• Goods Trade Liberalization

1. Streamline or eliminate border formalities

2. Liberalize government procurement

3. Harmonization and mutual recognition of technical standards in production, packaging and marketing.

4. Harmonization of VAT rates.

The Single Market Act (I) 1986

• Factor Trade Liberalization

1. Increased capital market integration

2. Liberalization of cross-border market-entry policies, including mutual recognition of approval by national regulatory agencies

The Single Market Act (II) 1986

• General Deregulation

1. Reduction in subsidies and anti-competitive regulation

2. More active enforcement of competition policy

The Single Market Act (III) 1986

• Procedural and Transfer Policies

1. Qualified majority voting in the Council of Ministers on most single market issues

2. Substantial Increase in Structural Funds

The Single Market Act (IV) 1986

Intra-EC trade as a percentage of total trade

25

30

35

40

45

50

55

60

65

70

75

80

1958 1963 1968 1973 1978 1983 1988 1993

Per

cent

age

of t

otal

tra

de

Belgium, Luxembourg France Germany Italy Netherlands

Progress Towards Freer Trade

• Regional trade integration went hand in hand with multilateral trade liberalization under the auspices of GATT and later WTO. --- In late 50s, average tariff rates differed sharply on manufactured imports, ranging from 6.4% for Germany to 18.7 % for Italy.•Deepening trade with the Eastern European countries under the Europe agreements signed in 1993.--- After 1961 Dillon Round, the tariff rates came down sharply, and the common external tariff (CET) of the Community fell to 10.4% in 1968. After the 1968 Kennedy Round, the CET fell to 6.6%. Hence, tariff protection dropped significantly (in manufacturing) in the 1960s and early 1970s.--- CAP Policy: Contrary to the developments in manufacturing, the CAP raised the protection level in agriculture in the 60s. Before the entry, the UK, Ireland and Denmark has significantly lower agricultural protection than the EEC.---In 1999, average tariff in EU on manufactured goods has been reduced to 4.2% and further down to 3.7 % in 2000.

Progress Towards Freer Trade

Multilateral Tariff Reductions (Simple Average MFN Tariff Rates, Industrial products)______________________________________________________________________

1958 Dillon Round 1968 Ext. Tariff Kennedy Round Belgium 9.7 8.7 10.4 6.6France 17.0 15.3 10.4 6.6Germany 6.4 5.8 10.4 6.6Italy 18.7 16.8 10.4 6.6Netherlands 9.7 8.7 10.4 6.6

UK 16.5 14.9 14.9 9.2Denmark 5.6 5.2 5.2 3.2

Austria 14.9 11.4 11.4 8.2Sweden 6.5 6.3 6.3 4.2Norway 10.3 10.3 10.3 6.4______________________________________________________________Source: Resnick and Truman (1975)

Progress Towards Freer Trade

• Progress towards multilateralism was slow during the early 1970s. There was a significant resurgence of protectionist measures, esp. in the form of non-tariff barriers.• Tokyo Round in 1973 was far more ambitious in coverage and complexity than the previous rounds which mainly focused on tariff reductions. Tokyo Round concentrated on new areas i.e. non-tariff barriers, such as quotas, technical barriers to trade (TBTs), government procurement, subsidies and countervailing duties. Agricultural liberalization also received attention.• Government subsidies remained high (at 1.5 to 2.5% of GDP compared to O.5% in the USA and 1% in Japan) in the EC.•No headway in reining in the use of non-tariff barriers such as voluntary export restraints, and anti-dumping actions.•The goals set at the Uruguay Round 1986-94 were even more ambitious: Apart from cutting tariffs, efforts were made to broaden the world trade to include services and intellectual property rights. It also sought to achieve a full return of agriculture, textiles and clothing to the system.

• Government procurement

– Government units purchase their supplies from domestic

companies as much as possible.

• Technical standards

– Countries require different standards for the

commercialization of some products. Also, some products do

not work in other countries (e.g. Electrical plugs).

Non-tariff barriers

• Technical standards– The Cassis de Dijon Case: French blackcurrant liqueur cassis had a

lower alcohol content than required by German law.

