Summary - European Economic Policy (1st partial), Dispense di Economia dell'Unione Europea

Scarica Summary - European Economic Policy (1st partial) e più Dispense in PDF di Economia dell'Unione Europea solo su Docsity! 1 EUROPEAN ECONOMIC POLICY – 1st partial EUROPE The Dimensions of EU Development WIDENING How was the European Union born? At the end of WWII, European leaders wanted to avoid a new similar tragedy, so nationalism had to be defeated by creating something like the United States of Europe. The U.S. offered financial assistance if countries agreed on a joint program for economic reconstruction, that is the Marshall Plan (1948). As Cold War got more war-like, West German rearmament became necessary. But strong and independent Germany was a scary thought for many; it was better to insert an economically and militarily strong West Germany into a supranational Europe. Two crucial steps (Treaties): 1. ECSC European Coal and Steel Community (Treaty of Paris, 1951) → Belgium, France, Germany, Italy, Netherlands, and Luxembourg (the ‘Six’) place their coal and steel sectors under the control of a supranational authority; this was useful to control German rearmament. 2. EEC European Economic Community (Treaty of Rome, 1957) → riding on the success of the ECSC, the Six committed to form a customs union with 4 fundamental freedoms and common policies. In 1960, we also have the EFTA European Free Trade Agreement with Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Evolution to two concentric circles: the domino effect Falling trade barriers within the EEC and within EFTA lead to discrimination (e.g., British firms exporting to Germany had to pay tariffs; French exports to Germany were tariff-free). The GDP of the EEC was much larger than that of EFTA, thus the EEC was far more attractive to exporters, and this led to new political pressure for EFTA nations to join the EEC. Denmark, Ireland, and UK joined in 1973, while Norwegians said no in a referendum. With the first enlargement (1973), the EEC moved from 6 to 9 members while the EFTA maintained 7 members thanks to the entrance of Iceland and Finland. Thanks to positive political developments, Greece joined in 1981, Spain and Portugal in 1986. Deeper integration in EEC strengthened the ‘force for inclusion’ in remaining EFTA nations. The European Economic Area (EEA) initiative was launched in 1989 to extend European single market of the EEC to remaining EFTA nations. Today, the EEA is made of 27 members of the EU and three of the four member states of the EFTA (Iceland, Liechtenstein, and Norway). In 1993, with the Maastricht Treaty, the EEC was renamed the European Community to reflect that it covered a wider range than economic policy. The fourth enlargement adds Austria, Finland, Sweden in 1995. The fall of the Berlin Wall and of the Soviet Union At the end of WWII, while the U.S. was providing aids to western Europe under the Marshall Plan, the Soviets had installed left-wing governments in the countries of eastern Europe liberated by the Red Army. The Warsaw Pact was a collective defense treaty established by the Soviet Union and Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania. The Warsaw Pact embodied what was referred to as the Eastern bloc, while NATO and its member countries represented the Western bloc. This changes at the end of the 80s: • End of 1989: democracy in Poland, Hungary, Czechoslovakia; fall of the Berlin wall (built in 1961). • 3 October 1990: German re-unification. • End of 1990: independence of Estonia, Latvia and Lithuania; • End of 1991: the Union of Soviet Socialist Republics (USSR) itself breaks up. The Cold War ends and, with it, the military division of Europe ends. Reuniting east and west Europe In June 1993 the European Council set the Copenhagen criteria for accession of Central and Eastern European Countries (CEECs), which still apply today. CEEC nations plus Cyprus and Malta joined the EU in 2004 followed by Romania and Bulgaria in 2007. 2 Becoming a member of the EU If a country wants to join the EU: 1. The country must be “European” (art. 49 TEU) and should sign an Association agreement with accession clause. 2. The country must send the application that needs to be approved by the Council of the EU (unanimity) after consulting the Commission and after receiving the consent of the European Parliament. 3. The country must meet the Copenhagen criteria: a. Political stability of institutions that guarantee democracy, the rule of law, human rights and respect for and protection of minorities; b. A functioning market economy capable of dealing with the competitive pressure and market forces within the Union. c. Acceptance of the “Community acquis”, i.e. EU law in its entirety, currently divided into 35 different policy fields (such as transport, energy, environment) each of which is negotiated separately. 4. The Accession Treaty, drafted by the Commission, must be voted by the Council of the EU and the European Parliament, and ratified by all the Member States and the Acceding Country. The enlargement deeply changed the institutional working of the European Union, and it required the EU to reform its institutions, ultimately through the Lisbon Treaty (signed in 2007, into force in December 2009). Due to the challenges posed by 2004 enlargement, the European Council (December 2006) agreed on carefully considering the EU’s capacity to integrate new members: the EU should be more cautious in assuming any new commitments. The case of Turkey Turkey is a candidate country as of today. It applied for membership in 1987, and it was declared eligible in 1997. Turkey involvement with the EU goes back to 1959 and includes the Ankara Association Agreement of 1963, for the progressive establishment of a Customs Union. EU and Turkey have free trade among themselves and share the same structure