Transcript Extract 3x - Beaconsfield High School Virtual Learning

Extract 3: Regional Economic Integration
Extract 3: Specification Topics
Page 8
• Students should be able to
1. Understand & explain the stages of economic integration, such as:
– Free-trade areas
– Customs unions
– Single markets
– Economic unions
– Monetary unions
2. Be familiar with examples of economic integration, such as:
– EU (European Union)
– NAFTA (North American Free Trade Agreement)
– ASEAN (Association of South East Asian Nations)
3. Evaluate internal and external consequences of economic integration, such as:
– Short-run – trade creation and trade diversion
– Long-run – dynamic effects
4. Explain the roles of the WTO (World Trade Organisation)
Drawing out the key issues in Extract 3
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What factors are causing regionalization of global trade?
Has EU enlargement accelerated EU intra-regional trade
Why is intra-regional trade in the EU so high (>70%)?
What are the welfare effects of the EU customs union?
Comment on the effects of UK membership of the single market
Does the free movement of labour within the EU single market
bring about gains in economic performance?
What are the arguments for and against joining the fixed
exchange rate system against the Euro (ERM II)
What are the arguments for floating versus fixed exchange rates
Evaluating the case for smaller EU nations such as Lithuania to
be a member of the single currency
Denmark is the sole remaining member inside ERM II. Comment
on the arguments for staying outside of the Euro Area
Extract 3: Regional Integration in Global Economy
• The World Trade Organization
publishes an annual report on
world trade.
• Its 2013 report noted a trend
towards greater regionalisation
of trade, particularly in both
Asia and Europe.
• For example, EU intra-regional
trade accounted for 71% of
exports of EU member states in
2011.
World Trade
Organisation
Page 8
WTO polices free
trade agreements,
and decides on trade
disputes between
countries.
Regionalisation An increase in the
of trade
intensity of trade
and investment
between countries
within the same
region
Intra-regional
trade
Exchange of virtually
identical products
between countries
within the same
region
Extract 3: Economic Integration in the EU
• This is not surprising given the
widening and deepening of
regional economic integration in
Europe.
• Not only has the EU grown to
include more economies through
a series of enlargements
(widening) but the level of
economic integration has
deepened from the original
formation of a customs union.
• This customs union resulted in
both trade creation and trade
diversion.
Page 8
European
Union (EU)
Economically
integrated group of
28 member states
(newest: Croatia)
Customs union
Countries that
operate free trade
with each other and
impose a common
external tariff
Trade creation
Welfare gains from
lower import tariffs
from within the
customs union
Trade diversion
Welfare loss from
higher import prices
from outside the
customs union
28 European Union Member Nations
Joined
EU
Euro Zone
Member?
Austria
1995
Yes
Belgium
1957
Bulgaria
Page 8
Joined
EU
Euro Zone
Member?
Italy
1957
Yes
Yes
Latvia
2004
Yes
2007
No
Lithuania
2004
Yes
Croatia
2013
No
Luxembourg
1957
Yes
Cyprus
2004
Yes
Malta
2004
Yes
Czech Republic
2004
No
Netherlands
1957
Yes
Denmark
1973
No (ERMII)
Poland
2004
No
Estonia
2004
Yes
Portugal
1986
Yes
Finland
1995
Yes
Romania
2007
No
France
1957
Yes
Slovakia
2004
Yes
Germany
1957
Yes
Slovenia
2004
Yes
Greece
1981
Yes
Spain
1986
Yes
Hungary
2004
No
Sweden
1995
No
Ireland
1973
Yes
United Kingdom
1973
No
Extract 3: Enlargement of the EU – New States
Advantages for new EU countries
Tariff free access to a single market > Opportunity to exploit
500m people
economies of scale
Easier to access foreign direct
investment from inside/outside EU
FDI can lift trend growth and
raise factor productivity
Access to EU structural funds
Investment to improve
infrastructure / public goods
Better access to EU capital markets
EU companies can raise
investment funds from bond
and capital markets
Discipline of competition from being Intra-EU trade already high for
inside the EU single market
many new EU countries
Extract 3: Enlargement of the EU – Per Capita Incomes
All of the new countries
joining the European
Union have a per capita
national income lower
than the EU average
But many have achieved
some convergence in
average living standards
despite the effects of the
recession in 2008-2010
Bulgaria and Romania
are outliers with per
capital incomes less than
½ of the EU average.
