EU Trade Policy: outline
• International framework
• Benefits of free trade
• Benefits of protectionism
• Some facts on EU trade & aid policy
• Preferential trade liberalization
EU Trade Policy
Common Commercial Policy - Article 113 of the
Treaty of Rome:
1. Community tariff regime
2. Common trade agreement with third
countries (trade in goods, service and
intellectual property)
International framework
• GATT (1948)
• WTO (1995) functions:
– Regulations for conduct of international trade
– Settlements of disputes
– Negotiations to liberalize world trade
• Latest negotiations rounds:
– 1986-94: Uruguay round
– 2001-?: Doha round
GATT / WTO principles
• Tariff reductions
• Reciprocity
• Non-discrimination
Benefits of free trade: theory
• Technological differences; comparative advantage
(Ricardo)
• Difference in endowments (Heckscher-Ohlin)
• Economies of scale
• Economies of scale and product varieties (Krugman,
New Trade Theory; intra-industry trade)
Comparative advantage: example
Technology
France
Italy
Bread (kg produced in a man-hour)
6
1
Wine (liters produced in a man-hour)
4
2
• In two hours, France could produce 6 kg of bread and 4 liters of wine
• Assume trade becomes possible at 6 kg of bread for 6 liters of wine
• France produces 12 kg of bread, and trades 6 kg of bread for 6 liters
of wine. They end up with 6 kg of bread and 6 liters of wine
• Similar reasoning for Italy; both countries better off with trade
• Lower wages in Italy
• Relative world price is between relative autarky prices
Heckscher-Ohlin
• A country will export the commodity whose
production is intensive of the factor in which the
country is relatively abundant
• Assume same technology in both countries
Heckscher-Ohlin
• Assume the production of bread is capital intensive
and the production of wine is labor intensive
• Assume France has a relative abundance of capital
and Italy has a relative abundance of labor
• This shows up in the production possibility frontiers
Heckscher-Ohlin graphically
Heckscher-Ohlin graphically
• Indifference curves shows combinations of wine and
bread consumption that give the same level of
satisfaction
• Assume same preferences in both countries (so same
indifference curves)
• Higher indifference curve means higher level of
satisfaction (higher utility level)
Heckscher-Ohlin graphically
Heckscher-Ohlin graphically
• Relative price is
the price of wine / the price of bread
• Slope of the blue lines in the next figure
Heckscher-Ohlin graphically
Heckscher-Ohlin graphically
• For trade to occur, relative world price must be
between relative autarky prices:
Rel. p(France) > Rel. world price > Rel. p(Italy)
• World price is slope of green line in next figure
Heckscher-Ohlin graphically
Heckscher-Ohlin graphically
• Because of trade, both countries end up on a higher
indifference curve and are therefore better off
• Both countries specialize
• Points outside of production possibility frontier
become possible
Benefits of protection
•
•
•
•
•
•
•
Protect specific groups in society
Diversify production (uncertainty)
Strategic independence (e.g. food, energy)
Protect employment
Protect infant industry
Strategic argument (terms-of-trade)
Avoid social dumping
EXPORTS
IMPORTS
Pattern of Trade EU25 (2003)
EFTA
4%
CIS Turkey
2%
1%
Other Europe
1%
North America
9%
Asia
7%
Other
24%
EU25
67%
EFTA
4%
CIS
3%
EU25
67%
EU25 Imports, 2003
Latin America
2%
RoW
1%
EU25 exports, 2003
Turkey Other Europe
1%
1%
Other
25%
Africa
3%
EXPORTS
Middle East
3%
North
America
6%
Asia
12%
Africa
3%
IMPORTS
Latin America
2%
Middle East
1%
Source: Eurostat. The latest data can be downloaded from Eurostat’s new user-friendly service
europa.eu.int/comm/eurostat/
Differences among Member States, imports 2003
NonEU Europe
N. Amer.
Africa
Latin Amer.
Asia
RoW
Luxembour
Ireland
Malta
Belgium
UK
Netherlands
Spain
Cyprus
Portugal
France
EU25-Avg
Greece
Italy
Hungary
Czech Rep.
Germany
Denmark
Sweden
Poland
Slovenia
Estonia
Finland
Austria
Slovakia
Lithuania
Latvia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Composition exports and imports
Machinery, transport
equipment
Other manufactured
Manufactured
Goods, 69%
Manufactured
Goods, 87%
Chemical products
Fuel products
Other raw materials
Food & live animals
Exports, 2004
Imports, 2004
Machinery, transport equipment
45%
34%
Other manufactured
26%
26%
Chemical products
16%
9%
Fuel products
3%
18%
Other raw materials
2%
5%
Food & live animals
5%
6%
Misc.
