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Posts Tagged ‘common market’

Hard Brexit

Theresa May has said that the UK will quit the EU single market and seek to negotiate new trade deals, both with the EU and with other countries. As she said, “What I am proposing cannot mean membership of the single market.” It would also mean leaving the customs union, which sets common external tariffs for goods imported into the EU.

The single market guarantees free movement of goods, services, labour and capital between EU members. There are no internal tariffs and common rules and regulations concerning products, production and trade. By leaving the single market, the UK will be able to restrict immigration from EU countries, as it is currently allowed to do from non-EU countries.

A customs union is a free trade area with common external tariffs and uniform methods of handling imports. There are also no, or only minimal, checks and other bureaucracies at borders between members. The EU customs union means that individual EU countries are not permitted to do separate trade deals with non-EU countries.

Once the UK has left the EU, probably in around two years’ time, it will then be able to have different trade arrangements from the EU with countries outside the EU. Leaving the customs union would mean that the UK would face the EU’s common external tariff or around 5% on most goods, and 10% on cars.

Leaving the EU single market and customs union has been dubbed ‘hard Brexit’. Most businesses and many politicians had hoped that elements of the single market could be retained, such as tariff-free trade between the UK and the EU and free movement of capital. However, by leaving the single market, access to it will depend on the outcome of negotiations.

Negotiations will take place once Article 50 – the formal notice of leaving – has been invoked. The government has said that it will do this by the end of March this year. Then, under EU legislation, there will be up to two years of negotiations, at which point the UK will leave the EU.

The articles look at the nature of the EU single market and customs union and at the implications for the UK of leaving them.

Articles
Britain to leave EU market as May sets ‘hard Brexit’ course Reuters, Kylie MacLellan and William James (17/1/17)
Brexit: UK to leave single market, says Theresa May BBC News (17/1/17)
How Does U.K. Want to Trade With EU Post-Brexit?: QuickTake Q&A Bloomberg, Simon Kennedy (17/1/17)
Brexit at-a-glance: What we learned from Theresa May BBC News, Tom Moseley (17/1/17)
Theresa May unveils plan to quit EU single market under Brexit Financial Times, Henry Mance (17/1/17)
Doing Brexit the hard way The Economist (21/1/17)
Theresa May confirms it’ll be a hard Brexit – here’s what that means for trade The Conversation, Billy Melo Araujo (17/1/17)
How to read Theresa May’s Brexit speech The Conversation, Paul James Cardwell (17/1/17)
Theresa May’s hard Brexit hinges on a dated vision of global trade The Conversation, Martin Smith (17/1/17)
Brexit: What is the EU customs union and why should people care that the UK is leaving it? Independent, Ben Chapman (17/1/17)

Questions

  1. Explain the difference between a free-trade area, a customs union, a common market and a single market.
  2. What arrangement does Norway have with the EU?
  3. How would the UK’s future relationship with the EU differ from Norway’s?
  4. Distinguish between trade creation and trade diversion from joining a customs union. Who loses from trade diversion?
  5. Will leaving the EU mean that trade which was diverted can be reversed?
  6. What will determine the net benefits from new trade arrangements compared with the current situation of membership of the EU?
  7. What are the possible implications of hard Brexit for (a) inward investment and (b) companies currently in the UK of relocating to other parts of the EU? Why is the magnitude of such effects extremely hard to predict?
  8. Explain what is meant by ‘passporting rights’ for financial services firms. Why are they unlikely still to have such rights after Brexit?
  9. Discuss the argument put forward in The Conversation article that ‘Theresa May’s hard Brexit hinges on a dated vision of global trade’.
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Free trade from Cairo to Cape Town

A deal has just been signed between 26 African nations to form a new free trade area, the Tripartite Free Trade Area (TFTA). The countries have a population of 625 million (56% of Africa’s total) and a GDP of $1.6 trillion (63% of Africa’s total). The deal effectively combines three existing free trade areas: the Common Market for Eastern and Southern Africa, the Southern African Development Community and the East African Community.

Although the deal has been signed by the nations’ leaders, it still needs parliamentary approval from each of the countries. It is hoped that this will be achieved by 2017. If it is, it will mark a major step forward in encouraging intra-African trade.

The deal will involve the removal of trade barriers on most goods and lead to a reduction in overall tariffs by more than 50%. The expectation of the leaders is that this will generate $1 trillion worth of economic activity across the 26 countries through a process of trade creation, investment, increased competition and the encouragement of infrastructure development. But given the current poor state of infrastructure and the lack of manufacturing capacity in many of the countries, the agreement will also encourage co-operation to promote co-ordinated industrial and infrastructure development.

Up to now, the development of intra-African trade has been relatively slow because of poor road and rail networks and a high average protection rate – 8.7% on exports to other African countries compared with 2.5% on exports to non-African countries. As a result, intra-African trade currently accounts for just 12% of total African trade. It is hoped that the development of TFTA will result in this rising to over 30%.

Much of the gains will come from economies of scale. As Kenyan academic Calestous Juma says:

“By having larger markets, it signals the possibility of being able to manufacture products at a scale that is cost-effective. For example, where you need large-scale investments like $200m to create a pharmaceutical factory, you couldn’t do that if you were only selling the products in one country.”