of tariffs with respect to the rest of the world. Accession negotiations started in 2005, and are currently stuck until Turkey agrees to apply the Additional Protocol of the Ankara Association Agreement to Cyprus, i.e. extending the four fundamental freedoms to Cyprus. DEEPENING The economic integration starts with a free trade area and customs union, which the six founding members of the European Economic Community (EEC) had accomplished by 1968, as well as the gradual build-up of the European Internal Market based on: • Four fundamental freedoms → free flow of goods, services, workers, and capital. • Common policies (where necessary) → the EU acts only within the limits of the competences that EU countries have conferred upon it in the Treaties; thus competences not conferred on the EU by the Treaties thus remain with countries (social policies, welfare, taxation remain in the hands of national governments). • Common rules → the development of a body of law harmonizing rules and procedures throughout the area. A paper published in 2015 presents a quantitative index of EU integration. It is divided in two periods of institutional integration: • “Common Market Era” → from 1958 (Treaty of Rome) until 1993 (Treaty of Maastricht); • “Union Era” → from 1993 to 2014, which was characterized by the Economic and Monetary Union (EMU) and the euro. The brown line is the maximum score achievable if all objectives of the Common Market Era and of the Union Era were fully accomplished. Deepening: the omitted elements Social policy (welfare, health, education, labor market regulation, pensions) and taxation are mostly national policies apart from the framework of the Value-Added Tax (VAT), which is a tax on the final consumer. EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (usually for foodstuffs). Actual rates applied vary between EU countries and between certain types of products. Harmonization in those fields is politically difficult, but it not really necessary because national wages adjust to the tax rates. 5 THE CLASSIC THEORY OF FTA AND CU Free trade vs autarky The theory of economic integration studies how intermediate situations between pure protectionism and free trade affect efficiency in the use of resources for every country. Consider one country H and one homogeneous good, produced both at home as well as somewhere else in the world. We assume: • Perfect competition • No transport costs • World supply SW perfectly elastic at price PW (small country hypothesis) because the world has so much supply that q doesn’t matter FREE TRADE DH > SH → I need to import from abroad OA = Domestic supply (PH < PW, so it’s convenient to produce at home) AB = Imports from RoW (PH > Pw so it’s convenient to import from abroad) OB = Domestic demand (= OA + AB) PROTECTIONISM AND AUTARKY We can distinguish three main tools through which protectionism can be implemented: 1. Tariffs, which can be calculated according to two main formulas: • Ad valorem → TH = PW (1 + t) • Specific → TH = PW + T Where: t = tariff rate T = tariff TH = Price in H after the tariff (not the tariff itself) Prohibitive Tariff If you put a tariff T, it increases the price of importing from the world and therefore increasing domestic supply QH = Domestic Demand = Domestic Supply → Autarky Non-prohibitive tariff OA’ = Domestic supply A’B’ = Imports from the rest of the world → smaller than AB OB’ = Domestic demand 6 Change in surplus The yellow area is only the change in surplus 2. Quotas → quantitative restrictions to imports 3. Non-Tariff Barriers (NTBs) → they are determined by the set of rules that each country imposes to regulate industrial production methods, safety standards, environment, consumer protection, etc. These requirements (legitimate when they aim at preserving consumers’ health) constitute a burden on producers and build a complex layer of multiple requirements constituting additional costs (thus higher prices). Free Trade Areas and Custom Unions REGIONAL INTEGRATION AGREEMENTS (RIAs) RIAs are groupings of countries formed with the objective of reducing barriers to trade between members of the group, such as the EU. As of January 2020, 303 RIAs are in force. Trade agreements between countries • 2 countries: Home (H) and Partner (P) • Starting point: protectionism with all trade partners → H and P maintain positive tariffs TH and TP between themselves • H and P now set zero tariffs between them They have two possibilities: o Free Trade Area (FTA) → Countries maintain individual tariffs TH and TP with the rest of the world but liberalize trade between themselves, like NAFTA (Us, Canada, Mexico) o Customs Union (CU) → Countries agree on a unique Common External Tariff with the rest of the world and liberalize trade between themselves, like the EU Trade deflection Suppose Free Trade Agreement (FTA) is in place between countries H and P • P autonomously decides to have free trade with C, while H keeps its protectionist policy with country C (this works in a FTA, but it’s impossible in a Customs Union because the tariff is the same in the entire CU). • If you are based in C, you can export duty-free to P, but if you want to export to H, you have to pay the tariff. • So, to avoid the H’s tariff, C exports duty-free to P and then you re-export the same product from P to the H. To prevent trade deflection, the rules of origin (= only goods that have “origin” and create value added in the FTA between H and P can freely circulate between H and P) was established. There are two basic criteria for determining the origin of products: • Wholly obtained or produced → it applies to commodities and related products that have been entirely grown, harvested or extracted from the soil in the territory of that member country or have been manufactured exclusively from these products (e.g. plants, animals born and raised, fish when caught in the territorial waters). • Sufficient working or processing (sufficiently transformed) → for complex products there are different criteria such as changes in tariff classification or % of regional value content. 