2%
3%
What with whom?
Institutions
• Trade policy is an exclusive competency of EU.
– Customs Union requires COORDINATION.
• Trade in goods:
• Commission has responsibility for negotiating, Council of Ministers
sets “Directives for Negotiation.”
– Karel De Gucht (Trade Commissioner).
– Council accepts/rejects final deal by Qualified Majority Vote.
• Commission in charge of surveillance and enforcement of 3rd nation
commitments to EU.
– Trade disputes with US, China, etc.
 European Parliament has no explicit powers. It’s only
informed.
QUALIFIED MAJORITY VOTE
Each member state has a fixed number of votes roughly
determined by its population, but progressively
weighted in favour of smaller countries.
To pass a vote by QMV, all three of the following
conditions must apply:
1. the proposal must be supported by 255 votes from a
total of 345 - about 74% of the votes;
2. the proposal must be backed by a majority of
member states;
3. the countries supporting the proposal must represent
at least 62% of the total EU population.
• Treaty of Rome only gave Commission power
over trade in goods.
• Treaty of Nice (& Amsterdam) extended
Commission’s authority to some aspects of
services trade and intellectual property rights.
• It made QMV the rule in Council on such
matters.
Contingent Protection (anti-dumping&anti-subsidy)
WTO allows members to raise tariffs to (does not violate WTO):
1. Counter ‘unfair’ trade practices, e.g.
– Antidumping (often)
– Anti-subsidy
2. Provide temporary protection “safeguards.”
(Iron, steel, consumer electronics, chemicals)
The various WTO articles on these require a procedure; in EU the
Commission is in charge of these procedures, but the final
decision is subject to QMV approval of the Council.
• Tariffs and preferably price undertaking (avoid complaints on
EU’s protection).
• Trade-off between consumer welfare and producer welfare.
Distributional consequences: Home
Home
Demand
price
Home
Supply
B= EU tariff revenue
A= Increase in producer
surplus
Price floor=Pw+T
A
T
B
C1
Pw
C1+C2= efficiency loss
C2
-(A+C1+B+C2)= loss in
consumer surplus
Z
Zf
Cf C
Imports (with floor)
Q
EU External Trade Policy
• Complex
• Has preferential trade agreements with all but nine
of the WTO’s 148 members.
• Each free trade agreement can contain hundreds of
pages of exceptions and technical rules.
• Has general agreement on trade, but also has
separate sectoral agreement
• See
for updating details.
EU External Trade Policy
• EU has special deals with 139 nations; often more than one per partner.
EU External Trade Policy
• European-Mediterranean area:
1. West, Central and Eastern Europe = Single market in
industrial goods; EU + EFTA (but not agricultural food)
2. Euro-Med10 Association Agreements:
• Morocco, Algeria, Tunisia, Egypt, Israel, the Palestinian
Authority, Lebanon, Jordon, Syria and Turkey.
• Bilateral duty-free trade in industrial goods
• Asymmetric:
Asymmetric dependence (e.g. 70% of Morocco’s exports to
EU, but <1% of EU to Morocco)
EU cuts its tariffs faster, Med 10 promise to eliminate their
tariffs on EU industrial goods by 2010
EU External Trade Policy
• European-Mediterranean area:
• Turkey uses EU’s common external tariff for industrial
imports
• EFTA nations sign similar agreements with Med-10
EU External Trade Policy
• Former Soviet republics & Western Balkans
1. Partnership and Cooperation Agreements (PCAs).
– Generalised System of Preference - GSP plus.
– Russia, Ukraine, Georgia, Belarus, Armenia, Azerbaijan,
Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan.
2. Stabilisation and Association Agreements (SAAs).
– Former Yugoslavian states.
– Croatia has started membership; others likely to follow.
These are all GSP (Generalized System of Preference), a WTO rule
allows rich nations to charge lower tariffs on imports from poor
nations. (Asymmetric)
Preferential arrangements with former colonies
• Colonial preferences conflicted with Common External
Tariff.
– EU made exception for these nations to avoid imposing new
tariffs; signed “unilateral PTAs”
• Yaoundé Convention and Arusha Agreement
– When UK joined 1974 extended to many Commonwealth nations.
• “ACP nations” (Africa, Caribbean & Pacific); the new agreement = Lomé
Convention.
• Duty-free but subject to quota for sensitive items (sugar, banana, etc.).
• These didn’t help the ACP nations to industrialize.
• When Lomé Convention renewed in 2000, the EU and the
ACP nations agreed to modernise the deal.
• Cotonou Agreement; eventually reciprocal free trade.
