Theory of Economic Integration

Transcription

1 Theory of Economic Integration The Revenue-Transfer Effect in a Customs Union. Extension to Free Trade Areas Katarzyna Śledziewska Dr Katarzyna Śledziewska

2 The most important reasons why governments may become involved in RTAs To protect a larger market from external competition, or in other words to divert trade and protect local enterprises; To enlarge a trading entity in order to increase bargaining power when dealing with other trading partners; To secure additional benefits from open trade and trade rules that cannot be realised at the multilateral level because multilateral negotiations are unsuccessful or too slow; To go further and deeper in terms of policy coverage and commitments ( WTO-plus ); To promote good neighbourliness or to secure any other of a range of political or foreign policy objectives that focus on a subset of the international community (nontrade objectives)

3 The most important reasons why governments may become involved in RTAs To reap short-term political advantage and publicity through signing agreements where the act of doing so may be seen as more important than the substance of a contemplated agreement (Bhagwati s CNN effect); To lock in domestic reforms in a fashion that a WTO commitment does not guarantee either because of the reach of its rules, the nature of exceptions to the rules, or the absence of a strong enough compliance imperative;

4 The most important reasons why governments may become involved in RTAs To allow experimentation with respect to different approaches to international rulemaking or with trade liberalisation (the laboratory motive ); To insure against future policy instability or uncertainty, particularly in the markets of major trading partners (the insurance motive ); To avoid exclusion as other countries and competitors secure advantageous access to markets via RTAs (the domino effect ).

5 The Revenue-Transfer Effect in a Customs Union Panagariya (1996), Bhagwati and Panarariya (1996) H potential importer Subtract its supply from demand and obtain its import-demand curve P an exporter Substrat its demand from supply and obtain its export-supply curve R infinitely elastic supply Dr Katarzyna Śledziewska

6 Dr Katarzyna Śledziewska

7 The Revenue-Transfer Effect in a Customs Union H imposes a per-unit tariff at rate t on P and R S t P, S t R P t H How RTA changes the equilibrium Depends on the level of external tariff in P in the post RTA equilibrium If external tariff H=P P t P= P P +t P s export supply curve drops to S P Pure trade diversion Imports M 1 M 2 H the transfer if tariff revenue to exporters from P H loses GFLH, P gains GFUH, the union lose FLU Dr Katarzyna Śledziewska

8 Extension to Free Trade Areas Assumption the price in each member country the world price plus external tariff Richardson (1994) problematic, producers are free to sell their output anywhere within the union if price higher in H all to H, demand in P satisfy by imports Grossman, Helpman (1995) Bhagwati and Paragariya (1996) analysis of FTAs more cumbersome Dr Katarzyna Śledziewska

9 P t R P R V Dr Katarzyna Śledziewska

10 Extension to Free Trade Areas Nondiscrimatory tariff in H t H t P <t H P net exporter Pre-FTA price in P continues to coincide with the world price S t P P s export supply curve Import come partially from P and partially from R Each pay the net price P R H and P form PTA H s external tariff at t H P s at t P 3 cases Dr Katarzyna Śledziewska

11 Extension to Free Trade Areas Case 1 The total Supply by H and P is less than the demand in H S H +S P < D H Assume that t P =0 Combined supply in H and P insufficient to satisfy demand In H H must import from R price in H must settle at P t R Dr Katarzyna Śledziewska

12 P t R P R V Dr Katarzyna Śledziewska

13 Extension to Free Trade Areas Case 1 If in country P t P =0 P P <P t R As result producers in P divert their supply to H Replacement of S t P by S 1 P P gains EFGH - f H loses EFGH Net f Union as o whole loses

14 Extension to Free Trade Areas Case 1 If in country P, t P >0 Additional loss arises Domestic price rises in P, welfare loss in P