7 CASES OF FREE TRADE AREAS • Let’s consider the demand for a homogeneous good in two countries: H and P • Both countries can produce the good (SH and SP) or they could buy it from the rest of the world at price pW (SW) • SP is flatter than SH → for all prices, P can supply more units of the good than H (= P is more efficient than H in producing the good) CASE 1: Tariff in both H and P, P is large Starting point: • Prohibitive tariff P = TH in H → OHQH is domestically produced and consumed, no imports from RoW • Prohibitive tariff P = TP in P → OPQP is domestically produced and consumed, no imports from RoW Then a Free Trade Area is formed, and each country maintains autonomous trade policies with RoW (TH  TP). • H has access to P’s production: we can draw the supply SH+P (flatter than both SH and SP) • We can draw the effective supply under the FTA (SH,FTA), which takes into account that P can supply up to OPQP at the price pFTA = pP • In H the total demand is the quantity OHD o OHC → H produces domestically o CD → H imports from P at the price pFTA = pP • In P the total demand is the quantity OPQP o OPE → P produces domestically o EQP = CD → P produces domestically but export to H, so P needs to import EQP from the rest of the world (indirect trade deflection) at price pw (consumers pay the after-tariff price Tp) Country P is large enough to cover demand from H not large enough to cover demand from H Prohibitive tariff both in H and P case 1 case 2 only in P case 3 case 4 10 CASE 3: Tariff in P, P is large Starting point: • Less than prohibitive tariff TH in H; OHA is domestically produced and OHB demanded, AB is imported from RoW • Prohibitive tariff TP in P; OPQP is domestically produced and sold, with no imports from RoW Then a Free Trade Area is formed, and each country maintains autonomous trade policies with RoW (TH  TP). • H has access to P’s production: we can draw the supply SH+P (flatter than both SH and SP) • We can draw the effective supply under the FTA (SH,FTA), which takes into account that P can supply up to OPQP at the price pFTA = pP • In H the total demand is the quantity OHD o OHC → H produces domestically o CD → H imports from P at the price pFTA = pP → H was importing from RoW and is now importing from P because it is cheaper! (trade diversion) • In P the total demand is the quantity OPQP o OPE → P produces domestically o EQP = CD → P produces domestically but export to H, so P needs to import EQP from the rest of the world (indirect trade deflection) at price pw (consumers pay the after-tariff price Tp) Welfare analysis: • H gains from the FTA because, even if producers are worse off, consumers can now buy the good at a lower price than before pFTA < pH → trade creation H experiences trade diversion: before H imported AB from the RoW and H’s government gained pwTH*AB. Now, H doesn’t import from RoW anymore. → the effect on H is ambiguous: (1) + (2) – (3) • P imports EQP from the RoW, so the government gains the revenue on the imported goods (4) 11 CASE 4: Tariff in P, P is not large Starting point: • Less than prohibitive tariff TH in H; OHA is domestically produced and OHB demanded, AB is imported from RoW • Prohibitive tariff TP in P; OPQP is domestically produced and sold, with no imports from RoW Then a Free Trade Area is formed, and each country maintains autonomous trade policies with RoW (TH  TP). • H has access to P’s production: we can draw the supply SH+P (flatter than both SH and SP) • We can draw the effective supply under the FTA (SH,FTA), which takes into account that P can supply up to OPQP at the price pP Notice: pFTA > pP because country H’s demand of imports from country P at price pP can’t be satisfied (P is not “large enough”) • In H the total demand is the quantity OHD o OHC → H produces domestically o CD → H imports from P at the price pFTA → H was importing from RoW and is now importing from P because it is cheaper! (trade diversion) • In P the total demand is the quantity OPQP o OPE = CD → P exports to H o OPQP → P imports from RoW (indirect trade deflection) at price pw (consumers pay the after-tariff price Tp) • Note that D’D = C’C (extra production in H) + QPE (extra production in P) Welfare analysis: • H gains from the FTA because, even if producers are worse off, consumers can now buy the good at a lower price than before pFTA < pH → trade creation H experiences trade diversion: before H imported AB from the RoW and H’s government gained pwTH*AB. Now, H doesn’t import from RoW anymore. → the effect on H is ambiguous: (1) + (2) – (3) • P imports OPQP from the RoW at price pw so the government gains the revenue on the imported goods (4) Moreover, producers in P export OPE to H at pFTA instead of pP : ΔPS = 5 Note! We observe price discrimination: price pP in P and price pFTA in H 12 CASES OF CUSTOM UNIONS In CUs, participating countries, apart from abolishing all trade restrictions among themselves, also relinquish their ability of independently fix their tariffs towards the rest of the world in favour of a Common External Tariff (CET), which will be fixed at a level convenient for each member of the CU. ➔ CET = PW + TCET (world price + tariff of the common external tariff) Once the CET is established, P cannot freely supply its production to H because it cannot import from the RoW at its own tariff, only at the CET. P will only be willing to export to H its excess supply (which is positive if CET > pP) CASE 5: Tariff in both H and P Starting point: • Prohibitive tariff TH in H: OHQH is domestically produced and consumed, with no imports from RoW • Prohibitive tariff TP in P: OPQP is domestically