Theory of Economic Integration Preferential Trade Agreements and the Multilateral Trade System European Union integration Dr hab. Katarzyna Śledziewska
Outline Regional Trade Agreements and WTO rules Landscape of regionlism EU integration- stages Dr Katarzyna Śledziewska
WTO rules The GATT The princeple of non-discrimination central conception Recognisedthe importance and value of economic integration between countries Regionalism - the most significant exception to WTO s principal of nondiscrimination Three sets of rules in the WTO permit the creation of RTAs: 1. Article XXIV of the GATT 2. the Enabling Clause 3. Article V of the General Agreement on Trade in Services (GATS)
WTO rules Article XXIV of the GATT lays down conditions for the establishment and operation of free trade agreements and customs unions covering trade in goods Paragraph 4 the purposeof a customs union or of a free-trade area should be to facilitate trade betweenthe constituent territories and not to raise barriers to the trade of other contracting parties with such territories
WTO rules Article XXIV of the GATT Paragraph 8 Definitions A customs union» substitution of a single customs territory for two or more customs territories» duties and other restrictive regulations of commerce are eliminated substantially» the same duties and other regulations of commerce are applied by each of the members of the union A free-trade area» a group of two or more customs territories in which the duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
WTO rules Article XXIV of the GATT Paragraph 8 duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union
WTO rules Article XXIV of the GATT Paragraph 8 substantially all the trade It is commonly accepted that agriculture is excluded (EFTA) or only included selectively (EU with Mediterrean coutries Questions, doubts substantially all the trade 100% or 90%? an exception to MNF allowed as long as it is total (100 percent of trade) rather than partial (20 percent preference for parnet country)
WTO rules Article XXIV of the GATT Paragraph 5 the duties and other regulations of commerce ( ) shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement Interim agreements are also possible, provided they lead to a FTA (CU) within a reasonable time
WTO rules the Enabling Clause, formally the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of developing Countries, permits regional agreements among developing countries on trade in goods The provisions of paragraph 1 apply to referential tariff treatment accorded by developed contracting parties to products originating in developing countries in accordance with the Generalized System of Preferences de facto unlimited discretion to conclude incomplete preferential agreements or any kind of FTAs
WTO rules Article V of the General Agreement on Trade in Services (GATS) Economic integration establishes conditions that permit liberalization of trade in services among regional partners for both developed and developing countries provides for the absence or elimination of substantially all discrimination between or among the parties through: elimination of existing discriminatory measures, and/or prohibition of new or more discriminatory measures,
WTO rules ArticleXXIV p. 10 The CONTRACTING PARTIES may by a two-thirds majority approve proposals which do not fully comply with the requirements of paragraphs 5 to 9 inclusive, provided that such proposals lead to the formation of a customs union or a free-trade area in the sense of this Article Dr Katarzyna Śledziewska
WTO rules ArticleXXV p. 5 In exceptional circumstances not elsewhere provided for in this Agreement, the CONTRACTING PARTIES may waive an obligation imposed upon a contracting party by this Agreement;Providedthat any such decision shall be approved by a two-thirds majority of the votes cast and that such majority shall comprise more than half of the contracting parties. Dr Katarzyna Śledziewska
WTO rules Other non-generalized preferential schemes non-reciprocal preferential agreements involving developing and developed countries require Members to seek a waiver from WTO rules require the approval of three quarters of WTO Members. the US Caribbean Basin Economic Recovery Act (CBERA),he CARIBCAN agreement Canada offers duty-free non-reciprocal access to most Caribbean countries Turkey-Preferential treatment for Bosnia-Herzegovina the EC-ACP Partnership Agreement. Dr Katarzyna Śledziewska
Outline Regional Trade Agreements and WTO rules Landscape of regionlism EU integration - stages Dr Katarzyna Śledziewska
Average number of PTAs in force per country, 1950-2010, notified and non-notified PTAs, by country group Dr Katarzyna Śledziewska
Cumulative number o f intra- and c ross-regional PtAs in force, 1950-2010, notified and non-notified PtAs Dr Katarzyna Śledziewska
Total and average number of PTAs in force, 2010, notified and non-notified PTAs, by region, regional type and country group Dr Katarzyna Śledziewska
Network of PTAs in force, 2010, notified and nonnotified PTAs, by region Dr Katarzyna Śledziewska
