Microeconomics

14.10.2011

Economics of the EU: introduction and microeconomic tools
Economic policies of the EU doc. dr. Vasja Rant

Content of the lecture
• Definition and stages of economic integration • Economic integration and non-discrimination principle (WTO) • Repeating microeconomic basics
– Measuring welfare (the concept of consumer and producer surpluss) – Parcial market equilibrium of an openeconomy – Benefits of international trade

• Effects of tariffs on international trade and welfare
– Small country case – Large country case

Definition of economic integration
• Economic integration can be understood as a spectrum of agreed organizational forms beetween member countries
– Liberalised global economy ↔ autarkic, closed economies.

• Formally, economic integrations arecontractual agreements, which define areas of mutual economic cooperation between members with the goal of ultimately removing various economic and political restraints to trade and other economic flows. • EU is by its nature a prime example of economic integration. • WTO classifies economic integrations as regional trade agreements (RTAs).

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Stages of economic integration
Freetrade Free trade area (FTA) Customs union (CU) Common market Economic union Economic and monetary (polit.) union Common external tariff Free flow of production factors Harmonisat. of economic policies Common currency (oth. policies)

              

Economic integration and the principle of non-discrimination (WTO)
• The core WTO principle is the principle of non-discriminationin international trade (most favored nation treatment)
– “Any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.” – Article I (GATT) – “Each Member shall accordimmediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.” – Article II (GATS)

• Economic intergrations (regional trade agreements) violate the non-discrimination principle.

Economic integration and the principle of non-discrimination (WTO)
• WTO rulesallow economic integrations or regional trade agreements (RTAs) under certain conditions • Legal basis for RTAs is:
– Article 24 of the GATT for goods – Enabling clause – Article 5 of the GATS → for services

• Conditions, under which RTAs are allowed:
– Substantially all trade must be covered by the agreement. – Trade restrictions between members must be removed in a reasonable timeframe. –Trade restrictions towards non-members must not increase on average.

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Trends in the field of economic integrations
Cumulative number of notified RTAs (active and inactive)
500 450 400 350 300
250

200 150 100 50 0
1955 1958 1961 1964 1967 1970 1985 1988 1991 1994 1997 2000
1949 1952 1973 1976 1979 1982 2003 2006 2006 2009 2009

RTA - goods

RTA - services

RTA -all

* RTA – goods and RTA – services for same areas counted twice

Trends in the field of economic integrations
Cumulative number of notified RTAs (active and inactive)
400 350 300 250
200

150 100 50 0
1955 1958 1961 1964 1967 1970 1985 1988 1991 1994 1997 2000
1949 1952 1973 1976 1979 1982 2003

CU

EIA

FTA

PTA

* CU & EIA, FTA & EIA and PTA & EIA counted twice

Trendsin the field of economic integrations
• Most of the active and future RTAs are bilateral in nature
– Trend of agreements where counterparties are themselves RTAs (not countries).

• Substantial part of RTAs are cross-regional
– Cross-regional trend is especially pronounced in future RTAs.

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Active economic integrations
Accessions (existing RTAs) GATT Art. XXIV (FTA)...