produced and consumed, with no imports from RoW Then a customs union is formed and a Common External Tariff (CET) is adopted with respect to imports from RoW, such that TH < CET < TP (tariff averaging). We consider a CET ensuring autarky of the integrated area. • H has access to P’s excess supply MP = FE = CD (P cannot import from RoW at pw as in the FTAs, but it can import only at CET), so we can draw the supply SH + MP • We draw the effective supply under the CU (SH,CU), which takes into account that P can supply up to its excess demand at all prices above pP • In H the total demand is the quantity OHD o OHC → H produces domestically o CD → H imports from P • In P the total demand is the quantity OPF o OPE → P produces domestically o FE = CD → P exports to H Prohibitive tariff both in H and P case 5 only in P case 6 15 FREE TRADE AREAS VS CUSTOMS UNIONS (COMPARE CASE FTA3 TO CU6) Moreover, CU imply a political cost of negotiations, which grows with the size and heterogeneity of the CU, thus generating a trade-off with different optimal solutions depending on the specific case. Since the FTA are more efficient, why did the EU choose to be a CU? CU can generate greater welfare effects for member countries by increasing their bargaining power on the global stage (= removal of the “small country” hypothesis), leading to favorable trade agreements. Because, as a CU, the EU becomes a "large country" and might gain by charging a moderate tariff unilaterally. This gain makes the threat credible, which would lead 3rd countries to reduce their tariffs too. The fact that raising tariff moderately in a large country might lead to gains can be shown with economies of scale. CASE 7: Economies of Scale in Customs Unions Starting point: • A good is produced in the two countries H and P at declining average costs (AC curve), with P more efficient than H (ACP is lower than ACH) • The supply curve (= min price at which producers are willing to supply quantity q) is the MC curve because AC must be always covered • When q↑, AC↓ and converges to MC asymptotically (AC is always above MC) • Because of the shape of supply (cost) curves, the minimal tariff that can be sustained at equilibrium is the prohibitive one (no imports from RoW). Hence country H internally produces and consumes OHA at price TH, while country P internally produces and consumes OPQ at price TP. 16 Then a customs union is formed and, because of the economies of scale, both H and P have incentives if P produce everything. A Common External Tariff (CET) is adopted with respect to imports from RoW. CET is not tariff averaging but it’s lower. • In H the total demand is the quantity OHA’ at the price CET o nothing → produced in H because H is less efficient so P attracts all the demand of H and the total demand in P = DP + DH, they probably specialize in another good or move their production to P o OHA’ → imported from P • In P the total demand is the quantity OPQ’ o OPX → produced in P (↑employment) o OHA’ = Q’X → exported to H Welfare effects: • H gains from the CU since its consumers can now buy the good at price CET < TH → trade creation (1) + (2) • At CET, consumers in P demand OPQ’ > OPQ at a lower price, hence experiencing the cost reduction (3) + (4), while producers produce OPX > OPQ, hence the country also gains in terms of employment. The change in welfare in P is bigger than in standard cases without economies of scale because CET < TP Some practical caveats Trade diversion • Initially H is not producing the good, but it import from RoW at pW. With the CU, consumers gain 1+2 due to trade creation, and the government loses 1+3 due to trade diversion. • In P, which was initially producing the good, with the CU it has a cost reduction (4+5). Trade suppression • Initially H is producing the good and, with the CU, consumers in H benefit from trade creation • Country P is not producing the good and is importing OQ from the RoW o at pw (TP is zero) → with CU, consumers in P will suffer from “trade suppression”, as cheap imports from RoW are replaced by less efficient internal production. o at pw + tariff = TP → with CU, consumers in P gain 4+5 (trade creation), the government loses 4+6 (trade suppression) Perverse specialization • We might observe “perverse specialization” if a large but less efficient country captures the whole market just due to a market-size advantage. • H is less efficient but bigger than P (see AC and D) • Consumers buy the cheapest good, so consumers in P will buy in H (TH < TP): the production in P stops. • The additional production in H slightly reduces the ACH. • Differently from other cases, the starting price (TH and TP) is not showing the efficiency level of the producer. 17 EU TRADE POLICY Goals, tools, and institutional aspects EU trade policy: introduction • The EU is the world’s biggest trader and believes that globalisation can bring economic benefits to all, including the developing countries, provided appropriate rules are adopted at the multilateral level and efforts are made to integrate developing countries in world trade. • That is why the EU is a member of the World Trade Organization (WTO and negotiates and signs (bilateral/regional) trade agreements with third countries. • EU Trade Policy has always been one of the most effective foreign policy tools and the customs union was the EU’s first big step towards economic integration. Treaty of Rome (1957) With the Treaty of Rome, the EU member States decided: • to start the process of forming a single market by abolishing legal restrictions to trade within the EU. • to set up a Customs Union with the aim to liberalize trade The Treaty of Rome gives the EU exclusive power to set the trade policy with third nations (individual Member States cannot sign independent trade agreements). In the 20th century, the EU’s power on trade policy was basically