European Economic integration and its impact on foreign trade
The essence of European economic integration. The consequences of economic integration in trade, the consequences of Market integration of the European Union and its impact on foreign trade. Threats, challenges in the last stage of economic integration.
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Among the most exported products are:
- “Machinery and electrical products, with a share of 17,82%.
- Fuels, with a share of 13,53 %.
-Chemicals with a share of 9,18%.
-Wood with a share of 8,47 %”
-Food (animal and vegetable) with a share of 7,47%.
We will use in our example the Croatia's domestic market for lamb, the EU market and we will compare them with New Zealand lamb imports. Before entering the EU, Croatian lamb market may well have experienced import penetration from New Zealand.
There are three possible situations (case a); case b); case c))
a) In case New Zealand produces at a lower cost, but the price of New Zealand's lamb in Croatia will be increases by the tariff imposed in EU on lamb imported from New Zealand (PNZ+ tariff). But, once a tariff is abolished (assuming the condition of a perfect elastic supply), a EU producer diverse trade- it substitutes the cheaper product of New Zealand (cheaper before the imposed EU tariff) with a more expensive one from EU producer (see figure 2.1.2).
Figure 2.1.2. Effects of Economic Integration
Source: https://www.youtube.com/watch?v=KJKuc1f5fI8 (cited on: 4.20.2016)
As a result, consumption will increase (from Q1 to Q3), the domestic producer is also affected, it
happens a contraction of domestic supply (from Q2 to Q4). The state welfare gains are shown by
the areas 2 and 4, whereas the state welfare loss by area 5 . Domestic welfare usually loss occurs
when area 5 outweights the areas 2 + 4.
b) In case when New Zealand produces more efficient then EU produces, a greater welfare loss occurs (see figure 2.1.3)
Figure 2.1.3. Effects of Economic Integration
Source: https://www.youtube.com/watch?v=KJKuc1f5fI8 (cited on: 4.20.2016)
In this case clearly area 5 outweights the areas 2 + 4. The loss is more significant when New Zealand produces more efficient then EU produces.
c) In case the cost of production of lamb in New Zealand is approximately similar, but still lower, then trade will be diverted to EU producer, when there is a tarrif applied or a common external tariff applied on New Zealand producer (see figure 2.1.4) .
Figure 2.1.4. Effects of Economic Integration
Source: https://www.youtube.com/watch?v=KJKuc1f5fI8 (cited on: 4.20.2016)
In this case, the state welfare gain might outweight the state welfare loss. There may actualy be an overall improvement in the welfare on the domestic market, because areas 2 + 4 outweight area 5.
Commenting the extends of which the economic integration will lead to welfare gains/losses in
the Croatian economy, we may stress three ideas:
Ш If trade is diverted from the most efficient producer (external) to internal producer, net gains in domestic welfare (area 2 + 4) are more likely to outweight the net losses to domestic welfare (area 5) if the internal producer produce at a cost closer to the costs of the more efficient external producer.
Ш Domestic welfare is more likely to be reduced if the external producers are able to produce at much lower cost than internal producer, as trade is diverted to much less efficient producers.
Ш It is difficult to say wether welfare will increase as a result of economic integration. If there is more trade creation than trade diversion. Welfare is more likely to improve. However, even when trade is diverted, total domestic social welfare may improve.
If we look at the PED and PES in the domestic market, we should consider the posibility that domestic Suply and domestic demand conditions can change. We will use two cases: case a) and case b).
a) In this case we will analyze what will be the outcome in both PED and PES if they become more inelastic (see figure 2.1.5).
Figure 2.1.5. Effects of Economic Integration
So there is less responsivness to a change in price in terms of both Supply and Demand. In this case the welfare gains of area 2+4 sum smaller then area 5 (representing domestic welfare loss).
b) In case that PED and PES are more elastic, another situation occurs (see figure 2.1.6).
If the demand and the supply is particulary responsive to changes in price, in the domestic
market welfare gains outweight welfare losses (area 2+4 >area 5).
We can comment the situation by looking at the responsivenes of domestic Demand and domestic Supply to changes in the price of lamb.
Ш First, net gains in the domestic welfare (area 2+4) are more likely to outweight the net losses to domestic welfare (area 5) when PED and PES are elastic.
Figure 2.1.6. Effects of Economic Integration
Source: https://www.youtube.com/watch?v=KJKuc1f5fI8 (cited on: 4.20.2016)
Ш Second, it is difficult to say weather welfare within Croatia will increase as a result of entry to the EU. Domestic PED and PES will differ in markets; the overall outcome is uncertain.
Ш Third, still if Croatian market is competitive, welfare is likely to increase. PES and PED in Croatian markets are likely to be more elastic if markets are competitive.
Turning our attention on the size of the tariff or on the common external tariff (CET) utilized by the European Union we can observe the phenomenon of trade creation.