Cumulative number of bilateral PTAs and types of plurilateral PTAs in force, 1950-2010, notified and non-notified PTAs Dr Katarzyna Śledziewska
Number of bilateral PTAs and types of plurilateralptas in force, 2010, notified and nonnotified PTAs, by country group and regional type Dr Katarzyna Śledziewska
Type of PTAs in force, 2010, notified and non-notified PTAs Dr Katarzyna Śledziewska
Cumulative number of PTAs, 1950-2010, notified and non-notified PTAs, by scope of coverage Dr Katarzyna Śledziewska
Participation of different types of RTAby country pairs, 1995-2009, % www.wto.org Dr Katarzyna Śledziewska
Participation of different types of RTA by country pairs, 1995-2009, changes Źródło: Opracowanie własne na podstawie danych WTO; www.wto.org data wejścia 29 maja 2011 Dr Katarzyna Śledziewska
Participation of different types of RTA by country pairs by continrnts, 2009 Źródło: Opracowanie własne na podstawie danych WTO; www.wto.org data wejścia 29 maja 2011 Dr Katarzyna Śledziewska
Formation of customs union in Europe. Tariff reduction. 01.01.1958 Treaty of Rome Realisation Manuf. Agricul. 01.01.1962 30% 40% 35% 01.01.1966 60% 80% 70% 31.12.1969 100% 100% 01.07.1968 100% 01.01.1968
Outline Regional Trade Agreements and WTO rules Landscape of regionlism EU integration - stages Dr Katarzyna Śledziewska
EU AND INTEGRATION PROCESS internal external Part of European integration process WTO RTAs
Economic integration in the EU The Treaty of Rome was a far-reaching document: it laid out virtually every aspect of economic integration implemented up to the 1992 Maastricht Treaty. The Treaty s intention was to create a unified economic area = an area where firms and consumers located anywhere in the area would have equal opportunities to sell or buy goods throughout the area, and where owners of labour and capital should be free to employ their resources in any economic activity anywhere in the area: 4 freedoms : goods, service, workers and capital; common policies where necessary.
Main elements of economic integration in the EU Free trade in goods: eliminate tariffs, quotas and all other trade barriers. Common trade policy with the rest of the world: Customs Union to trade deflection. Ensuring undistorted competition (to avoid deals that offset trade barrier removal): state aids are mostly prohibited; anti-competitive behaviour regulated by Commission; approximation of laws (i.e., harmonization); taxes (weak restrictions but no explicit harmonization).
Main elements of economic integration in the EU Unrestricted trade in services: principle of freedom of movement of services, but implementation has been hard. Labour and capital market integration: free movement of workers; free movement of capital in principle but many loopholes; very little capital-market liberalization until the 1980s. Exchange rate and macroeconomic coordination. Common policy in agriculture: set up in 1962, agriculture was much more important than it is today (e.g., about a third of French population was involved in agriculture in 1950s; today less than 5%).
Omitted elements of economic integration in the EU Social policy: social harmonization very difficult politically: nations have very different opinions on what types of social policies should be dictated by the government; it is not as an exchange of concessions. Also, not clear that European economic integration demands harmonization of social policies: national wage would adjust to offset any unfair advantage; if lower social standards meant lower production costs, long term result would be higher wages that offset the advantage. Tax policy: like social policies, tax policy directly touches the lives of most citizens and it is the outcome of a national political compromise. Thus, EU leaders have always found it difficult to harmonize taxes.
Task allocation Which level of government is responsible for policies in the EU? - exclusive competences : EU decides alone; - shared competences : responsibility shared between the EU and Member States; two types: members cannot pass legislation in areas where the EU already has; existence of EU legislation does not hinder members rights to make policy in the same area; - supporting, coordinating or complementary competence where the EU can pass laws that support action by members; - national competences : national or sub-national governments alone decide.
Task allocation
EU ability to act: decision-making efficiency In economics, efficiency means an absence of waste. In EU decisionmaking, efficiency means ability to act. The perfect measure of efficiency would predict all possible issues to be voted, decide how members would form coalitions, and use this to develop an average measure of how easy it is to get things done in the EU. Such predictions, of course, are impossible! Instead, passage probability measures how easy it is to find a majority under a given voting scheme (for a given issue): Passage probability = number of possible winning coalitions number of possible coalitions
EU ability to act: decision-making efficiency How has EU s efficiency changed over time as a result of reforms and enlargements?
