Chapter 5: Essential Economics of Preferential Liberalisation. The PTA Diagram

Transcription

1 Chapter 5: Essential Economics of Preferential Liberalisation 1 he PA Diagram Studying European integrations e.g. EEC s customs union which were discriminatory, i.e. preferential requires: at least three countries: at least two integrating nations. at least one excluded nation. Ability to track domestic and international consequences of liberalisation. Must -MS diagram to allow for two sources of. 2 1

2 he PA Diagram: Free trade eq m XS R XS P MS 1 2 P F X R X P M=X P +X R 3 he PA Diagram: MFN tariff eq m MS MFN XS R XS P MS 1 2 P F P X R X R X P X P M M=X P +X R 4 2

3 Discriminatory, unilateral liberalization o build up to analysis of real-world policy changes (e.g. customs union): Consider removes on only from. 1 st step is to construct the new MS curve. he liberalisation shifts up MS (as with MFN liberalisation) but not as far since only on half of. Shifts up MS to half way between MS (free trade) and MS (MFN ), but More complex, kinked MS curve with PA. 5 Discriminatory, unilateral liberalization MS MFN MS PA XS R XS P MS P P - P a p* 1 X R X R X P X M M 6 3

4 domestic price & border price changes domestic price falls to P from. -based firms see border price rise, P - to. firms see border price fall from P - to -. XS R XS P MS MFN MS PA P - P MS X R X R X P X M M 7 Quantity changes: supply switching exports fall. exports rise more than exports fall, so domestic rise. XS R XS P MS MFN MS PA P - P MS X R X R X P X M M 8 4

5 Impact of customs union formation 100% 80% 60% 40% 20% 0% EEC-6 Other 6 Europe Rest of World $ billion (current pric ces) $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 EEC otal 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: able 5, External rade and Balance of Payments, Statistical Yearbook, Recapitulation, , 9 Welfare effects s net change = A+B-C. s net change = +D. s net change = -E. RW P - E XS R XS P A D P P - C B X R X R X P X X R M M 10 5

6 Analysis of a Customs Union European integration involved a sequence preferential liberalisations but all of these were Good 1 reciprocal. In example, both & drop on each other s exports. Need to address the 3- nation trade pattern. Good 3 Good 1 Good 2 Good 2 Good 3 11 Analysis of a Customs Union FA vs Customs Unions. Given symmetry 3-nation set up, FA between and is automatically a customs union. - e CU has Common o External ariff (CE) equal to in the real world, things are more complicated. Analysis is simply a matter of recombining results from the unilateral preferential case. In market for good 1, analysis is identical. In market for good 2, plays the role of. In market for good 2, plays role of. 12 6

7 Welfare effects of a customs union In market for good 1: change = A+B- C 1 -C 2. In market for good 2: change = +D 1 +D 2. NB: D 1 =C 1. Net impact =A+B-C 2 +D 2. impact identical. loses. euros P - D 2 XS euros P D 1 C 2 C 1 - B M X P X P X R X P A 13 rade creation & diversion rade creation & diversion is jargon that is often used. It is imprecise, but widely used. Intuition for why it is so popular, despite its shortcomings. It captures ambiguity of welfare gains in two words. Discriminatory liberalisation. Liberalisation = tends to improve welfare ~ trade creation Discrimination -= tends to diminish welfare ~ trade diversion 14 7

8 Not just tariffs 15 Frictional barrier preferential Liberalisation In market for good 1: change = A+F. In market for good 2: change = +D. Net impact: =A+F+D. Unambiguously positive. gains same. loses. euros P - D XS euros P - F A M X P X P X R X P 16 8

9 Customs Union vs FA FA like CU but no Common External ariff. Opens door to tariff cheats, goods from destined for market enter via if 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 FAs, almost all preferential trade arrangements in world are FAs. CU s require some political integration. Must agree on CE and how to change it, including anti-dumping duties, etc. 17 WO Rules A basic principle of the WO/GA is non-discrimination in application of tariffs. FAs and CUs violate this principle. Article 24 permits FAs and CUs subject to conditions: Substantially all trade must be covered. Cannot pick and choose products. Intra-bloc tariffs must go to zero within reasonable period. If CU, the CE must not on average be higher than the external tariffs of the CU members were before. In EEC s CU this meant France and Italy lowered their tariffs, Benelux nations raised theirs (German tariffs were about at the average anyway). 18 9

10 Kemp Wan heorem Possible to alter CE to get Pareto improvement. Form CU and adjust CE to ensure zero external trade effect ec (thus welfare e impact on is zero). reat external trade vector as part of endowment vector & First Welfare heorem tells us F between partners achieves FB and so is better than distorted equilibrium. Not practical, but an intellectual landmark (FAs need not be bad)