Background on Poland: (Pop 38.5m) (Data)
Recent Macroeconomic Data
Background Information
Latest annualised GDP
Growth (%)
0.9%
Currency unit
Zloty
GDP per capita (US $,
PPP standard)
Exchange rate system
Float
$22513
Current policy interest
rate
2%
Inflation rate (%)
-1%
Trade surplus or deficit? Def
Unemployment rate
(% of labour force)
11.5%
Current account
balance (% of GDP)
-1.3%
Fiscal balance (% of
GDP)
-4.3%
Main corporate tax rate
(per cent)
19%
Government debt (%
of GDP)
57%
Global competitiveness
ranking for 2014
43rd
Yield on 10-Yr Govt
Bonds (%)
2.1%
Economic Freedom
Index Ranking
50th
Corruption Perception
Ranking
35th
Investment (% of
GDP) in 2012
22.0
Other Indicators
Latest HDI ranking
35
% of population living
below their national
poverty line
17%
Life Expectancy (years)
76.8
Rank for capacity to
attract skilled talent
124th
Rank for Innovation and
sophistication
63rd
Gini coefficient (Latest
published estimate)
32.8
Changing Relative Per Capita GDP for EU - 2003-2013
Index (EU28 =
100)
GDP (PPS) 2003
GDP (PPS) 2013
Index (EU28 =
100)
GDP (PPS) 2003
GDP (PPS) 2013
Austria
127
128
Italy
112
99
Belgium
123
119
Latvia
45
64
Bulgaria
33
45
Lithuania
48
73
Croatia
56
61
Luxembourg
240
257
Cyprus
94
89
Malta
82
86
Czech Republic
77
82
Netherlands
133
131
Denmark
124
124
Poland
48
67
Estonia
52
73
Portugal
78
79
Finland
115
113
Romania
29
55
France
111
107
Slovakia
53
75
Germany
116
122
Slovenia
82
82
Greece
93
73
Spain
100
94
Hungary
62
66
Sweden
127
127
Ireland
141
130
United Kingdom
123
109
Context: Different Decisions about Euro Membership
Lithuania
Poland
Denmark
Greece
Joined EU
2004
2004
1973
1981
Euro Area Member?
January 2015
No
No
Joined 2001
Currency
Euro
Zloty
Krone
Euro
Currency system
Euro float
Free float
Managed Peg
within ERM II
Euro Float
Unemployment rate (%)
12.4%
11.5%
3.9%
25.8%
Competitiveness ranking
41/144
43/144
13/144
81/144
GDP per capita (US$)
$16,000
$13,394
$59,191
$21,857
Inflation rate (%)
-0.3%
-1.0%
0.3%
-2.6%
Government debt to GDP (%)
39.4
57.0
44.5
175
Current account (% of GDP)
+1.5
-1.3
+7.4
+0.7
New Member States: Advantages from Joining the Euro
Boost to Trade and Investment
• Lower transactions costs for exporters and investors
• Eliminating currency conversion costs boosts tourism
• Fall in currency risk as threat of devaluation is less
Financial support and political stability
• Access to the European Central Bank as lender of last resort
in case of financial difficulty
• Euro membership a confirmation of long-term political
alignment with the European Union
Reduced vulnerability to external shocks
• Many consumers and businesses in new member states
save, borrow, and take out mortgages in euros
• Joining the Euro reduces the risks of taking out loans
New Member States: Risks from Joining the Euro
Exposure to Euro Zone economic problems
• Exposure to contributing to future fiscal bail-outs
• Exposure to continued weak growth in Euro Zone
• Risk that new member states will import deflation
Trade Patterns / Trade Diversion Effects
• Some of the main trade partners outside of Euro Zone
• Might involve switch of trade to higher cost countries
Structural Reforms and Jobs
• New Euro member countries will have to accelerate
process of structural reforms to improve
competitiveness inside the Euro – this may lead to a rise
in structural unemployment
Fixed versus Floating Exchange Rates
• Case for fixed exchange
rates
• Promotes trade and
Investment: because of less
currency risk
• Some adjustment to the
fixed currency parity is
possible
• Reductions in the costs of
currency hedging for
businesses
• Disciplines on domestic
producers to keep costs and
prices down
• Reinforcing gains in
comparative advantage if
unit costs can be reduced
• Case for floating exchange
rates
• Reduced need for foreign
currency reserves as no
exchange rate target
• Useful instrument of macroeconomic adjustment e.g.
after an external shock
• Partial automatic correction
for a trade deficit
• Less opportunity for
currency speculation
• Freedom (autonomy) for
domestic monetary policy –
interest rates can be set to
meet other macro
objectives
ERM II – The Danish Krone
Denmark has been inside the ERM II since the
launch of the Euro in 1999. Prior to the
introduction of the euro, the Danish fixed
exchange rate was vis-à-vis the German D-mark.