Regional groups, ACP nations
West Africa
Central
Africa
East South
Africa
Benin
Burkina Faso
Caper Verde
Cote d’Ivoire
Gambia
Ghana
Guinea
Guinea Biss.
Liberia
Mali
Mauritania
Niger
Nigeria
Senegal
Sierra Leona
Togo
Cameroon
Central
Africa
Chad
Congo
Equat.
Guinea
Gabon
Sao Tome e
Principe
Burundi
Comoros
Congo (Rep
Dem)
Djibouti
Eritrea
Ethiopia
Kenya
Malawi
Mauritius
Madagascar
Rwanda
Seychelles
Sudan
Uganda
Zambia
Zimbabwe
Southern
Africa
Caribbean
Angola
Botswana
Lesotho
Mozambique
Namibia
Swaziland
Tanzania
Antigua
Bahamas
Barbados
Belize
Dominica
Domin Rep
Grenada
Guyana
Haiti
Jamaica
Sta Lucia
St Vincent
St Ch and
Nevis
Surinam
Trinidad and
Tobago
Pacific
Cook Is
Fed Micron
Fiji
Kiribati
Marshall Isl
Nauru
Niue
Palau
Papua NG
Samoa
Solomon Is
Tonga
Tuvalu
Vanuatu
Preferences for poor nations: GSP
• 1971 GATT provision.
• EU grants GSP-generalised system of tariff preferences- to almost all
poor nations.
1. General GSP (to all developing countries).
2. “Super-GSP” more generous on market access :‘Everything but Arms’
for least developed nations.
On paper, EBA grants zero-tariff access to all goods, except arms and
munitions.
– Goods in which these nations are most competitive are in fact excluded from the
deal.
– Tariffs on bananas, rice and sugar – products where these poor nations could
easily expand their EU sales – are to come down only in the future.
– Moreover, even though all tariffs on these items will be gone by 2009, the
exports quantities are limited by bilateral quotas.
49 nations qualify for EBA in principle in 2005.
Non-regional free trade agreements
• Mexico, Chile, and South Africa, done.
• Ongoing with Mercosur, & the Gulf Cooperation
Council (Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and United Arab Emirates).
No more agreements until DOHA ROUND is
concluded.
Non-preferential trade
• About 1/3 EU imports are not granted some sort of
preferential treatment (US, Japan, etc.).
• Average Common Ext. Tariff 6.5%
• Average industrial goods 4.1%
• Average on agricultural imports 16.5%
Cynical way to arrange agreements
with huge
variation
EU Common external tariff
19
Cut flowers and plants
other agricultural products
76
oil seeds, fats, oils and their products
76
26
Fish and fishery products
71
beverages and spirits
150
fruit and vegetables
114
Coffee and tea, cocoa, sugar, etc
75
Tobaco
192
live animals and products thereof
101
grains
210
dairy products
Wood, pulp, paper and furniture
10
non electric machinery
10
metals
10
12
mineral products, precious stones
non agricultural articles
14
electric machinery
14
High
Average
23
chemical and photographic supplies
Leather, rubber, shoes and travel …
17
22
Transport and equipment
12
Textiles and clothing
0
50
100
150
Agricultural products have much higher tariff than others!
200
250
Current facts…
• “Traditionally, there has been a divide between
northern liberal countries, such as Britain and
Sweden, and protectionist founder members, such as
France and Italy”. The Economist Dec 2006
• USA and EU blaming each other for failure in trade
negotiations.
“What they're saying is that for every dollar that they strip out of their tradedistorting farm subsidies they want to be given a dollar's worth of market access in
developing country markets," Commissioner Mandelson said. "That is not
acceptable to developing countries and it's a principle that I on Europe's behalf
certainly couldn't sign up to either." US trade representative Susan Schwab insisted
the US remained "fully committed to multilateral trading system”.
Some remarks on poverty
• World Trade policies are fundamental to diminish
poverty and inequality.
• Poverty is the main cause of violence
• Disparities in trade policies increase the gap among
countries.
• Globalization and technology progress make more
difficult the migration control. Restrictive policies
are not the solution… eliminating miserable
conditions from certain areas in the world is.
• But how to really help poor developing countries to
industrialize?
Aid policy
Instruments:
• Trade preferences
• Development finance
• Humanitarian aid
Aid policy
EU-US trade and investment
• Disputes over issues as varied as bananas, beef, trade
legislation and subsidies to aircrafts.
• EU and US are the most important world traders. EU share
in goods trade is 22.8% and 27.3% in services. US shares
are 19.1% and 20.2% respectively.
• Each other’s largest trading partner: US accounts for 17.7%
(24.2%) of EU15 total imports (exports) of goods. While
EU accounts for 24.2% of total US trade of goods.