limited to tariffs, but as the range of important trade barriers broadened, the competence of the EU has been extended (eg, to foreign investment, services, property rights) → big step forward with the Lisbon Treaty (2009). EU institutions for trade policy • The European Commission has the task of negotiating trade matters with third nations on behalf of the Member States. The Commission has also the right of initiative on trade agreements, and it supervises the implementation of such agreements. The Commission conduces negotiations in accordance with specific mandates defined by the Council and the Parliament. Such directives are approved through ‘ordinary legislative procedure’. • The Parliament and the Council legislate on all EU trade legislation (eg, granting GSP preferences, imposing anti- dumping measures). • The Council must adopt any agreements negotiated by the Commission after the Parliament has given its consent. Parliament cannot amend in this case (but has influence through veto power). In the U.S. → Trade Promotion Authority (TPA), also called "fast track”, gives the President the power to negotiate trade agreements, draft implementing legislation to change US law, and sign agreements into international law. Congress’s involvement is restricted to an up or down vote on the final bill with no amendments allowed. EU’s competences regarding trade policy The EU's exclusive competence covers the following matters: • trade in goods, including regulatory matters; • trade in services, including mutual recognition agreements and all transport services; • trade related aspects of Intellectual Property (IP); • public procurement; • market access in the area of FDI; • investment protection as far as it concerns FDI; • trade and sustainable development in its entirety; and • the termination of member State bilateral investment agreements for the parts concerning exclusive competence. Mixed agreements are when agreements cover policy areas that are not only of EU’s exclusive competence and, along with the EU approval, national parliaments have to ratify them. 20 Global value chains (GVCs) A value chain is the full range of activities that firms engage in to bring a product to the market, from conception to final use (from design, production, marketing, logistics and distribution to support the final customer). Global value chains (GVCs) are the natural offspring of globalization: • Reduction in transport, trade and investments costs (due to technology, trade and investment liberalization). • The growing interconnectedness of economies and access to foreign markets (inputs and outputs). • Specialisation of firms and countries in tasks and business functions. • Networks of global buyers and suppliers. In GVCs firms control and co-ordinate activities in networks of buyers and suppliers, and multinational enterprises (MNEs) play a central role. • New drivers of economic performance. In GVCs, trade and growth rely on the efficient sourcing of inputs abroad, as well as on access to final producers and consumers abroad. Gravity model and GVCs According to the gravity model (Jan Tinbergen), two points about the geography of international trade matter: • Size → The bigger the GDP of the countries involved in a bilateral trading relationship, the more they trade with each other. • Distance → The farther away two countries are from each other, the smaller the volume of trade. That is partly related to transport costs, but also cultural and linguistic differences come into it. EU tariffs, bilateral agreements and the GSP The tariff structure of the EU • When declared to customs in the EU, goods are classified according to the Combined Nomenclature (CN). This determines which rate of customs duty (tariff) applies and how the goods are treated for statistical purposes. • The CN is based on an international classification of products known as the Harmonized System Nomenclature (HS) which comprises about 5000 commodity groups. • The tariff structure of the EU (TARIC database) indicates the tariff for every single detailed product classified in the HS nomenclature The EU’s ‘Pyramid of preferences’ The pyramid of preferences ranks the preferential relationships of the EU with the various countries in the world according to a decreasing degree of preference. The top of the pyramid expresses the maximum preferential treatment that the EU can grant to another country, i.e. the membership of the EU. At the bottom of the pyramid: the MFN tariff (i.e. the default CET) applied by the EU when no specific preferences are granted but the ones agreed within the WTO rules. Special tariffs (GSP) • If a country negotiates agreements with other countries, that means that the tariffs that both parties are committed to set are below the MFN tariff (the default tariff set for WTO members), this is why they are also named preferential trade agreements (PTAs). • The WTO allows to violate the MFN rule to give a special treatment to developing countries. In the EU: 21 EU types of agreements 1. Association Agreements → the neighbourhood dimension, or “proximity policy”, which concerns the countries close to Europe, and aims at strengthening the EU trade and political relations countries surrounding the EU from Ukraine to Morocco In certain cases, they prepare for future membership of the EU by containing an ‘accession clause’. 2. Cooperation Agreements → the enhanced EU sphere of influence as a global partner EU Agreements 1. Enlarged Single Market → European Economic Area Agreement with Norway, Iceland, Liechtenstein and Switzerland 2. Euro-Med Association Agreements → asymmetric bilateral FTAs, since the EU cuts tariffs to zero faster than partners, plus financial and technical assistance, services and FDI. 3. GSP+ with Balkans → the EU has granted preferential trade access on asymmetric basis. Several Stabilization and Association Agreements have been signed, involving cooperation in view of future membership of the Union. 