Under ERM II, the Danish krone is fixed against the
Euro – the central bank intervenes to keep the
currency within agreed limits when needed.
The Danish central bank’s sole mandate is to adjust
policy interest rates and currency reserves to defend
the krone’s peg to the euro
Euro against Norwegian and Swedish currencies
Sweden
Appreciation v Euro
Norway
Norway is not a member of the EU but does
have membership of the single market. The
commodity rich economy has a huge current
account surplus and high per capita income but
has been challenged by an appreciating
currency and a slowdown in GDP growth.
Sweden operates a floating exchange rate
against the Euro. The Swedish currency
appreciated during the recession / euro crisis
– a factor behind the slower growth of
Sweden and the growing risk of price
deflation. Sweden has an opt out from the
single European currency.
Chart: The Crisis in the Greek Economy
Data: European Union Common External Tariffs (%)
All
Products
Agricultural
Non-Agricultural
Simple average final bound
tariff
5.5
13.5
3.9
Simple average most
favoured nation applied
5.2
13.2
4.2
Trade weighted average
tariff
2.6
8.4
2.2
2064
125
1938
Total value of EU imports in
billion US$ (2012)
Source: www.wto.org/english/res_e/booksp_e/tariff_profiles14_e.pdf
Import tariffs on agricultural products are substantially higher than for non-agricultural goods
such as manufactured products. The EU has, in recent years, negotiated a number of trade
agreements with other countries and regions – but a global trade deal remains elusive.
Data: European Union Tariffs by Selected Product (%)
Product group
Dairy products
Fruit, vegetables, plants
Sugars and confectionery
EU Final bound import tariff (%)
54%
10%
30%
Beverages & tobacco
Minerals & metals
Petroleum
21%
2%
2%
Clothing
11%
For many products the EU levies extra import tariffs when the world price of a product falls
below the EU market intervention price paid to EU producers. A good example of this would
be import duties on a number of different cereals.
In many cases, the EU allows a quota of tariff-free goods to come into Europe each year
before an import tariff is applied. Changes in these quotas are important trade decisions.
Extract 3: The EU as a Customs Union
Page 8
• The European Union is a customs union. A customs union comprises
countries which agree to:
1. Abolish tariffs and quotas between member nations to encourage free
movement of goods and services. Goods and services that originate in
the EU circulate between Member States duty-free. However these
products might be subject to excise duty and VAT
2. Adopt a common external tariff (CET) on imports from non-members
countries. Thus, in the case of the EU, the tariff imposed on, say, imports
of Japanese TV sets will be the same in the UK as in any other EU
country
3. Preferential tariff rates apply to preferential or free trade agreements
that the EU has entered into with third countries or groupings of third
countries including many of the least developing countries
• Exam tip: Specific knowledge of the economics of a customs union is
needed for the exam. Apart from the European Union, another example
is that Kazakhstan and Belarus make up a customs union with Russia –
forming for the basis for a new Eurasian customs union system.
Extract 3 : Different Stages of Economic Integration
The table above provides a summary of economic integration.
• A free trade agreement is the 1st stage of integration followed by a customs union. The EU
has deepened integration with the creation of a single European market. As of January
2015, of the 28 member nations of the EU, 19 have entered the 4th stage of integration –
namely the single European currency.
• Progress towards full economic union including fiscal union has proved much harder to
achieve. Many countries want to retain autonomy over their own tax systems.