15 Extension to Free Trade Areas Case 2 The total Supply by H and P equals the demand in H S H +S P = D H If in country P t P =0 P P <P t R Supply from P S 2 P FTA eliminates R as a source of imports to H This delinks price in H from P t R Instead determine by intersection of H s import demands curve and P s supply curve

16 P t R P R V Dr Katarzyna Śledziewska

17 Extension to Free Trade Areas Case 2 KL new trade is created Associated with rise of union s welfare SLU ZV trade diversion Costs UVZ The union as a hole gains or loses The father to the right S 2 P, the larger SLU, the smaller UVZ

18 Extension to Free Trade Areas Case 2 H Gains SKL (trade creation) Loses WKVH (tariff revenue transfer) The father to the right S 2 P the closer the internal price do the P R, more likely that H net gainer P Prices received by exporters and the quantity of exports rises Net gain WLZH In the limiting case when price drops to P R no gain but also does not lose

19 Extension to Free Trade Areas Case 2 If in country P, t P >0 P R +t P <L the modification is minor (welfare loss in P) P R +t P >L the prices in P s market high, no producer will sell in H We go to case 3

20 P t R P R V Dr Katarzyna Śledziewska

21 Extension to Free Trade Areas Case 3 The total Supply by H and P exceeds the demand in H S H +S P > D H If S P intersects D H at price below P R +t P The union price settles at P R +t P Producer are indifferent between markets H and P P benefits H and the union as a whole - may or may not benefit The lower the t P the more likely that the union as a whole and H benefit.

22 Impact of customs union formation 100% EEC-6 Other 6 Europe Rest of World $100 $90 80% 60% 40% 20% $ billion (current prices) $80 $70 $60 $50 $40 $30 $20 $10 EEC T otal imp orts 0% $ Note: Left panel shows share of EEC6 s import from the three regions. Other Euro-6 are the 6 countries that joined the EU by the mid 1980s, UK, Ireland, Denmark, Spain, Portugal and Greece. Source: Table 5, External Trade and Balance of Payments, Statistical Yearbook, Recapitulation, ,

23 Share of intra EU trade and changes, ,0% 70,0% 60,0% 50,0% 40,0% 30,0% intra EU extra EU 20,0% 10,0% 0,0% / / /1995-3,0-2,0-1,0 0,0 1,0 2,0

24 Poland and FTA with EU countries Poland signed an association agreement with the EU in The core of the European Agreement trade policy creation of a free trade area in non-agricultural products More rapid liberalisation was required of the EU completion by the end of Polish imports from the EU the liberalisation completed by the end of 2002 the majority of the industrial tariff reductions were phased in between 1995 and 1999.

25 Tariffs decrease form 1995 to 2002 for different industrial groups of products (CN2), percentage change MFN EU

26 Trade creation and diversion effects Empirical estimations of these effects is complicated 1. liberalisation was phased in at different rates over time on different product lines. 2. other bilaterally discriminatory trade reforms at the same time 3. Poland s import structure has been strongly influenced by the emergence of China

27 The EA - one of the many preferential trading arrangements that Poland negotiated The Baltic States Faroe Islands Israel Turkey Poland UE EFTA CEECs

28 Poland and regionalism China ROW Faroe Islands Israel The Baltic States Poland UE Turkey CEECs EFTA

29 Share changes in geographical structure in Polish import from 1991 to 2003 KOREA UKRAINE SWITZERLAND TURKEY DENMARK FINLAND SLOVAK REPUBLIC NORWAY HUNGARY JAPAN AUSTRIA SPAIN SWEDEN UNITED STATES BELGIUM-LUXEMBOURG NETHERLANDS CZECH REPUBLIC UNITED KINGDOM CHINA FRANCE RUSSIA ITALY GERMANY -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

30 The Analytic Framework Trade creation and diversion Import Price (P) S POL t P ROW t S ROW P EU P ROW S EU S ROW D POL 0 Q1 Q2 Q 3 Q 4 Import Volume (Q)