In case New Zealand produces more efficient then EU produces, but the CET is of same size as the original tariff of Croatia before entering EU, we have the situation described in figure 2.1.2. However, the CET Croatia adopts will be determined by all members of the European Union. This CET might be lower then the tariff already used by or existing in Croatia. In this case we have a different situation (see figure 2.1.7).
Figure 2.1.7. Effects of Economic Integration
Source: https://www.youtube.com/watch?v=KJKuc1f5fI8 (cited on: 4.20.2016)
This means that the price of New Zealand lamb will fall on the Croatian market, because of a reduction in the size of tariff applied (from PNZ+ tariff to PNZ+ CET). This leads to trade creation and not trade diversion, because trade with New Zealand already exist, it will just create more trade with this country by reducing the price consumers pay domestically for New Zealand lamb. There is a significantly increase in the quantity consumed up to Q3 (from Q1). Domestic producers also produce less, so there is a contraction of the domestic supply (from Q2 to Q4). The total quantity of imports increases, consumers can consume a greater amount of Q3 at a lower price, and there is an extension of demand.
This situation shows a clear advantage. As trade is created, there is no loss of welfare due to changing or switching supply to higher cost producer within EU.
Three conclusions on the effects of economic integration in regard with tariffs and CET, can be drawn:
Ш It is more likely trade would be created, and welfare increased, if CET's are low. Welfare would increase, if the external price including the CET was lower that the internal price, as more trade would be created; net gains in domestic welfare = area 2+4.
Ш If the CET is higher than the original tariff protection, domestic welfare is likely to reduce, as a result of trade diversion.
Ш Using this market based model, the greatest gains in welfare are seen when protectionist measures are removed (CET's = 0); trade would be created and output would be produced by most efficient producers.
Besides from all the above-mentioned factors, the European economic integration also means the abolition of non-tariff barriers between its member states to allow free movement of merchandise. In fact, the free movement of merchandise means:
Ш Suppression of non-tariff barriers;
Ш Commercial defence against external factor;
In EU, there were four types of non- tariff barriers:
-The physical barriers encountered in the free movement of goods are:
o sanitary and veterinary controls
o monitoring transport licenses
o bureaucratic formalities for statistical purposes
o border tax adjustments (different types of VAT)
In order to erase the obstacles, EU has:
Ш Introduced the principle of mutual recognition, in order to allow the free circulation within the European Union without having to harmonise national legislation.
Ш Harmonized the norms through different directives.
Ш Introduced INTRASTAT-the system by which traffic statistics of goods between member states are recognized. It began its activity in 1993 when it replaced the customs declaration to become the source of trade statistics within the union.
Ш Introduced a new system of VAT declaration.
-Among the technical barriers, are: a diversity of norms and regulations concerning the fabrication of goods, such as certificate of conformity of the product, which affected the majority of the inter-community trade (equipment goods, electronics, telecommunication, mechanical goods, etc.). The achievement of all these certificates represents a bigger cost for the businesses, meaning shorter production series and less economies of scale. It also represents the biggest obstacle for enterprises of non-member countries, which want to enter the EU market.
In order to fight against these impediments, EU has:
Harmonized the national norms and regulations by various directives and by obliging the member countries to harmonize the national legislations, especially the health and security one.
Mutual recognition “ensures market access for products that are not subject to EU harmonisation. It guarantees that any product lawfully sold in one EU country can be sold in another. This is possible even if the product does not fully comply with the technical rules of the other country.
The principle of mutual recognition stems from Regulation (EC) No 764/2008. It defines the rights and obligations for public authorities and enterprises that wish to market their products in another EU country. The Regulation also defines how a country can deny mutual recognition of a product.”
At the present moment, the series of programmes (above mentioned) designed to erase the technical barriers between member states of EU has been completed. The biggest part of inter-community trade is subject to harmonization.
-The fiscal barriers in EU represent the difference in all the types of indirect taxation between the member states. It impacts the final price of the good. Also, it can change the market conditions (via prices).
In order to avoid the distortion of competition for VAT, several steps were undertaken, among them:
Ш Suspension of tax at source. Since 1993, it set ordinary VAT declaration within the country.
Ш Application of taxation at destination. In such a way a reduction of the costs related to customs transmission happened. It also allowed a better cooperation between member states (introduction of VIES program).
Ш Harmonization of types of tax rates in order to apply a regime of taxation at source. But, this step that had as a major objective the improvement of the functioning of the actual system in order to avoid fraud, was postponed.
The introduction of the Common Customs Tariff had as one of the primary objectives the protection of EU market against “exterior threats”. The CCT determines the rights that operators are required to meet as a result of the import or export of goods under the Community customs territory. At the same time, the Community made the TARIC (which is the acronym for the French name Integrated Community Tariff) where all tariff measures, which are in force in the Community customs territory, are collected.