Conventional Gains from Trade – Growth Enhancers
Helps to reduce
extreme poverty
Increased market
contestability
Better access to
new technologies
Knowledge
transfers
Exploiting
economies of scale
Better use of our
scarce resources
Examples of Barriers to Free Trade
Transportation costs
• Freight costs
• Time costs
• Customs Delays
Policy barriers
• Import Tariffs
• Non-tariff barriers such as import quotas
Internal trade and transaction costs
• Information costs
• Contract enforcement costs
• Red tape
Understanding: Motivations for Protectionism
Protectionist tendencies have grown because of slow growth and widening trade imbalances
Response to import
“Dumping”
Response to chronic
trade gap / deficits
Protect key /
politically strategic
industries
Employment
protection
Raise extra revenues
for governments with
budget deficits
Protect “fledgling” infant sectors
Response to a
recession / stagnant
domestic demand
More countries have opted to “manage” their currencies – another form of protectionism
Arguments against Trade Barriers / Protectionism
Protectionism invites a retaliatory response and countries can get locked into trade wars
Risk of Retaliation
Market Distortion
Higher prices for
consumers
Regressive effect on
income inequality
By-passing import
controls
Higher costs for exporters
The WTO has found it impossible to negotiate a wide ranging global trade agreement
Analysis: Import Tariffs
Price
Volume of
imports
after tariff
Domestic
Supply
P2
Supply after tariff
P1
World supply
pre-tariff
Domestic
Demand
Q1
Q3
Q4
Q2
Output
Explore: In October 2014, Kenya lost their tariff access to the European Union single
market for exports of cut flowers. Read about the issue here and consider the effects
on Kenyan producers as a result of this change in trade conditions.
Customs Union: Trade Creation from Tariff Reduction
• Trade Creation effects
• Trade creation involves a shift in consumer spending from a higher cost
domestic source to a lower cost partner source for example - within the
EU - as a result of the abolition import tariffs on intra-union trade
– For example UK households may switch their spending on car and
home insurance away from a higher-priced UK supplier towards a
French insurance company operating in the UK market
– Similarly, Western European car manufacturers may be able to find
and then benefit from a cheaper source of glass or rubber for tyres
from other countries within the customs union than if they were
reliant on domestic supply sources with trade restrictions in place.
• Trade creation should stimulate an increase in trade between countries
that have signed trade agreements and should, in theory, lead to an
improvement in the allocative efficiency and gains in consumer and
producer welfare e.g. through lower prices and higher profits.
Analysis: Trade Creation and Welfare Gains
Price
Domestic Supply
Trade creation – access to
cheaper supplies allows a
lower price – which benefits
consumers
Supply price from outside the EU
P1
Supply price from EU Supply
P2
Lower price leads to an
expansion of demand and a
rise in consumer surplus + a
net improvement in
economic welfare
Domestic Demand
Qs2
Qs1
Qd1
Qd2
Output (Q)
Customs Union: Trade Diversion from External Tariff
• Trade Diversion effects
• Trade diversion is a shift in domestic consumer spending from a
lower cost world source to a higher cost partner source (e.g. from
another country within the EU) as a result of the elimination of
tariffs on imports from the partner
• The common external tariff on many goods and services coming
into the EU makes imports more expensive.
• This can lead to higher costs for producers and (eventually) higher
prices for consumers if previously they had access to a lower cost /
lower price supply from a non-EU country
• Trade diversion which leads to higher prices can have a regressive
effect on lower-income households.
Analysis: Import Quotas
Price
Import
Quota
Export Supply
of a product
(no quota)
P2
P1
Import
Demand for a
product
Quota
Q1
Output
Example of EU import quotas: The EU agreed a quota for imports of maize from all origins
into the customs union bloc in 2006. Special arrangements have been made to allow duty
free access for maize from Ukraine.
Analysis: Examples of Non-Tariff Barriers
1. Voluntary Export Restraint – where two countries make an
agreement to limit their exports to one another each year
2. Intellectual property laws e.g. patents and copyright protection
3. Technical barriers to trade including labeling rules and stringent
sanitary standards. These increase product compliance costs
4. Preferential state procurement policies – where government favour
local producers when finalizing contracts for state spending e.g.
infrastructure projects or purchasing new defence equipment
5. Domestic subsidies – government help (state aid) for domestic
businesses facing financial problems e.g. subsidies for car
manufacturers or loss-making airlines.
6. Financial protectionism – e.g. when a government instructs banks to
give priority when making loans to domestic businesses
7. Murky or hidden protectionism - e.g. state measures that indirectly
discriminate against foreign workers, investors and traders.