– The European Court ruled in 1978 that consumer protection could have

been achieved by a label indicating the alcohol content: The German

requirement was not essential.

– The Cassis de Dijon Principle has become the basis for the mutual

recognition of standards ever since, eliminating an important non-

tariff barrier to trade among the member states.

– Need for harmonization of standards: E.g. Safety requirements for

motor vehicles. In 1996, 58 technical requirements for passenger cars

became mandatory. In 1999, the EU adopted global technical requirements

for wheeled vehicles, equipment and parts in line with the UN Economic

Commission for Europe.

Non-tariff barriers

• Local content and rules of origin

– Local laws require foreign firms to buy fixed percentages of

their production supplies from domestic firms.

• Physical barriers

– Internal customs stations slow down communication and

impose bureaucratic burdens.

• Fiscal frontiers

– VAT, excise taxes, corporate taxes, are very different among

countries.

Non-tariff barriers

• Voluntary Export Restraints (VERs)-inconsistent with the ethos and legal requirements of GATT.

• VERs are prominent devices by which an importing country negotiates a physical limit on exports from a particular country. It has the similar effect of a tariff which raises the price of the imported goods. Here, no tariff revenue is gained. Instead, there is an “economic rent” associated with the quota depending on how the quota is allocated among competing countries.

Voluntary Export Restraints (VERs)

Voluntary Export Restraints (VERs)

•The most extreme use of VERs in textile and clothing. •GATT restricted its use in 1961 and 1962 by raising all quotas by 5 % a year (Long-Term Agreement on Cotton Textiles). •A Multi-Fiber Agreement (MFA) was negotiated in 1974which provided bilateral agreements between countries. Quotas were to be increased by 6 % per year, but EC did not comply with these requirements. •The growth was limited to only 1-2% per year for the ‘sensitive’ products such as cotton yarn, fabrics, T-shirts, jeans, etc.

• Widespread use by both the EC and the USA of countervailing and anti-dumping duties.

• Dumping is defines as the situation where the product is sold in a market at less than its ‘normal’ value, which is regarded as either beingThe comparable price when destined for consumption in the exporting country, or the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit (Article VI, GATT 1986)

• The importing country can levy an anti-dumping duty not greater than the margin of dumping on exports of the firm. If the difference is due to the government subsidy, again, a countervailing duty can be imposed to offset it.

• In 1999, the EU took 199 anti-dumping actions. The products most affected were iron and steel, consumer electronics, and chemicals.

Anti-Dumping

• They are arbitrary.

• They may penalize the most efficient firms exporting a good to the EC.

• EC is also accused of using dubious statistics in calculating dumping duties.

Non-Tariff Barriers

• By 1986, still large number of non-tariff barriers existed.

• The European White Paper was a proposal of legislation to eliminate the existing non-tariff barriers by 1 January 1993 (The Date of the establishment of the Single European Market).

• The Single European Act (SEA) formally approved most of the legislation proposed in the White Paper and other legislation promoting the liberalization of capital.

Single European White Paper (1985)Single European Act (1986)

• Government procurement – The SEA requires member governments to open up their

purchases from firms of other member countries.

• Technical standard – The SEA adopts the principle of Mutual Recognition: if a

product is legal in one country, it can access all other countries’ markets, given no security or safety problems.

• Physical barriers – Simplification of export-import documentation and custom

checkpoints procedures.

• Fiscal barriers – Homogenization of VAT and corporate taxation. Countries

could choose, for each product, to eliminate the VAT or impose a minimum VAT of 15 percent.

Single European Act (1986)

• Japanese Car Imports into the EU: Individual quotas against Japan were replaced by a single EU quota in 1991 (1.23 million units of cars and trucks). By 2000, all such restraints were removed.

• Financial Services: In 1989, a financial firm authorized in one member state was also authorized to operate in another member state. Hence, there was a mutual recognition of licenses. But the home country was responsible for the supervision of the financial firm.