As a result of the activities undertaken (above mentioned) to foster deeper economic integration, the European Union is currently number one trading power in the world (see figure 2.1.8).
Figure 2.1.8. Relative market shares in % of world total, 1999-2013.
“Trade policy is a crucial element of the EU's overarching `Europe 2020 strategy for smart,
sustainable and inclusive growth,' and is one of the main pillars of the EU's relations with the
rest of the world.
The EU is highly integrated in both regional and global value chains. Although a high proportion of the value of EU exports is created in the EU (86?% in 2009), this has been decreasing as the EU has become more integrated with the global economy. Additionally, the EU Member States' economies remain among the most open in the world.
In 2013 the EU started negotiating free trade agreements with two strategic partners: the US (the so called Transatlantic Trade and Investment Partnership (TTIP) and with Japan. The aim is to go beyond the classic approach of simply removing tariffs and to open markets for investment, services and public procurement as well.”
2.2 Case study: The impact of EU membership on British trade
“In the industrial revolution Britain led the world in advances that enabled mass production: trade exchanges, transportation, factory technology and new skills needed for the new industrialized world.”
The United Kingdom is one of the biggest powers on the international arena, the fifth-largest economy in the word and the second largest in the European Union. european economic integration trade
It is one of the most developed nations in terms of trade, having a long history behind. Beginning with the ascension of the Tudor Dynasty to the English throne in the 16th century, we can talk about Britain as a big commercial power and by this a powerful player on the international arena.
In Henry VIII and Elisabeth I The Tudor Dynasty produced the two most famous monarchs in English History. The former, throughout the Acts of Union with Wales (1536-1543) became the first ruler to declare himself king of both Wales and Ireland, it is under his reign, that the country begun exploring continents and trading outside Europe. The later, ruled England for forty-four years. Her reign was called “The Golden Age”, a period of advancement and enlightenment. It was the age of great personalities such as Sir Francis Drake, Sir Walter Raleigh, Francis Bacon and William Shakespeare. Unlike her father, she had had a more modern political view, thus she adopted a prudent diplomacy. It was during her rule, that the English Fleet vanquished the Spanish Armada, this being one of the most prominent victories in the history of England.
The 17th century brings another prominent personality in the history of the country. In Charles II,
The British Empire finds its roots at the moment he took possession of Bombay and Tangiers. During this century Scotland by singing the Act of Union, in 1707 becomes part of The Single Kingdom of Great Britain.
When describing the events that happened in The Kingdom as well as in its overseas dominions, during the 18th century, we cannot skip one basic term- mercantilism.
This doctrine was “the result of great geographical discoveries, of formalization of strong and centralized nations and of the rise of Protestantism (a moral and intellectual revolution in Europe). As a theory, was concerned with three main aspects:
§ The individual and national wealth;
§ The origin and role of the profit > the concept of balance of trade.
§ The relationship between the level of prices, the amount of commodities and the amount of money mediating the transactions.”
The mercantilism theory represented the reflection of the political power of absolute monarchy in the economy. In the Kingdom of Great Britain, this doctrine had certain national peculiarities. The country concentrated mainly on the trade aspect of this practice, this is why historians call the English Mercantilism a commercial one (English Commercial Mercantilism). First of all, Britain promulgated this policy all over its overseas possessions. Second, it originated the first Transnational Corporation in the world- The East India Company. This, being a consequence of the alliance between the monarch and the merchants. This types of alliances sought only two goals to maximize profits and to eliminate the competition. Third, and most outstanding distinction of British mercantilism was that “it developed not only the visible exports, but also the invisible ones (shipping services, insurance services, etc.). Thus, it succeeded to create the most powerful navy in the world.”
During the 19th century the already United Kingdom was at the peak of its power. It was imposing its hegemony all aver the five continents.
The Industrial Revolution was the main accomplishment of that period. Great Britain passing through a process of transition from agriculture to manufacture becomes the first industrialized economy in the world. A key role played the fact, that it knew how to properly attract the right people that “inaugurated” the revolution.
The Industrial Revolution in a very accelerated pace, remodelled the British society and economy. It brought trade on a new level, and it increased the country's competitiveness.
The 20th century is marked by new events. The ruinous state of affairs of Europe as a result of the Second World War required a radical change. Politic and economic reconstruction was necessary. The method of reconstruction chosen was first in its kind and it implied voluntary integration of different nations.
Originally there were the Benelux countries, France, Italy and West Germany that created the ECSC the first precursor of the present European Union. At the beginning, Britain was reluctant in its decision to adhere to the “European integration idea” fearing that it may lose from its sovereignty and its commercial power. And as a response in 1959, United Kingdom together with Norway, Sweden, Denmark, Austria, Portugal, Switzerland created the European Free Trade Association (EFTA).
