracticePractice DefinitionDefinition ofof economiceconomic integrationintegration The combination of several national economies into a larger territorial unit. It implies the elimination of economic boarders between countries. Economic borders : any obstacle which limits the mobility of goods services and factors of production between countries. DefinitionDefinition ofof economiceconomic integrationintegration • Jan Tinbergen: all processes of economic integration include two aspects: – Negative integration: the elimination of obstacles. – Positive integration: harmonization, coordination of existing instruments. Number of regional trade agreements, 1948-2002 Source: WTO (2003) LevelsLevels ofof economiceconomic integrationintegration • There are several levels of economic integration: – A. Free trade area – B. Customs union – C. Common or single market – D. Economic and monetary union TypesTypes ofof RegionalRegional TradeTrade AgreementsAgreements The EU FECHA PAIS FECHA AMPLIACIONES FECHA AMPLIACIONES Alemania Dinamarca 2004 Hungría Francia1973 Irlanda 2004 Polonia Italia Reino Unido 2004 República Checa 1958 Bélgica 1981 Grecia 2004 Eslovenia Holanda España 2004 Estonia 1986 Luxemburgo Portugal 2004 Chipre Austria - Turquía 1995 Suecia 2004 Malta Finlandia 2007 Rumanía 2007 Bulgaria 2004 Letonia 2004 Lituania 2004 Eslovaquia TypesTypes ofof RegionalRegional TradeTrade AgreementsAgreements EFTA FECHA PAÍS FECHA PAÍS FECHA PAÍS FECHA PAÍS Reino Unido Austria Austria Noruega Austria Noruega Noruega Suiza 1995 Dinamarca Portugal Suecia Islandia Noruega Suecia1986 Suiza Liechtenstein 1973 Portugal Suiza Islandia 1960 Suecia Islandia Finlandia Suiza Finlandia Liechtenstein Islandia Liechtenstein EUROPEAN ECONOMIC AREA (EEA) Finlandia FECHAS PAÍSES Liechtenstein UE-15 EFTA (menos Suiza) 1994 Noruega Islandia Liechtenstein TypesTypes ofof RegionalRegional TradeTrade AgreementsAgreements ACUERDOS FECHAS PAÍSES Bolivia ACUERDOS FECHAS PAÍSES PACTO Perú 1969 USA ANDINO Ecuador NAFTA 1994 Canadá Venezuela Méjico MERCADO Costa Rica Argentina El Salvador COMÚN Bolivia 1960 Guatemala CENTRO- Brasil Honduras Chile AMERICANO Nicaragua Colombia Antigua/Barbuda ALADI 1980 Ecuador Bahamas Méjico Barbados Paraguay Dominica Perú Granada Uruguay COMUNIDAD Guayana 1973 Venezuela DEL CARIBE Jamaica Argentina Montserrat Brasil MERCOSUR 1991 Santa Lucía Paraguay San Cristobal/Nieves Uruguay San Vicente y Granadinas Trinidad y Tobago Theory: Preliminaries • Demand curve shows how much consumers would buy price of a particular good at any particular price. • It is based on optimisation exercise: mu’ – Would one more be worth price? p* Marginal • Market demand is utility curve is aggregated over all mu” the demand consumers’ demand curves. curve for one consumer – Horizontal sum. c’ c* c” 9 quantity Theory: Preliminaries • Supply curve shows how much price firms would offer to the market Marginal at a given price. cost • Based on optimisation: mc” – Can increase production as A firm’s supply long as price you can sell at p* curve is its is equal or above mc. marginal cost • Market supply is aggregated mc’ curve. over all firms. – Horizontal sum. q’ q* q” quantity 10 Theory: Preliminaries • Since demand curve based price Triangle is sum of on marginal utility, it can all gaps between be used to show how marginal utility and price paid consumers’ well-being (summed over (welfare) is affected by total consumption) changes in the price. p* • On the right we have the market demand for a product. • Gap between marginal Demand= MU utility of a unit and price curve paid shows ‘surplus’ from being able to buy c* at p*. c* quantity 11 Theory: Preliminaries • If the price falls: – Consumers obviously better off. price – Consumer surplus change quantifies this intuition. • Consumer surplus rise, 2 parts: – Pay less for units consumed at old price; measure of this = area A. p* • A = Price drop times old consumption. p’ AB – Gain surplus on the new units consumed (those from c* to c’); measure of this = area B. Demand • B = sum of all new gaps between curve marginal utility and price c* c’ quantity 12 Theory: Preliminaries • Since supply curve based Triangle is sum of price all gaps between on marginal cost, it can be price received and used to show how marginal cost (summed over producers’ well-being total production) (welfare) is affected by S=MC changes in the price. p* • On the right have the market supply of the product. • Gap between marginal cost of a unit and price received shows ‘surplus’ from being able to sell q* at p*. q* quantity 13 Theory: Preliminaries • If the price rises: – producers obviously better off. price – Producer surplus change quantifies this intuition. Supply • producer surplus