31 Trade creation and diversion under alternative conditions Import Price (P) t S FTAs S FTAs t P ROW P EU P ROW t S ROW S EU S ROW D POL 0 Q1 Q2 Q 3 Import Volume (Q)

32 Trade creation and diversion under alternative conditions Import Price (P) S POL t S FTAs S POL+ FTAs t P ROW P EU P ROW t S ROW S EU S ROW D POL 0 Q1 Q2 Q 5 Q 3 Q 4 Import Volume (Q)

33 Estimation Method the trade diversion equation We estimated the import response from non-liberalised sources (ROW) ln M ( + t ) + µ ln( + t ) T i ( ROW ) = µ t o + µ i ln 1 i( EU 2 1 i( ROW ) + µ t M i( EU ) ln M i ROW t µ o µ ( ti EU ) µ ( ti ROW ) µ + µ tt M ( ) = + 1 ln 1+ ( ) + 2 ln 1+ ( ) + 3 ln Σ ik t 1 ln M i ROW t = µ + µ + ti EU + µ + ti ROW + µ M i EU t + µ ( ) 0 1 ln 1 ( ) 2 ln 1 ( ) 3 ln ( ) 1 t ( ) ( ) T complications about the Polish trade liberalisation with CEFTA countries and about the entry of China we include and exclude CEFTA and China

34 Data The trade data the PC-TAS data base for the period i set at the 6 digit level of the CN classification. The tariff data the same period from the Polish International Trade Centre at the 10 digit of CN classification Estimated using STATA.

35 Growth of Polish Imports from EU and the rest of the World (based equations, year dummies not reported) Dependent variable Import Growth from: Independent variables EU ROW Tariff change on imports from: EU (0.003) Constant (0.002) ROW Number of observations 22,003 21,165 F Prob (F) R 2 (within)

36 Estimated Import Growth, Trade Diversion and Trade Creation Effects (based equations) (millions UD $) Import Growth Trade Diversion Trade Creation

37 Growth of Polish Imports from EU and the Rest of the World (extended equations): (Dependent variable Import Growth, year dummies not reported) Independent variables EU EU ROW ROW Tariff change on imports from: EU Share of imports from EU in total imports (lagged) Amount of imports from EU (lagged) (0.004) (0.017) ROW Constant , (0.037) ,8300 Number of observations 22,003 22,003 20,101 20,081 F , Prob (F) R 2 (within)

38 Change in Polish Imports from the Rest of the World with Geographical Exclusions: (dependent variable: import growth from ROW excluding FTA countries or China, year dummies not reported) Independent variables FTA countries China Tariff change on imports from: EU ROW Constant (0.004) Number of observations 18,784 18,549 F Prob (F) R 2 (within)

39 Growth of Polish Imports from EU and the rest of the World Independent variales EU ROW Tariff change on imports from: EU (0.003) (0.002) ROW Change in Polish Imports from the Rest of the World with Geographical Exclusions: Independent variables FTA countries China Tariff change on imports from: EU ROW (0.004) -4.75

40 Conclusions The Europe Agreements had transitory but significant import growth and diversion effects A trade-diverting source of growth of Poland s imports from the EU dominated the trade-creating source of growth The econometric method allows control for other trade shocks, and for the estimation of different diversion effects for different groups of countries less diversion of Polish imports from other preference receiving countries China was less affected on average by trade diversion than other nonpreference receiving countries

41 Customs Union vs FTA FTA like CU but no Common External Tariff Opens door to tariff cheats, goods from RoW destined for Home market enter via Partner if Partner has lower external tariff, called trade deflection Solution is rules of origin meant to establish where a good was made. Problems: Difficult and expensive to administer, especially as world get more integrated Rules often become vehicle for disguised protection Despite the origin-problem in FTAs, almost all preferential trade arrangements in world are FTAs. CU s require some political integration Must agree on CET and how to change it, including anti-dumping duties, etc.