However the early success of the European Community made United Kingdom reconsider its position. At that moment it was impossible for her to retain its economic and political power on her own. Not even the fact that it belonged to the trade block of EFTA (it being a simply economic and not also political union as was the European community) could secure its position on the world market. As a result, in 1961 UK submitted its first offer of becoming a full member of the community. The final accession of UK to the European Community took place in 1973. Only two years from then Britons began to discus the benefits and the drawbacks of UK leaving the community.
“At the present moment, British Eurosceptic contend that the rise of emerging economies reduces the importance of Britain's European trade. China's economy grew by ten per cent a year between 2002 and 2012, and its trade integration with the rest of the world expanded even faster. Emerging economies' growth has slowed since the crisis - and in all likelihood will be permanently lower - but they will continue to expand more rapidly than developed countries. Hence, the reasoning goes, the EU's single market is of declining value to the UK. It may even hold the country back from developing its trade with emerging economies: Eurosceptic argue that a British exit could free the country to pursue more and more comprehensive trade agreements with emerging economies”.
On January 2013, David Cameron the actual prime minister has promised to his voters that in case of the win of conservators during the parliamentary elections, the government will try to achieve special conditions for Britain in the European Union. On May 2015, the party of Cameron has won the elections, and the prime minister has started the negotiations with the European leaders about a “special status” of the United Kingdom within EU.
According to recent interviews, this special status has four key objectives to be discussed at the negotiations between UK and European Union's leaders:
v “Economic governance: Securing an explicit recognition that the euro is not the only currency of the European Union, to ensure countries outside the Eurozone are not materially disadvantaged. The UK wants safeguards that steps to further financial union cannot be imposed on non-Eurozone members and the UK will not have to contribute to Eurozone bailouts.
v Competitiveness: Setting a target for the reduction of the "burden" of excessive regulation and extending the single market.
v Immigration: Restricting access to in-work and out-of-work benefits to EU migrants. Specifically, ministers want to stop those coming to the UK from claiming certain benefits until they have been resident for four years. Ministers have reportedly been warned by the UK's top civil servant this could be discriminatory and any limits may be reduced to less than a year. An option of an "emergency brake" to stop the payments for four years is being discussed as a compromise deal.
v Sovereignty: Allowing Britain to opt out from the EU's founding ambition to forge an "ever closer union" of the peoples of Europe so it will not be drawn into further political integration. Giving greater powers to national parliaments to block EU legislation.”
However, since then a lot has changed both on the continent and in Britain itself. Migration crisis swamped the EU by giving the sceptics a reason to talk in a loud voice about the need to withdraw from the Union.
A referendum is planed on 23rd of June 2016, which may bring global changes not only in the Kingdom but also on the whole European continent.
Today the situation in the Kingdom resembles a powder keg: the organization Vote Leave, advocating for the termination of membership in the European Union, holds a major campaign, and many exit polls show a roughly equal number of votes "for" and "against" the EU.
Here are some numbers related to the future referendum:
§ “6 million pounds - the maximum budget of campaigns "for" and "against" exit from the EU.
§ 400 billion pounds - the value of the European Union to the United Kingdom as a trading partner.
§ 11.2 billion pounds - the UK contribution to the EU in 2015, this is 11 % of the Union budget.
§ 4.6 billion pounds - the funds received from the EU country in 2015.
§ 3.5 million - the number of jobs in the UK that are dependent on exports to the EU. ”
The below table (table 2.2.1) shows the top export products of United Kingdom as of 2015. The aircraft and spacecraft industry are between the fastest growing in terms of exports. The export of vehicles is number one branch in terms of improving export sales.
United Kingdom's Top 10 Exports in 2015
Export Product (2015)
Total value (billions USD)
% Share of total Exports
Machine, engine, pump
US$ 63.9 billion
Gem, precious metal
US$ 53 billion
US$ 50.7 billion
US$ 36 billion
US$ 33.2 billion
US$ 29 billion
US$ 18.9 billion
Medical, tech. equipment
US$ 18.4 billion
US$ 14 billion
US$ 11.8 billion
According to experts, in case of an eventual exit the most affected markets will be the automotive and investment ones.
Bankers threaten the collapse of the pound. Thus, HSBC experts say that the British currency will fall against the dollar to general indicators of the 80s. The forecasts of big business are pessimistic too in the case of exit from EU, London will lose the status of financial capital of the world.
Speaking purely about trade, those against the exit state that participation in the European Union greatly simplifies the export from the UK to European countries: the minimum duties and bureaucratic delays. Given the fact that it is in Europe where 45% of the goods the country produces, go a simplified procedure is a huge plus.
Those that are for the exit, defend their opinion by saying that United Kingdom will sign new trade agreements without reference to the European legislation. This can help to create new trade links with China, India and America.
The single market of the European Union has three main instruments that help stimulate trade:
ь The abolition of tariffs.
ь The establishment of the four freedoms.
ь The reduction in the costs of production of future exporters.
It happens a homogenization of trade principles that allows producers from different member countries to comply with the same standards.