The distribution of power among EU members No perfect measures available for distribution of power (i.e., influence) among EU members: - most direct and intuitive measure is national voting shares in the Council, but it has severe shortcomings; - probability of making or breaking a winning coalition = normalized Banzhaf index (NBI): although more sophispcated, the NBI for the EU15 is not very different from the national vote-share measure. The measures are also quite similar for EU27. Notice that budget allocations are an observable manifestation of power.
Power shifts in 2014 (or 2017) Voting rules introduced by the Lisbon Treaty came into effect in 2014. And, at the insistence of Poland they can be suspended at the wish of a single member up to 2017 (and old Nice rules apply). The Lisbon Treaty grants more power to smallest states and Germany while Spain, Poland and middle-sized states are biggest losers.
Internal integration: the EU-Index institutional integration (e.g. Mongelli et al. 2007) economic integration(könig, Ohr 2012) 25 indicators 4 dimensions of European economic integration: 1. EU Single market (for goods, services, capital and labor) 2. EU homogeneity (level of convergence) 3. EU symmetry (of business cycles) 4. EU conformity (to EU law and institutional participation)
Degrees of european economic integration Source: Mongelli et al. (2007)
Degrees of european economic integration
Degrees of european economic integration Stage 1 FTA tariffs and quotas are abolished for imports from the members area reduced in three steps starting in 1957 and ending in 1968 national tariffs and quotas against third countries Stage 2 CU common tariffs and quotas (if any) for trade with non-members completed in 1968 Stage 3 CM non-tariff barriers to trade & restrictions on factor movement- abolished promoting the integration of product and service markets restrictions on factor movement promoting the integration of capital and labor markets 1993 -the European Single Market
Degrees of european economic integration Stage 4 Economic Union a common market with a significant degree of co-ordination of national economic policies harmonization of relevant domestic laws Stage 5 Total Economic Integration an economic union with all relevant economic policies conducted at the supranational level, in compliance with the principle of subsidiarity. the euro area with a single monetary policy
EU AND INTEGRATION PROCESS Dr Katarzyna Śledziewska
EU AND INTEGRATION PROCESS
EU-Integration for certain country groups König, Ohr 2012
Two strands of European integration Federalism and intergovernmentalism= disagreement about depth of European integration: - Intergovernmentalism: nations retain all sovereignty OEEC (1948), Council of Europe (1949), Court of Human Rights (1950), and EFTA (1960). - Federalism: supranational institutions ECSC (1951): Belgium, France, Germany, Italy, Netherlands and Luxembourg (the Six ) place their coal and steel sectors under the control of a supranational authority.; EEC (1957): riding on the success of the ECSC, the Six committed to form a customs union, promise free labourmobility, capital market integration, free trade in services and a range of common policies.
Two non-overlapping circles Situation by the late 1960s:
Evolution to two concentric circles: domino effect I Falling trade barriers within the EEC and within EFTA lead to discrimination. The GDP (i.e., potential market size) of the EEC much larger than that of EFTA (and EEC incomes were growing twice as fast) Thus, the EEC club was far more attractive to exporters and this lead to new political pressure for EFTA nations to join the EEC. The UK applied for membership in 1961 and Denmark, Ireland, and Norway also followed since they would otherwise face stronger discrimination (other EFTA nations did not apply because of political reasons).
Evolution to two concentric circles domino effect I Charles De Gaulle stopped UK membership twice. Denmark, Ireland, and UK join in 1973 while Norwegians said no in a referendum.
Euro-pessimism, 1973-1986 - Political shocks: Luxembourg Compromise + enlargement = decision-making jam; Plans for extensive economic integration promised postponed. - Economic shocks: Bretton Woods falls apart, 1971-1973; Failed EEC monetary union; 1973 and 1979 oil shocks with stagflation; Introduction of technical barriers to trade. - Bright spots: Democracy in Spain, Portugal and Greece lead to their accession; EMS set up in 1978 works well; Merger Treaty (1965) and direct election of EU Parliament (1979).
Deeper circles: Single Market Programme Jacques Delors launches completion of the internal market. The Single European Act (1987) aims to create "an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured (i.e., the four freedoms promised by the Treaty of Rome). It also implemented important institutional changes: majority voting instead on unanimity on issues related to the Single Market.
Single Market Programme Basic elements: - Goods trade liberalization Streamlining or elimination of border formalities; Harmonization of VAT rates within wide bands; Liberalization of government procurement; Harmonization and mutual recognition of technical standards in production, packaging and marketing. - Factor trade liberalization Removal of all capital controls; Liberalization of cross-border market-entry policies, including mutual recognition of approval by national regulatory agencies.