Trade disputes EU - USA
• A lot of press attention
• But most disputes only touched a minimal % of
trade
• Agriculture: USA objected to EU variable levies,
domestic support and export subsidies
Share in EU15 FDI flows 1998-2001
EFTA; 9,8
ROW; 25,5
Inflows
China
mainland;
0,1
Japan; 3
USA; 61,9
EFTA; 11,1
ROW; 33,5
China
mainland;
0,6
Japan; 2,4
Outflows
USA; 52,4
Preferential trade liberalization
• Early literature (Viner, 1953) focused on static
effects of integration on welfare:
• Trade creation
• Trade diversion
Trade creation
• Benefit of liberalization: domestic production is
replaced by cheaper imports from a partner country
Trade diversion
• Negative effect of preferential liberalization: more
expensive imports from a partner country replace
low-cost imports from suppliers in third country
Implications for the Global Trading System
• Questions:
– Can PTA expansion lead to global free trade?
– Do PTAs make multilateral liberalization less
likely?
– Do PTAs lead to a rise in trade barriers against
non-members?
– What kind of trade regimes are we likely to have
with criss-crossing PTAs (Spaghetti-Bowl
Phenomenon)?
– WTO-illegal policies in PTAs?
Can PTA Expansion Lead to Global Free Trade?
• Baldwin’s “Domino Theory of Regionalism”
– Economic incentives for outside countries to seek entry into an
existing PTA
– Unless there are sufficiently strong non-economic factors that
counter these incentives, as the PTA expands, eventually all
countries want to enter the PTA
• Limitations of Baldwin’s analysis
– Trade barriers are seen as transport costs, thus the tariff revenue
aspect is not taken into account
– Assumption that “insiders” have no incentive to block the entry
Do PTAs Make Multilateral
Liberalization Less Likely?
Building or stumbling blocks? (Bhagwati)
Building blocks?
• Multilateral negotiations will move more rapidly if
the number of negotiators is reduced to a handful of
blocs
– However, if blocs take the form of FTAs, there is no effect
on the number of participants
– One voice in EU or too occupied with internal problems?
• PTAs may serve as a bargaining threat
Do PTAs Make Multilateral
Liberalization Less Likely? - ctd.
Stumbling blocks?
• PTAs are mostly between developed and developing
countries
• Such PTAs are associated in public mind (in developed
countries) with large inflows of L-intensive goods and
reduced wages for the unskilled
• This can energize and unify protectionist lobbies, generating
obstacles against multilateral liberalization
• Multilateral negotiations, by contrast, involve both
developed and developing countries and draw less attention
of protectionist lobbies
Do PTAs Lead to a Rise in Trade Barriers against NonMembers?
1. FTA can lead to a reduction in tariffs on inputs:
– Assume a pre-PTA equilibrium a union member faces lower tariffs
on final goods and higher tariffs on intermediate inputs, relative to
its potential partner in some sectors
– Final goods producers are in disadvantage and lobby to reduce the
external tariff on the input
> Counter arguments:
– Reduction in the tariff on inputs increases the effective protection
on final goods
– Lobbying by final goods producers might also result in an
increased tariff on final goods
– It assumes that producers of intermediate goods do not lobby
•53
Do PTAs Lead to a Rise in Trade Barriers against NonMembers? - ctd.
2. Tariff-revenue objective:
– If a country is dependent on tariffs for revenue purposes
(e.g. Africa), it may be forced to raise the external tariff
to maintain the fiscal balance
– The more the country imports from the FTA partner, the
larger the loss of revenue, the greater possibility of an
increase in the external tariff and greater the trade
diversion
Do PTAs Lead to a Rise in Trade Barriers against NonMembers? - ctd.
3. Political economy:
– when producers play the central role in determining trade
policies, liberalization through FTA is likely to be
replaced by increased protection against outside countries
4. Considerable empirical evidence of increases in
outside tariffs following the implementation of
PTAs
The Spaghetti-Bowl Phenomenon
• To avoid trade deflection, FTA agreements usually include
rules of origin
• Criss-crossing FTAs leads a “Spaghetti Bowl” whereby
tariffs vary according to origin of the product
• See Fig. 3:
– Each FTA has its own rules of origin which vary across products
and transition phase
– For a given product, there are several different tariff rates
depending on what origin is assigned to it
Spaghetti Bowl
WTO-illegal policies in PTAs
• PTAs can undermine the global trading system
by introducing arrangements measures which are
WTO inconsistent
• Example:
– Anti-Dumping provisions in the EU Czech
association agreement
– trade-balancing requirement within Mercosur (an
Argentine company operating in Brazil must export
as much Brazilian goods to Argentina as it imports)
• These practices are not widespread