“However, there are two ways in which the UK's membership of the single market may
constrain its trade with non-European countries. The first is membership of the EU's customs union. Trade is tariff-free between member-states, but the EU sets tariffs on imports from outside the bloc. The second is the way in which the EU removes non-tariff barriers: in doing so, it may regulate at a European level in a way that makes trade with non-European countries more difficult. Together, these may divert British trade from lower cost producers outside the EU, to higher cost ones inside. If more trade is diverted than created, Britain may gain by leaving the single market”.
Starting with 1986 trade between The United Kingdom and non-member states has rise. The below figure (see figure 2.2.1) shows the trends of UK's trade with four groups:
Ш With the states that were in EU since 1986;
Ш The emerging economies;
Ш The non-EU member states of OECD;
Ш The current states within European Union.
Figure 2.2.1. Trends in UK total trade with the EU and the rest of the world
“After an initial expansion in the proportion of British trade conducted with the EU in the 1980s and 1990s, it leveled off. The proportion conducted with the EU-11 (and the OECD) fell over the last decade, as trade with emerging economies rose. However, faster emerging economy growth may be the cause, and Britain's ties to the EU may do nothing to constrain trade with the rest of the world”.
Experts divide their opinions whether will or will not be British trade affected by a potential exit from the European Union. A thing is clear-EU remains number one trade partner of United
Kingdom. Still, from the EU countries, it is in Denmark, Netherlands, France, Belgium and
Germany that the biggest quantity of British exports go. For instance, these are the richest countries of EU and the direct neighbors of UK. The geographical position of UK in relation with these countries may potentially retain their trading relations even if United Kingdom decides to exit the Union.
There is no single opinion weather the entering of UK in the European Union has increased or decreased the British trading potential. There are several factors that must be considered when analyzing this statement. Among these factors, the most important are:
Ш Economic potential and size
Ш The geographical distance from UK
Ш The knowledge of English language by potential partners
If this factors are leveled off and still the biggest amount of British exports go to member states of European Union, then the supplementary increase of the trading potential can be attributed to the membership of the EU.
The following figure (see figure 2.2.2) shows the level of UK export and imports to EU and non-EU states.
Figure2.2.2. UK exports and imports to EU and Non-EU
Source: Office for National Statistics
As we can observe half of the country's exports go to the European Union. This is a big segment, considering the fact that the other half is spread between non- member states and emerging economies each of them having small shares.
“Rich, large and neighboring economies trade more than poor, small and distant ones. The EU's tariff and non- tariff barriers to trade reduce Britain's imports of some products from countries outside the Union - although there is no evidence that the EU diverts trade overall. But the benefits of reduced barriers to Britain's natural trading partners - the many medium-sized, rich economies on its doorstep - outweigh those costs. Britain's economic interest lies in reducing the costs of trade with its largest trading partners, which EU has been effective in doing.”
In terms of services trade of United Kingdom with EU has not significantly rise, still EU constantly strives to liberalize services. As a result, UK exports of the service sector are expected to rise in the future.
In terms of Foreign Direct Investments the country is the largest beneficiary from EU. This can be also attributed to the fact that London is considered the financial capital of the world. The advantages that put UK in this position have little to do with the EU. It has been an open economy even before entering the union. Also, it has an advanced capital market that was developed centuries ago. Additionally, we cannot skip the language factor that plays a lot in favor of Britain.
Still, experts find it difficult to believe that UK will continue to receive such huge amounts of FDI in case it quits the EU. A lot of companies from countries within EU invest in UK as they see there better opportunities for their businesses. Moreover, EU based companies are more wiling to invest into a county with European base and that has approximately same rules and legislation. Starting from this assumption, we can conclude that the economic integration of UK in the European Union plays a crucial factor and expands the country's market.
“In summary, membership of the EU has boosted Britain's trade and investment. Far more trade in goods appears to have been created than diverted; and the UK has been the largest beneficiary of capital from outside the EU which sought a country within the single market as a base”.
In the opinion of Britons, the Brexit would ease the trading formalities. The will be no nee to reach consensus with all the 28 states of EU, before signing a free trade agreement with other countries that are not member to EU. The are a lot of emerging economies that are growing fast and that could exceed the economic power of the European Union, in several years. Trading with them directly and not through a union might boost the British economy.
But these statements are rather unfounded. There are very important details that must be considered when thinking to exit the EU. First of all, it the problem of distance. The cost of realizing exports and imports operations reduces a lot when someone gets involved in trading activities with neighbors. In Britain's case all of its rich neighbors and main trade partners are part of the EU. Sill, it is not clear if they will continue to trade with UK in case it exit the union. Second, the commerce with poor countries has its drawbacks, such as inflation or low skilled labor force. Whereas, the commerce between two rich countries may boost both economies. Just like the multiplier effect in economic theory, high competition will lead to innovation and innovation will lead to economic progress.