Deeper circles: Domino effect II Deeper integration in EC12 strengthened the force for inclusion in remaining EFTA nations. New forces for inclusion lead to a domino effect: -EEA initiative (1989) to extend single market to EFTA nations; -Membership applications by all EFTA nations except Iceland and Liechtenstein: Norwegian rejected (again) membership in a referendum; Switzerland only adopted a EEA-like bilateral deal with EU. The fourth enlargement (1995) adds Austria, Finland, Sweden and leads to the EC15.
Communism s spectacular collapse Division of Europe was cemented by the Berlin Wall (1961). By the 1980s, West s economic system provided a far better way of life. Up to 1980s, Soviets thwarted reform efforts but inadequacy of Soviet system forced changes in USSR: -timid pro-market reforms (perestroika); -openness (glasnost).
Velvet revolutions in CEECs Pro-democracy forces in the central and eastern European countries (CEECs) had been repeatedly put down by military force hereto but found little resistance from Moscow in the late 1980s: -June 1989: Polish labour movement Solidarity forced free parliamentary elections and communists lost. Moscow accepted new Polish government. Moscow s hands-off approach to the Polish election triggered a chain of events: -Hungary opened its border with Austria and many East Germans moved to West Germany via Hungary and Austria; -mass protests in East Germany; Wall falls 9th November 1989; -end of 1989: democracy in Poland, Hungary, Czechoslovakia; -end of 1990: German unification.
The Maastricht Treaty On the success of the Single Market, Delorsproposes 2ndradical increase in European economic integration: monetary union. Maastricht Treaty signed 1992 committed EU countries to achieve monetary union by 1999, and a single currency by 2002. Ratification difficulties: - Britain opted out of common currency; - Danish voters rejected the Treaty and reversed their choice only once Denmark opted out of common currency.
Reuniting east and west Europe At first, no promise of eventual membership but Europe Agreements : -free trade agreements with promises of deeper integration and some aid. In 1993, the EU sets the Copenhagen criteria for accession of CEECs: -political stability of institutions that guarantee democracy, the rule of law, human rights and respect for and protection of minorities; -a functioning market economy capable of dealing with the competitive pressure and market forces within the Union; -acceptance of the Community acquis (EU law in its entirety) and the ability to take on the obligations of membership. Copenhagen summit (2002) says CEEC nations plus Cyprus and Malta join in 2004 (5th enlargement).
Preparing for eastern enlargement Impending enlargement required EU to reform its institutions. Five tries: - Amsterdam Treaty, 1997; - Nice treaty, 2000; - draft Constitutional Treaty, 2003; Reconsidered by IGC 2003; - Constitutional Treaty, 2004; - Lisbon Treaty, 2007.
Amsterdam Treaty Failed to agree main reforms set out as the goal for the Treaty. But, it did tie up the Maastricht Treaty: -more social policy; -Parliament powers modestly boosted; -flexible integration, closer cooperation introduced. But no agreement on reform of Commission, reform of Council voting rules, or on list of areas to move to QMV. The Amsterdam leftovers would be addressed by a future Treaty.
Nice Treaty Not a success! The critical Amsterdam leftover issues the size and composition of the Commission, extension of majority voting in the Council of Ministers and reform of Council voting rules were not fully solved. Irish voters initially rejected the Treaty. After some concessions were granted to Ireland, Irish voters accepted the Treaty.
Constitutional Treaty One year after Nice Treaty, EU leaders adopt the Laeken Declaration and set up the Convention on the Future of Europe to outline a new Treaty. The Convention decided to write a Constitution, which was signed in Rome in 2004. France and Netherlands rejected the Constitutional Treaty in referendums in 2005 and EU leaders suspend the ratification process.
Lisbon Treaty Under the German EU Presidency (2007), EU leaders declared the Constitutional Treaty to be dead and agreed on the basic outlines of its replacement: the Reform Treaty, known as the Lisbon (2007). Much of the Constitutional Treaty is taken up in the Lisbon Treaty: -all the grandiloquent language and gestures to supranationalism were dropped; -all references to symbols of statehood were eliminated; -the word constitution was banished. Goal was to avoid referendums without changing the substance. But Irish Constitution required a referendum: Irish voters initially rejected the Treaty, reversing their vote after some concessions. The Lisbon Treaty came into effect in December 2009.