4. GSP → Several Partnership and Cooperation Agreements are in place with CIS countries. Note! The EU-Korea FTA is the most comprehensive free trade agreement ever negotiated by the EU. EU trade policy with former colonies To avoid imposing the CET on imports from former colonies, the EU signed agreements with many of them: asymmetric deals where EU tariffs were set to zero but the poor nations did not remove theirs. These agreements have been renegotiated various times and in 2000 the EU and the ACP (African, Caribbean, Pacific) nations agreed to modernize the deal (also because it was inconsistent with the WTO as it distinguished among developing nations on the basis of colonial ties). With the Cotonou Agreement, ACP nations commit to eventually removing their tariffs against EU exports by negotiating bilateral Economic Partnership Agreements (EPAs) with the EU and among themselves. The new EU’s trade strategy Four drivers that triggered a new phase in the EU: 1. The WTO got stuck: the Doha Round is not progressing, and the Appellate Body is not working. 2. President Trump thought that he inherited “a significantly flawed trading system” that justified a more confrontational and mercantilist U.S. approach, imposing tariffs also on EU export. 3. In 2001 China joined the WTO but the expectations of deep liberalization did not materialize: China ranks first in EU’s antidumping tariffs and is purchasing businesses abroad through its State-controlled enterprises that are allegedly subsidized by the State. 4. With Covid-19 trade is not flowing like it used to be. Lockdowns stopped manufacturing and shipping, national security concerns stopped the export of essential/critical products such as personal protective equipment and vaccines. Global value chains are as strong as the weakest link. The new EU’s trade strategy • In 2020 the European Commission coined “Open strategic autonomy” o Reduction of dependency and reinforcement of security of supply o Protection from unfair and abusive practices o Diversification and solidification global supply chains • In 2021 the Commission listed six policy areas: 1. Reform the WTO: eg, restoring a fully-functioning WTO dispute settlement with a reformed Appellate Body. 2. Support the green transition and sustainable value chains → Carbon Border Adjustment Mechanism (CBAM) 3. Support the digital transition and trade in services → pushing WTO agreement on digital trade including rules on data flow and privacy. 4. Strengthen the EU’s regulatory impact by ‘exporting’ EU standard at an international level. 5. Strengthen the EU's partnerships with neighbouring, enlargement countries (Western Balkans) and Africa. 6. Strengthen the EU’s focus on implementation of trade agreements, and ensure a level playing field. 22 EUROPEAN SINGLE MARKET What is the European Single Market? A market has got its distinct geography due to restrictions of different nature: physical (oceans, mountains), economic (transaction and transportation costs), legal (exclusive rights, tariffs, standards). Market integration is a situation such that the flows of products, services and factors between countries are on the same terms and conditions as within countries. This creates new opportunities for businesses, but also gives consumers wider choice and lower prices. In the single market price differences eventually arising among countries should be no more than the cost of transportation plus related transaction costs. Keywords of the European Single Market • Four fundamental freedoms → in the Treaty of Rome, the EU has the aim to achieve free movement of goods, capital, services, and labor. • Level-playing field → a market based on free and fair competition where everyone, independently of the nationality, has the same chance of succeeding. • Liberalization → it is the process of removing government control, reducing entry barriers (e.g. authorizations and licenses) and opening up the markets to competition. • Ownership neutrality → usually liberalization goes with privatization (i.e. the transfer of ownership from the government to the private sector). However in the EU, according to the principle of ownership neutrality, State- Owned Enterprises (SOEs) are not illegal. However SOEs, as any other firm, cannot receive a preferential treatment by any public institution. How to set up a single market In order to change the geographic dimension of the market, States have to facilitate free circulation of goods, services, capital and labour by: 1. Abolishing legal restrictions: no tariffs, no quotas, no legal monopolies → European Single Market 2. Promoting fairness in free trade: no public subsidies and protections granted in the domestic market to national players or anti-competitive behaviours by national players → Competition policy 3. Reducing the impact of physical obstacles: building transport infrastructure → Trans-European Networks 4. Reducing economic costs: fixing exchange rates between currencies, substituting national currencies with a single currency → Economic and Monetary Union (EMU) In order to maximize the gains from market integration, two dimensions of potential costs/distortions have to be eliminated, namely: • Market fragmentation caused by: o Non-tariff barriers (NTBs) o The absence of a regulatory framework • Negative macroeconomic spillovers 1st step: elimination of tariffs and quotas Starting from the late 1960s the EU abolished intra-EU tariffs and quotas 2nd step: elimination of NTBs Non-Tariff Barriers might be imposed by countries to norm industrial production methods, standards for safety, environment, consumer protection. With the Treaty of Rome, the EU started a programme for the approximation of Member States’ national legislations through