We should not forget about imports from rich foreign countries, because they result crucial for the countries economy. “Imports boost competition in the domestic economy, which raises the incentive for domestic firms to make productivity-enhancing investments and to invent new technology. This process is known as the `dynamic' gains from trade. The constant pressure of competition from more productive overseas companies raises productivity growth. Outside the EU, Britain could unilaterally and fully open its markets to the US, Japan, Australia and the EU in order to take advantage of those dynamic gains. But without unimpeded access to the EU market, foreign direct investment to the UK would be lower. Such investment is a big source of dynamic gains”.
As a possible alternative in case it decides to exit, United Kingdom could sign a free trade agreement with the European Union. Considering its size and its rich history in the domain of commerce, it will be not difficult for her to convince the leaders of the union that an agreement of such type will be mutually beneficial. But in the long-term, it would rather benefit EU then UK, as the letter will have to comply to a series of standards and regulations related to health, safety, labor market rule and competition.
To conclude, the British trade will have more to lose then to gain if UK exits the European Union. Some experts think that an Independent Britain will gain more in terms of commerce, while other experts think that the European economic integration has boosted the UK's trading activity. A thing is clear-an exit at this moment, when EU is number one commercial power in the world, with already established principles that are proved to function, will be a mistake. Moreover, the geographical proximity to the richest EU countries almost oblige, Britain to remain within EU.
“The idea that the UK would be freer outside the EU is based on a series of misconceptions: that a medium- sized, open economy could hold sway in an increasingly fractured trading system, dominated by the US, the EU and china; that the EU makes it harder for Britain to penetrate emerging markets; and that foreign capital would be more attracted to Britain's economy if it were no longer a part of the single market. The UK should base policy on evidence, which largely points to one conclusion: that it should stay in the EU”.
CHAPTER III: MAIN TRADE CHALLENGES OF THE EUROPEAN ECONOMIC INTEGRATION
3.1 Inherent differences and persistent tensions
In the middle of the twentieth century, when Europe was devastated by Second World War, a revolutionary idea was put into practice by eleven pioneers: Konrad Adenauer, Joseph Bech, Johan Willem Beyen, Winston Churchill, Alcide De Gasperi, Walter Hallstein, Sicco Mansholt, Jean Monnet, Robert Schuman, Paul-Henri Spaak, Altiero Spinelli. What seemed then unreliable has currently become one of the top economies and powers of the world.
The European Union represents a success story. It is the achievement of the European nation states that put aside their misunderstandings and conflicts in order to raise the continent's economy (devastated by the Second World War) by creating new relationships and establishing new trade hubs, which culminated in 60 years of peace and prosperity.
International economics' experts conceive the European economic integration as a process that has as aim the unification of European economies and national markets, which previously were operating separately and individually. The objective of this merger is to form a single market (common market), whose alleged dimension would be much more favorable and suitable for trade of goods and services produced by these economies.
According to other scholars, the process of European economic integration is the method by which the European Countries are removing the instruments that encourage a differential treatment between them. These differential treatments may include tariff and non-tariff barriers, provisions regarding the movement and exchange of goods and services from one country to another, etc. The final result of this process is the adoption of macro and micro policies that have an international impact, the adoption of similar or equal fiscal and monetary policies, also the adoption of exchange rate regimes that allow them at greater or lesser extent to meet their international commitments.
To reach this purpose (European economic integration), it is necessary to phase out policies (tariff and non-tariff), impeding the free flow of trade between the economies involved.
This in order to suppress the differential characteristics of each country, such as trade barriers, limiting the movement of factors of production, adoption of competition, industrial and technological policies that could have national and international impact. In addition, it suggests that economic integration requires the basis of a supranational policy, meaning that during the integration process a coordination of national policies: financial, monetary, banking, tax, is required.
This is only possible with the creation of institutions with representatives of each country: European Parliament, European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union, the European Central Bank and the Court of Auditors. The decision-making power is above those of the states themselves. In order for this to happen were required - say advocates of integration - the necessary and indispensable transfer of part of national sovereignty to a common type institutions, these institutions acquire thereby a supranational character.
Making a parallel with the theory of economic integration, we can say that EU has successfully passed through four of the stages: preferential agreement stage; free trade area stage; customs union stage; common market stage, and is currently passing through the fifth and last stage: the economic and monetary union which in fact embodies the total economic integration.
The customs union, in force since 1968, is an essential foundation of the European Union (EU). It provided the elimination of borders between member countries with regard to trade in all goods (Article 28 of the Treaty on the Functioning of the European Union). The customs duties on import and export, as well as taxes of equivalent effect, were prohibited between Member States.
At the external borders, goods from third countries are taxed at a common customs tariff completed by the Integrated Tariff of the European Communities (TARIC). The goods circulate freely in the EU in accordance with internal market rules and taking into account certain provisions of the common commercial policy. In addition, the Community Customs Code ensures the uniform application of the rules by the customs administrations of the Member States.
