Lecture 4 - The trade and specialisation effects of the EU Customs Union
Introduction
EU framework over a decade between 1958-1968
In theory, the CU Predicts the following:
- Increased trade between member countries, due to removal of tariffs and restrictions
- Increased specialisation derived from less inefficiencies during import substitution at cheaper prices and increased efficiency
- One-off increase in output & income as resources are shifted to more efficient uses (specialisation and division of labour theory, Adam Smith)
- TO BE CONSIDERED. All factors must be fully employed, to be beneficial.
What effect did the CU have on the trade of the member countries?
Most obviously, rapid trade growth occured in the EC, 1958-72
| Type of trade | Growth p.a. | Comment |
|---|---|---|
| Intra EC Trade | +15% | Strong increase |
| Extra EC trade | +8.5% | Similar to world average |
| Global Trade Overall | +8.5% | Baseline |
Question to consider: it may be consistent with CU theory, or is there other factors coming to play?
Did trade grow fast because of the CU or other factors?
During Analysis we can perform a Counter factual experiment, aka anti-monde
In this case, we compare two scenarios. One where a CU is present, and where a CU is absent
- E.g a simple counter-factual is to extrapolate
Conclusions of empirical studies of EEC effect
- Substantial effect within-EEC trade in manufactures
- Positive increase from 15-30%
- Trade creation >>> Trade diversion (for manufactured goods) as each country becomes more efficient
- Trade with RoW not adversely effected, except on agriculture (faster growth in EC, increased imports for lower cost unfinished goods from LIC)
- Badinger & Breuss 2004 study concluded that
- Increased by 1/4 of EU trade due to tarrif removal
- Main factor driving trade was increase in incomes, QUESTION: WHICH ONE CAME FIRST?
Effect of EU entry on the UK
Prebrexit, joined 1973 - CU 1977 - Gasiorek, Smith and Venables (2002) study estimates CU effects by hypothetically reimposing tarrifs on UK trade with EU (computable general equillibrium model)
- 1985 tade with EU has increased, mostly by trade creation
- Trade diversion was small
- some external TC
- main gain derived from increased competition in markets and efficiency
Adjustment Issues
- In the late 50s, concerns about CU formation might cause large job losses and widespread factory closures due to international competition
- Might not happen in the real world, EU have safeguard clause. Temporary Trade Barriers
- Why did it not happen?
- Golden Age of economic growth and long transition period, low unemployment
- Specialisation
- Trade barriers remained