directives and regulations. However, the progress in this area have been limited, due to the use of unanimity voting in the Council of the EU on issues related to the single market. Example: Cassis liqueur case, in which the ECJ said that every member State is obliged to accept on its territory products which are legally produced and marketed in another member State (principle of mutual recognition), limiting the negative impact of NTBs. 3rd step: harmonization of legislation Many services are non-tradable (e.g. local transport, retail banking, mobile telecommunication); this means that foreign firms cannot ship the service from their home country but they need to locate assets in the target country. However, national regulations can block or can slow-down the entry of foreign firms (for example being a dentist in Italy requires a certification issued by an Italian authority). 25 Capital Market Union (CMU) • The efficiency of the financial sector can generate additional growth. However, the financial sector in the EU is far from being a single market. • Moreover, the EU has a high bank dependency. This means that firms, in particular the small ones, have difficulties accessing alternative funding sources when they cannot get credit from banks. And, since the financial crisis (2008), cross-border lending in the EU declined and banking activities migrated increasingly back to home jurisdictions. • To solve this problem the Commission launched a capital markets union (CMU) initiative in 2015 but markets remained fragmented. The Commission re-launched the CMU in September 2020, to support the recovery following the COVID-19 crisis and finance the green and digital transitions. The CMU action plan proposes 16 actions such as: o Action 1: Making companies more visible to cross-border investors: Establishing a European single access point (ESAP) to provide for seamless, EU-wide access to all relevant information (including financial and sustainability-related information) disclosed to the public by companies including financial companies. o Action 2: Supporting access to public markets. o Action 7: Empowering citizens through financial literacy. o Action 14: Consolidated tape to provide complete, accurate and comparable data on prices and volume of traded securities in the EU, thereby improving overall price transparency across trading (and competition between) venues such as stock exchanges. Consequences Medium-term growth effects: EU accessions Accession countries provide a natural experiment to evaluate the medium-term growth effects of European integration since these countries experienced a rather sudden and well-defined increase in economic integration when they joined. 1. stock market prices should increase (due to higher efficiency, thus profits and expected dividends); 2. the aggregate investment to GDP ratio should rise; 3. the net direct investment figures should improve. Long-run growth effects The economic integration can lead to permanently higher growth rates if: • the rate of technological progress is positively affected by market integration • strong competition as induced by the integration of the single market leads to continuous productivity gains • structural reforms boost the potential growth of the involved countries EUROPEAN COMPETITION POLICY Competition in the European Single market Introduction Economic integration (from national markets to a Europe-wide market) and liberalization (no special protection to national firms) lead to an increasing competition among firms. This brings the need to restructure (mergers, acquisitions, exits) and only the fewest, biggest, most efficient firms survive. This gives incentives for firms to collude and for national governments to subsidize national firms in trouble. There’s the need for an ad-hoc competition policy to protect European consumers, so that big firms (regardless of their nationality) that want to do business in the EU have to comply with competition rules. A case-by-case approach is needed because monopolies, or concentrated markets, might not be necessarily dangerous for consumers’ welfare (economies of scale, contestable markets, innovation). EU competition policy applies to the behaviour of “undertakings”, which means any entity engaged in an economic activity regardless of its legal status. This means that parent and subsidiary firms may be held to be part of the same undertaking. The EU legislation identifies the legal instruments to be used to guarantee the effectiveness of competition in the single market and the scope of application, which states that EU rules apply only when a competition issue concerns practices which affect trade between Member States (= firms should have a certain amount of market power). 26 The Institutions of EU Competition policy • In the EU, the European Commission is the Institution responsible for managing competition policy. • The Commission has a wide range of inspection and enforcement powers: investigate businesses, hold hearings, impose fines and grant exemptions. • The Commission decides independently on cases, but its decisions can be challenged in the General Court with a final appeal before the Court of Justice. The definition of the relevant market Market definition is a tool to define the boundaries of competition between firms, with the objective to identify market power. Generally, it is in the interest of defendant undertaking to describe the market as broadly as possible, and for the Commission to verify the correctness of the proposed description. Two dimensions of boundaries: 1. Product relevant market (the principle of substitutability) • The assessment of demand substitution entails a determination of the range of products which are viewed as substitutes by the consumer. • One way of making this determination is by making a hypothetical “Small but