EUP – Internal market

a trading bloc that gives preferential access to certain products from the participating countries

Free trade area/association (FTA)

Customs Union (CU)

Common Market (CM)

Economic Union (EcU)

Total Economic Union (TEcU) (Political Union)

• Members eliminate trade barriers with each other
• Members maintain own policies against non-members
• No positive integration
• EFTA, NAFTA

• CU  = FTA + common external tariffs
• Suppression of discrimination against CU members
• No positive integration
• Mercosur

• CM = CU + free movement of capital and labour
• A CU which abolishes restrictions on movements of factors of production
• No positive integration, ‘four freedoms’, EU-28

• CM with some degree of harmonization of national economic policies
• Positive integration introduced

• Unification of monetary, fiscal, social and countercyclical policies
• Supranational regulatory
• USA

Static effects (short term)

• Trade Creation: Gains due to shift of production from higher cost producer to lower cost producer.
• Ex: Before 2004, Netherlands imports machine tools from UK, due to NL tariffs against Polish imports…
• Trade diversion: Trade being diverted away from a more efficient supplier in a non-member country, towards a less efficient supplier in one of the member countries.

Dynamic effects (long-term)

• Firms serve larger markets so grow and specialize à economies of scale: lower costs
• More incentive to innovate and larger firms have more profits to allow it.

One act of integration triggers another

Due to the increased vulnerability of the countries outside the trade bloc in terms of trade flows.

Gains due to shift of production from higher cost producer to lower cost producer.

trade flows are redirected due to the formation of a free trade area or a customs union

When a customs union is formed, the member nations establish a free trade area amongst themselves and a common external tariff on non-member nations. As a result, the member nations establish greater trading ties between themselves now that protectionist barriers such as tariffs, import quotas, non-tariff barriers and subsidies have been eliminated

Trade being diverted away from a more efficient supplier in a non-member country, towards a less efficient supplier in one of the member countries

trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union

When a country applies the same tariff to all nations, it will always import from the most efficient producer, since the more efficient nation will provide the goods at a lower price. With the establishment of a bilateral or regional free trade agreement, that may not be the case. If the agreement is signed with a less-efficient nation, it may well be that their products become cheaper in the importing market than those from the more-efficient nation, since there are taxes for only one of them. Consequently, after the establishment of the agreement, the importing country would acquire products from a higher-cost producer, instead of the low-cost producer from which it was importing until then. In other words, this would cause a trade diversion.

• Goods & services (art 28 & 56) (most economists in favour of free trade)
  • More competition --> more efficiency, more choice, lower prices
  • But ‘creative destruction’ --> loss of firms & industries during transition
• Capital (art 63)
  • Capital can seek higher returns so better investment opportunities financed
  • But ‘creative destruction’ --> loss of firms & industries during transition
• Labour (art 45)
  • Labour can move to countries with jobs and higher wages
  • ‘Brain drain’
  • Extra pressure on social services

• Law of one Price
  • Price of good X should be same in two markets
  • Otherwise, opportunities for arbitrage[1]
• Intra EU trade – Extra EU trade
• Internal Market Scorecard:
  • The Commission publishes this scorecard every year – 4 pages about report on the progress the countries made concerning regulations, directives…

Opening the market to free competition

• Reducing tariffs
• Reducing / eliminating quotas
• Reducing non-tariff barriers.
• Trade liberalisation allows countries to specialise in producing the goods and services where they have a comparative advantage à economic welfare
• Lower prices
• Increased competition. Trade liberalisation means firms will face greater competition from abroad
• Economies of scale: trade liberalisation enables greater specialisation.

• Trade liberalisation often leads to a shift in the balance of an economy. Some industries grow, some decline. Therefore, there may often be structural unemployment from certain industries closing.
• Trade liberalisation could lead to greater exploitation of the environment, e.g. greater production of raw materials, trading toxic waste to countries with lower environmental laws.
• Not good for sectors such as oil, gas and electricity: companies get big --> Monopolies? Or these companies cooperate, not compete, and, so, keep high prices.

• Physical barriers
  • Border controls
• Technical barriers
  • Different product standards (e.g. Product labeling)
  • Public procurement practices
    • Government orders favour domestic firms
• Fiscal barriers
  • Different VAT levels, excise duties
• Examples of Barriers:
  • Customs duties
  • Customs procedures
  • Technical regulations, standards, etc. – e.g. for the purpose of consumer protection, health protection

Policy dictating a minimum of governmental interference in the economic affairs of individuals and society

• One country’s rules must apply throughout the EU.
• If one member determines product is fit for sale, all others obliged to do so as well.
• This is powerful way to overcome non-tariff barriers.

The problem is that government buy more goods from their country than from other countries, not the most efficiency cost.

• It is the buying of goods and services by government organizations.
• Opening up these contracts, which account for a large proportion of the GDP of the EU, has allowed an increase in competition between the enterprises of the European Union, reducing prices and guaranteeing better quality of services for citizens. Over the years, the EU has introduced legislative provisions, which modernise and facilitate the award of contract process. It has increased transparency, fairness and interoperability in this respect.

The good thing about PP is to stimulate economy.

• Positive Competition
  • Allocative Efficiency
    • Scarce resources are used to produce what buyers want
    • Unprofitable firms close: those resources employed by firms that are profitable (so produce things buyers want)
  • Technical or productive efficiency
    • Goods are produced at lowest costs
  • Dynamic efficiency
    • Firms encouraged to find new ways to use resources: innovate
• Perfect competition
  • More gains to consumers

difference between what buyer is willing to pay and what s/he has to pay (market price)

difference between what seller is willing to accept and what s/he receives from a sale (market price)

Prices are lower and quantities sold are higher than with less competition à More total surplus

• No supernormal profits
  • Supernormal profits = profits higher than resources can earn elsewhere for same risk
• Limitation of (perfect) competition
  • Small firms do not have funds to invest in R&D
• Small firms may have higher costs

Increasing the scale of production, leading to a lower cost per unit of output

Increasing the range of products produced by a business reduces the cost of each one (by making efficient use of complimentaries)

• Business cycle fluctuations, especially without policies to balance.
• Unequal income distribution (rich people gain more than poor people)