• Public Procurement: It accounted for 16% of GDP in 1987, a third in manufactures. National firms supplied their own governments and other national industries reducing the proportion of public procurement supplied by imports. Under the SEA, the public procurement orders are open to all suppliers in member states. Government procurement fell to 14%in 2000.

Single European Act (1986)

• Common External Tariff: It was reduced from 6.9% in 1995 to 4.1% in 2000 on all non-agricultural products.

• All tariff and non-tariff barriers to trade was also eliminated on agricultural equipment, beer, construction equipment, furniture, medical equipment, paper, pharmaceuticals, and some steel products.

• In 1997, an Information Technology Agreement was reached in Singapore. By 2000, tariffs were to be removed on information technology products including computers, fax machines, modems, pagers, semiconductors, software and scientific instruments.

• In 1999, the highest tariffs were on textiles, clothing, footwear, aluminum and passenger cars (10%) with parts up to 22%. Electrical equipment-radio and TV sets at 14%.

• Removal of “Voluntary” Export Restraints in the form of quotas, including MFA on clothing and textiles. Under the Agreement on Textiles and Clothing (ATC), the MFA quotas were to be gradually eliminated by 2005 starting in 1995.

The Uruguay Round 1986-1994

• The industrialized countries drag their feet: The USA, EU and Canada started with products not currently subject to import restraints and quota restrictions were lifted very slowly: Only 5.4% of the 1990 EU’s restricted categories were de-restricted by 1999.

• In 1996, at the behest of Eurocoton, the trade body, the EU imposed anti-dumping duties of between 3 to 36% on imports of dyed cotton fabric from India, Pakistan, China, Taiwan and Egypt who were said to be undercutting German, French and Italian weavers by 28 to 36 %.

• The EU firms appear to be willing to locate clothing production in a developing country provided they get in return some access for their up-market products into that country.

• Preferential agreements were also negotiated with Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia whereby textile and clothing import duties were to be abolished over six years since 1994. By 1998, the imports from these countries have been growing much faster than Asia.

The Uruguay Round 1986-1994

• The General agreement on Trade in Services (GATS) in 1994: • No discrimination between foreign and national suppliers in terms of

market access and treatment, a commitment to multilateralism.• The Telecommunications Agreement in 1997: signed by 68

countries who agreed to open their markets to foreign competition, allow overseas companies to buy stakes in domestic operators, and abide by common rules on fair competition in the telecommunications sector.

• The agreement came into effect in January 1998 when USA, Europe and Japan liberalized their sectors.

• High-speed internet agreement in 2001.• It was estimated that competition would cut the cost of international

calls by more than 80% and the telecom bills by 4% of the GDP. It would also assist the development of the global information highway and boost foreign investment in modernizing and expanding the telecommunication network in developing countries.

The Uruguay Round 1986-1994

Labor mobility

• Workers move from areas with low wages to areas of high wages.

• The movement of workers to areas with high wages tends to reduce the wages of existing workers.

• The redistribution effects motivates conservative resistance.

• However, intrinsic labor immobility prevented this mechanism from working in the EU.

Liberalization of factors of production

MPLI

WG

MPLG

LaborG,I

WI

Wages in Germany

Wages in Italy

LGLI

Equilibrium wages with and w/o labor mobility

MPLI

WG

MPLG

LaborG,I

WI

Wages in Germany

Wages in Italy

LGLI

Equilibrium wages with and w/o labor mobility

WG WI

Capital mobility

• Capital moves from areas where the return on capital (interest rate) is low to areas where the return is high.

• The movement of capital to areas with high interest rate tends to reduce the interest rate in these areas and increases the interest rate in the areas with law rates.

• As for labor there are significant redistribution effects that motivate conservative resistance.

Liberalization of factors of production

Capital mobility (continued)

• During 1980s there were extensive capital controls in the EU. Individuals and firms were not allowed to open bank deposits in other EU countries.

• In July 1990 these controls were eliminated and it was one of the causes of the 1992 collapse of EMS.

• In 1993 there has been a major liberalization of the banking system

• In anticipation of the SEA, there has been an increase in merger and acquisition activities. In particular in the service and banking sectors.

Liberalization of factors of production