Although, inter-community trade was liberated from duties and quotas, other trade barriers have remained at this stage of economic integration. The environmental and consumer protection standards which differed from one member state to another, often resulted even more damaging then the quantitative restrictions that were previously abolished. As long as these barriers were hidden in different regulations, the prices on some imports grew; other imports were completely abolished (not being economically convenient anymore).
Even though, the free circulation of goods (one of the main provision of the customs union) has raised the GDP of its members to an unprecedented level.
The construction of the Common Market emerged as the main objective of the Treaty of Rome, having advanced since then substantially to achieve an adequate level of integration that allows us today to speak of the existence of a single market in many areas. At the present moment, the internal market of EU is a space shared between 28 member countries with a total of 508,450,856 of people. Thanks to the internal market, workers, businesses and consumers in the EU have benefited from:
ь Increased competitiveness,
ь Growth and employment opportunities,
ь Availability of choice,
ь Guaranteed security,
ь Ease of movement.
Thanks to the common market, new jobs have been created and the standards of living improved. This offered a wider range of qualitative goods and services to European citizens at a reasonable price. The common market has also enabled an efficient allocation of resources and has offered greater trading opportunities to businesses.
It would be helpful here to define the two concepts: the concept of a common market and the concept of the single market. “The concept of a common market as defined by the Court of Justice, in a consistent line of decisions involves the elimination of all obstacles to intra- community trade in order to merge the national markets into a single market bringing about conditions as close as possible to those of a genuine internal market. It is important that not only commerce as such but, also private persons who happen to be conducting an economic transaction across national frontiers should be able to enjoy the benefits of that market.
While the common market was lunched in 1957, the realization of a single market was only achieved in 1992-1993. Thus, all these concepts represent successive phases of the fourth stage of integration:
Ш Common market;
Ш Single market;
Ш Internal market.
The common market abolished barriers to trade and the single market, provided free movement of factors of production”.
Among the main benefits of the internal market for businesses, are:
ь The removal of different kinds of barriers and trade regulation, has allowed an ease of doing business within the community. A citizen from Denmark can go to England to set up a company or open a subsidiary effortless, now that many formalities have been abolished. They also, receive access to a bigger market of millions of consumers, this allowing the firm to experiment economies of scale.
ь The mutual recognition of standards has relieved many manufacturers, and because of it they have less restrictions stopping them from selling their products all over EU.
ь The need to adapt to single international standards and not to various national ones, allows companies to optimize their resources.
ь The abolition of frontiers has in many ways benefited trade. The annulation of the fulfillment of all paperwork once crossing a national border, saves a lot of time, reduces transportation costs and, of course simplifies the crossing-border procedure.
ь The fact that now transportation costs are cheaper and that “the goods are free to move” within the community, have permitted companies to move across borders to reduce their production costs. Many companies from rich countries such as Germany, France, United Kingdom, Sweden, etc., relocate their production facilities in countries where production results cheaper, such as Greece, Ireland, etc.
ь Another great achievement of the single market is that it encourages innovation in all the sectors, especially technological innovations.
ь The SEM has allowed firms to reduce their costs on raw materials, also by making them more available and cheaper.
ь Another benefit is the free access to financing sources all over the EU. This in a way, may reduce the costs of credit taking procedures and insurance.
ь Collaboration is encouraged as a result of the markets cohesion. This allows a new niche to develop: the companies of consulting and engineering. This companies result very beneficial in helping companies to solve their problems or helping them to optimize their resources.
According to latest data from Eurostat the intra-EU trade in goods has increased (see figure 3.1.1). “The first estimate for extra-EU28 exports of goods in February 2016 was €137.1 billion, down by 1% compared with February 2015 (€138.2 bn.). Imports from the rest of the world stood at €134.1 bn., down by 2% compared with February 2015 (€136.4 bn.). As a result, the EU28 recorded a €3.0 bn. surplus in trade in goods with the rest of the world in February 2016, compared with +€1.8 bn. in February 2015. Intra-EU28 trade rose to €256.7 bn. in February 2016, +4% compared with February 2015. In January to February 2016, extra-EU28 exports of goods fell to €258.6 bn. (a decrease of 2% compared with January-February 2015) and imports fell to €266.7 bn. (-3% compared with January-February 2015). As a result, the EU28 recorded a deficit of €8.1 bn., compared with -€10.0 bn. in January-February 2015. Intra-EU28 trade rose to €496.0 bn. in January-February 2016, +2% compared with January-February 2015”.
Figure 3.1.1. “International trade in goods of the EU28, € bn.”