rise, 2 parts: curve – Get more for units sold at old price; p’ A B measure of this = area A. p* • A = Price rise times old production. – Gain surplus on the new units sold (those from q* to q’). Measure of this = area B. • B= sum of all new gaps between marginal cost and price. q* q’ quantity 14 BenefitsBenefits fromfrom thethe creationcreation ofof aa freefree tradetrade areaarea Price World price: P’ Supply Domestic price: P* Price with tariff: P’’ P* Effect of tariff On trade : P” Reduces imports ABCD On welfare P’ Consumer surplus: Demand -A-B-C-D Producer surplus: +A Tariff revenue: +C Dead weight losses: +B+D (why?) Z’Z” C” C’ Quantity BenefitsBenefits ofof aa customscustoms unionunion • Effects of a customs union : static and dynamic. • A. Static effects, 2 groups : – A.1. Trade creation • Production effect • Consumption effect (also known as trade expansion) – A.2. Trade diversion • B. Dynamic effects StaticStatic effects.effects. TradeTrade creationcreation • Replace domestic production by cheaper imports from another member of the customs union: – Production effect: reduce inefficient local production and minimize the inefficient use of resources – Consumption effect: increase demand since price has fallen StaticStatic effects.effects. TradeTrade diversion.diversion. • Replace imports from cheaper 3rd countries by more expensive imports from members of the customs union. • The customs union has a positive welfare effect if trade creation > trade diversion. This will tend to happen when: – The more inclusive the customs union (fewer 3rd countries). – The higher the initial tariff eliminated by the creation of the customs union (P F-P G in the following figure) – The smaller the difference between the price which emerges from the customs union and the price which could be had from importing from the most efficient producer who by definition is a 3rd country. StaticStatic effects.effects. Example,Example, FranceFrance && GermanyGermany formform aa customscustoms unionunion leavingleaving thethe USUS outsideoutside The US is the most efficient producer (P us ) P Before the CU: Demand France imports ru from the US applying Supply a tariff which leads to P F. T = ruhi CU: Germany faces no tariffs but the US does: France imports kn from Germ. r u PF Loss of tariff revenue and reduction of producer surplus : ruhi + P FrkP G (in favour of consumers) k l m n PG Trade creation: g h i j •Consumption effect: umn PUS Sw •Production effect: rkl Trade deviation: lmhi (what you don’t import from the US multiplied by P - 0a ABCDEF Quantity A PUS ) Net welfare effect : rkl+umn-lmhi CustomsCustoms unionunion andand tradetrade EEC-6 Other 6 Europe Rest of W orld $100 100% $90 $80 EEC 80% $70 Total imp orts $60 60% $50 $40 40% $30 $ billion (current prices) (current $ billion 20% $20 $10 0% $0 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 Note: Left panel shows share of EEC6’s import from the three regions. Other Euro-6 are the 6 countries that joined the EU by the mid 1980s, UK, Ireland, Denmark, Spain, Portugal and Greece. Source: Table 5, External Trade and Balance of Payments, Statistical Yearbook, Recapitulation, 1958 -1991, DynamicDynamic effectseffects ofof aa customscustoms unionunion • More difficult to measure • Increases productivity and thus potential growth rates due to: – More specialization with the CU. – Greater competition with the CU. – Capacity to explore economies of scale and thus compete with 3rd countries. BenefitsBenefits ofof aa commoncommon marketmarket • Free movement of K and L: – More efficient allocation of resources – Convergenece of wages and capital incomes within the CM. – But: • K moves easier than L (transport and cultural costs). Capital movements in the Common Market • M&A activity is high in EU. • much M&A is mergers within member state. – about 55% ‘domestic.’ – Remaining 45% split between: • one is non-EU firm (24%), • one firm was located in another EU nation (15%), • counterparty’s nationality was not identified (6%). 23 Capital movements in the Common Market • Distribution of M&A quite varied: – Big 3’s share M&As much lower than share M&A activity by nation, 1991-2002 of the EU GDP. It, Fr, B, 2.8% D (Ger) 36% of the UK, 31.4% DK, 2.6% M&As, 59% GDP. S, 5.3% EL, 1.1% – UK share is important IRL, 1.7% NL, 6.5% (31.6%). L, 0.5% I, 6.2% – Small members have A, 2.1% P, 1.2% F, 13.5% disproportionate share D, 16.3% FIN, 3.9% of M&A (compared to E, 5.0% GDP). 24 CompetitionCompetition rulesrules inin thethe SingleSingle MarketMarket • For creating an effective single market two elements are necessary: – As we have stated, the removal of national barriers to the trade of goods, the
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