Data: Scale of UK and Global Labour Migration
In the year to June 2013 - 503,000 people immigrated to the UK
whilst , 320,000 emigrants left the UK. Net migration = 183,000
• Labour migration between countries has become an increasingly
important feature of a globalising world
• Migration has an impact on sending and receiving countries
• Over 200-million people are now estimated to live in countries in
which they were not born
• The global stock of international migrants grew by 38 per cent
from 1990 to 2010. However, international migrants constitute a
small fraction of the world population, just 3.1% in 2010
• Migration is overwhelmingly from less developed to more
developed countries and regions
EU: Economic Benefits of Net Inward Migration
The benefits of net inward migration depend in part on the human
capital of migrant workers and how long they stay in a country
1.
2.
3.
4.
5.
6.
7.
Migrants provide fresh skills and higher labour productivity
An increase in the size of the active labour supply –
boosting potential output
A driver of innovation and entrepreneurship
Positive multiplier effects if migrants find paid work
Reducing skilled-labour shortages in growing industries
Remittances sent home by migrants add to the gross
national income of home nations – creating potential for
rising exports
Tax revenues: Legal immigrants in work pay direct and
indirect taxes and are likely to be net contributors to the
government’s finances.
AD-AS Analysis & the Effects of Labour Migration
General
Price Level
LAS1
LAS2
AS1
AS2
AD1
AD2
GPL1
Y1
Yp1
Y2 Yp2
A rise in net
inward migration
will bring about an
increase in the size
of the active
labour supply and
also an increase in
aggregate
demand. There
might also be
positive effects on
long run aggregate
supply (LAS)
Real GDP
Risks / Costs from Net Inward Migration
Several pressure groups / parties campaign for tighter restrictions
on migration – remember to keep to economic arguments!
1.
Welfare costs: Increasing cost of providing public services
2.
Possible displacement of domestic workers
3.
Social tensions arising from the problems of integrating
thousands of extra workers into local areas and regions.
4.
Rising demand for housing which forces up property prices
and housing rents for many groups in the population
5.
Poverty risk: Migration may have the effect of worsening
the level of relative poverty in a society. And many migrant
workers have complained of exploitation by businesses that
have monopsony power in a local labour market.
Evaluating the Economic Effects of Labour Migration
The effects of migration are hard to quantify. Much depends on
1.
The types of people and their skills who choose to
migrate from one country to another i.e. The quality of
migrants may be more significant than the quantity
2.
The ease with which migrant workers settle into a new
country and whether they find regular jobs
3.
Whether a rise in labour migration stimulates capital
spending by firms and by government
4.
The dynamic effects of migration e.g. Gains in
innovation and research from migrant entrepreneurs,
scientists and other groups
5.
Whether migrants decide to stay in the longer term or
whether they regard it as temporary (e.g. to gain
qualifications, learn some English)
Longer Term Dynamic Effects of Migration
Waves of inward migration can have structural effects on a
country’s macroeconomic performance
Increase in the
active labour
supply which
might cause lower
unit labour costs
for host country
• Increase in
population size
• Rising demand
for public services
• If housing stock
is fixed, can lead
to higher prices
and rising rents
Labour Market
Consumption
Fiscal Effects
Competitiveness
Inward migration
increases pressure
on govt spending
but can also lead
to rising tax
revenues
• Human capital
helps generate
new ideas
• Many migrants
start businesses –
possible exporters
• Knowledge
spillovers
Selection of Suggested Questions for Extract 3
1.
2.
Describe two roles of the World Trade Organisation
Distinguish between trade creation and trade diversion for countries
inside a customs union
3. Distinguish between a customs union and a single market
4. With the aid of a diagram, analyse the effects of a reduction in import
tariffs for a developing country
5. Comment on the impact of the UK government cutting the main rate of
corporation tax from 28% in 2010 to to 20% from 2015
6. Comment on the argument that new member states of the EU are likely
to benefit from membership of the European single currency
7. To what extent does restricting the free flow of labour from new EU
states result in a worsening of economic performance?
8. Evaluate the case for the European customs union agreeing a new trade
deal with the United States
9. Discuss the impact of the enlargement of the EU to 28 countries for an
economy such as the UK
10. Discuss the policies likely to be most effective in reducing
unemployment rates within the EU