Significant Non-transitory Increase in Price” (SSNIP test) and evaluating the possible reactions of customers. o Would costumers switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small, permanent price increase in the products and areas being considered? o If substitution would be enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market. o This would be done until the set of products and geographic areas is such that small, permanent increases in relative prices would be profitable. • The cross-price elasticity of demand shows the relationship between two goods or services; it captures the responsiveness of the quantity demanded of one good to a change in price of another good. The cross-price elasticity may be positive when the two products are substitutes or negative when the two products are complements. The SSNIP test examples • Is “Barilla” big enough to cause competition concerns in the EU? What is its market power? Using the SSNIP we assume a 10% increase of the price of pasta. If a 10% price increase for pasta pushes customers to buy more rice so that the price increase is unprofitable, then the two products are substitutes and the relevant market has to include both pasta and rice. • Is banana importers capable to cause competition concerns in the EU? What is their market power? Using the SSNIP we assume a 10% increase of the price of bananas. If the 10% price increase for bananas is profitable, that means that consumers keep on buying bananas even if they are more expensive. No other fruit is a substitute, and banana is a relevant market on its own. 2. Geographic relevant market The geographic market comprises the area in which the undertakings are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas. Consumers’ preferences may be such that geographic and cultural barriers are relevant. The size of the market decreases with transportation costs and increases with the value of the product. 27 What does EU Competition policy control? 1. AGREEMENTS BETWEEN FIRMS (CARTELS) • Normally, firms make agreements: they can be vertical (between a manufacturer and a distributor) or horizontal (with a firm in the same market to develop a joint project). In any case, firms keep their independence (≠ mergers). • Agreements which contribute to improving the production or distribution of goods or to promoting technical or economic progress might not be dangerous for competition, provided that consumers are allowed a fair share of the resulting benefit. • Agreements are prohibited if they are price-fixing agreements or territorial protection clauses, since they distort competition. • Agreements are not necessarily written and signed contracts Concerted practices: cartels and tacit collusion Concerted practices (= collusion) happens when firms cooperate to raise prices above competitive levels. Concerted practices generally have an “horizontal” dimension. They can be: • Explicit collusion → a cartel colludes by directly communicating with each other. • Tacit collusion → firms collude without explicit communication. o When there is no evidence of an agreement the Commission analyses the behaviour of undertakings which leads to conditions of competition which do not correspond to the normal conditions of the market. o The Commission focuses on those relevant markets where there are conditions easing collusion such as: ▪ homogeneity of product ▪ importance and number of undertakings (it’s easier to co-ordinate a small number of undertakings, but participation should represent a large part of the market) ▪ entry barriers ▪ information sharing (price leader’s announcement, trade association, discounts) ▪ low variability of the market (it’s easier to control the behaviour of undertakings belonging to the cartel). However, parallel price increases by several undertakings are not in themselves prohibited if it is a coincidence or the result of a particular market situation. Fines, immunity, and victims’ claims for damage • Firms involved in illegal agreements (cartels) are liable to be fined up to 10% of the turnover of the entire group of companies worldwide and for all products sold. • However, a leniency programme encourages firms to inform the Commission about their infringements. The first firm that enables the Commission to find an infringement, receives total immunity from its fine • In addition to the Commission’s fine, any citizen or business which suffers harm as a result of a breach of the EU competition rules is entitled to claim compensation from the party who caused it. Examples o Six LCD panel producers agreed on prices, exchanged information on future production planning, capacity utilization, pricing and other commercial conditions. o Four rechargeable battery producers took part in bilateral, and sometimes multilateral, contacts to increase prices and exchange commercially sensitive information. o Sotheby’s and Christie’s operated a price-fixing cartel to inflate commission fees. Vertical agreements: less dangerous than the horizontal ones Agreements between companies operating at different levels of the production or distribution chain can have: • Anticompetitive effects → when the agreement limits the supplier or the buyer (an obligation on the buyer not to purchase competing brands or an obligation on the supplier to only supply a particular buyer). • Procompetitive effects → when the agreement helps a manufacturer to enter a new market, or when avoids the situation whereby one distributor ‘free rides’ on the promotional efforts of another distributor. A Block Exemption Regulation provides a safe harbour for most vertical agreements (when both the supplier and the buyer do not have a market share exceeding 30%). Example: NBC Universal and Sanrio illegally restricted traders from selling licensed merchandise cross-border and online within the European Single Market.