Source: Eurostat, the statistical office of the European Union
The 2010 Communication entitled “Trade, Growth and World Affairs”, made international trade a cornerstone of the new Europe 2020 strategy, aimed at achieving a more competitive and greener EU. The new strategy places greater emphasis on external economic relations of the EU as a catalyst for growth and job creation, and recognizes the need to adopt a coordinated approach to external and internal policies of the EU approach. Similarly, the business strategy of the EU 'Trade for all "reaffirms the role of trade policy in the EU as the main engine of growth, employment and investment, and calls for a revitalization of the WTO by defining three following objectives:
Ш Trusting to the WTO a key role in the development and implementation of standards in all areas of world trade;
Ш Adopting, within the WTO, a more focused approach to address each issue in terms of its
importance, rather than the current approach of "single undertaking", according to which all agenda items be agreed together;
Ш Creating a "two-speed mechanism" that allows a subset of WTO members to advance with a particular issue, leaving the door open so that, at a later stage, other members adhere.
Currently, Europe is the largest exporter of manufactured goods and services, and is also the largest market for exports of some eighty countries. According to Eurostat, as of January-February 2016, among the main traded primary goods are: food and drink (with a share of 16.9 billions of euros), raw materials (share of 7 billions of euros) and energy (share of 12.5 billions of euros); among the most traded manufactured goods are: chemicals (with a share of 47.9 billions of euros), machinery and vehicles (with a share of 110.5 billions of euros) and other manufactured goods, hawing a share of 61.5 billions of euros.
Among the main trading partners (see table 3.1.1) of European Union are United States, China, Switzerland, Russia, etc.
Source: http://trade.ec.europa.eu/doclib/docs/2013/december/tradoc_151969.pdf (cited on 04.20.2016).
The free trade agreement between the European Union and the US It is known as transatlantic trade and investment partnership (TTIP, Transatlantic Trade and Investment Protocol) and is traded since July 2013 with the intention to be closed before the end of term of the current US President Barack Obama, one of its main drivers.
The official aim of the treaty is "to increase trade and investment" between the two sides of the Atlantic, "creating a genuine transatlantic market, that would generate new economic opportunities for job creation and growth through improved market access and greater regulatory compatibility".
According to the European Commission, EU- US exchanges now account for 40% of world trade, and are made at a rate of 2,500 million euros a day.
The negotiation process -in which the EU is represented by the European Commission has been criticized by large sectors of European society, denouncing its lack of transparency and priority access granted by the institutions to corporate lobbyists, that point as the real beneficiaries of the treaty. So far, the opposition movement to TTIP has collected two million signatures in EU.
According an article, criticism has focused on three points that articulate the futures free trade agreement and are explained below:
· Officials from both sides have admitted that the main objective of TTIP is not to stimulate trade by eliminating tariffs between the US and the EU, which are very low in most sectors and products, but to eliminate regulatory barriers, so-called non-tariff measures.
One of the organizations that oppose the treaty- “Justice Food Global” explains that the average US tariff on European agricultural products stood at 6.6% (9.9% was six years ago) and the levy imposed by EU on Americans is 12.8% (compared to 19.1% in 2009), while the average agricultural tariff in the world is 60%. Thus, Justice Food Global claims that the barriers that are to delete "are some of our more precious regulations on social and environmental rights, including labour rights, food safety standards, regulations on the use of toxic chemicals, the laws of privacy protection on the Internet and even new guarantees in the banking sector. "
Trade Commissioner of the EU, Cecilia Malmstrцm, has denied that the TTIP will override the current European requirements on such sensitive issues as food security or environmental protection. She also added that the already existing laws regarding the food safety would not be changed.
· To harmonize their laws, European and US negotiators have established the so-called mechanism of regulatory convergence, a process of adaptation to the existing regulations on both sides of the Atlantic "to ensure that goods produced on one side can be exported to another without special additional requirements ".
The harmonization will not apply only to the current regulations, but also to future legislation. Regulatory Cooperation Council- a body monitoring the process, composed of experts and representatives of the sectors involved in each transnational body, will be created.
Critics warn that this may involve a downward harmonization, so that the highest standards will be lowered. "If the financial control is stricter in the US, it will taking into account harmonized European regulation; if labour law is tougher in the EU, the application of US rules will deregulate the rights of workers, "says the platform “not to TTIP”, adding" the idea is to repeal any regulation that is an obstacle to market. "
The Commissioner Malmstrцm has said that the new agency will be "a forum of European and Americans regulators " that due to the "science and technology advance" - should analyse "how can be harmonized or recognized the standards defended by each of the parties ".
· The mechanism of ISDS (Investor-State Dispute Settlement), originally was created to protect investors against arbitrary expropriations and ensure that foreign investments are not discriminated against national in countries considered risky, those in which the courts are not independent of government and can not ensure neutral framework for solving such problems.
However, the reality of this practice has shown that the impartiality of arbitrators of these courts is not assured and that, given the freedom of interpretation of the content of the existing free trade agreements, this system reduces the freedom of States to legislate.
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