The question is whether the agreement signed on the 10 June will lead to the member countries fully taking advantage of the opportunities for trade creation. Agreeing on a deal is one thing; having genuinely free trade and investing in infrastructure and new efficient industries is another.

Videos and audio
African leaders ink trade deal Deutsche Welle (11/6/15)
African leaders sign pact to create ‘Cape to Cairo’ free trade bloc euronews (10/6/15)
Africa Free Trade Analysis BBC Africa, Calestous Juma (9/6/15)

Articles
African Leaders To Sign Free Trade Agreement To Create Common Market International Business Times, Aditya Tejas (10.6.15)
EAC, COMESA and SADC Blocs Ink ‘Historic’ Trade Deal allAfrica, James Karuhanga (11/6/15)
Tripartite Free Trade Area an Opportunity Not a Threat allAfrica, Sindiso Ngwenya (9/6/15)
Africa a step closer to free trade area Business Report (South Africa), Rob Davies (11/6/15)
The Cape to Cairo trade ‘super bloc’ is here; 15 surprising – and shocking – facts on trade within Africa Mail & Guardian (Kenya), Christine Mungai (8/6/15)
The tripartite free trade area agreement in Africa is bound to disappoint Quartz Africa, Hilary Matfess (10/6/15)
Africa creates TFTA – Cape to Cairo free-trade zone BBC News Africa (10/6/15)
Will the Cape to Cairo free-trade zone work? BBC News Africa, Lerato Mbele (10/6/15)
African free trade still some way off BBC News, Matthew Davies (10/6/15)
Zambia not to benefit from Africa’s TFTA Medafrica, Geraldine Boechat (10/6/15)

Questions

  1. Distinguish between a free trade area, a customs union and a common market.
  2. What does the law of comparative advantage imply about the gains from forming a free trade area?
  3. Distinguish between trade creation and trade diversion.
  4. Why is it likely that there will be considerable trade creation from TFTA? Would there be any trade diversion?
  5. Why are small countries with a relatively low level of economic development likely to experience more trade creation than larger, richer ones?
  6. What barriers might remain in trade between the TFTA countries?
  7. Why might smaller, less developed members of TFTA be worried about the removal of trade barriers?
  8. Why might concentrating on developing local capacity, rather than just lowering tariffs, be a more effective way of developing intra-African trade
  9. What ‘informal’ barriers to trade exist in many African countries?
  10. Why is it that ‘Ordinary Africans are most probably not holding their breath’ about the gains from TFTA?
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The EU: good for the UK says the CBI

The Conservatives have pledged that, if they win the next election, they will hold a referendum in 2017 on whether or not the UK should remain in the EU. The Prime Minister has also said that he will renegotiate the terms of UK membership and push for reforms to the EU to cut administrative costs, reduce intervention and make the EU more competitive. We are likely to be bombarded with arguments for and against membership over the coming months.

In a contribution to the debate, the CBI has just published research showing that membership of the EU benefits the UK by up to £78 billion per year – £3000 per household. It also conducted a poll of its members which shows that the vast majority (78%, including 77% of SMEs) want to remain part of the EU, believing that membership brings net benefits to their business and the economy more generally.

However, as the Director-General of the CBI, John Cridland, said:

But the EU isn’t perfect and there is a growing unease about the creeping extension of EU authority. Europe has to become more open, competitive and outward looking if we are to grow and create opportunities and jobs for all our citizens.

The following articles and documents look at the CBI’s arguments.

Articles
Britain must stay in the European Union, says CBI Independent, Margareta Pagano (4/11/13)
Britain must stay in EU, says business lobby group The Guardian, Katie Allen (3/11/13)
EU membership: what the CBI have said The Telegraph, Rebecca Clancy (4/11/13)
CBI says staying in EU ‘overwhelmingly’ best for business BBC News (4/11/13)

CBI documents
In with reform or out with no influence – CBI chief makes case for EU membership CBI Press Release (4/11/13)
Our Global Future: Factsheets CBI

Questions

  1. Distinguish between a free trade area, a customs union, a common market and a monetary union. Which is the EU?
  2. Itemise the arguments for and against membership of the EU.
  3. What types of reform to the EU are being advocated by the CBI?
  4. What factors will determine the negotiating power of the UK government with other EU governments?
  5. How is greater fiscal integration in the eurozone likely to affect the case for and against EU membership for the UK?
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The UK and the single market

A key debate for some months has been the UK’s membership of the European Union. The debate has centred around the desire to return some powers back to the UK, but this has extended into the possibility of a referendum on our membership of the preferential trading area. So, let’s take a step back and consider why any country would want to be a member of a preferential trading area.

Preferential trading areas can be as basic as a free trading area or as advanced as a currency, or even political union. The eurozone is clearly a currency union, but the European Union, of which the UK is a member, is a common market. A common market has no tariffs and quotas between the members, but in addition there are common external tariffs and quotas. The European union also includes the free movement of labour, capital and goods and services. Membership of a preferential trading area therefore creates benefits for the member countries. One such benefit is that of trade creation. Members are able to trade under favourable terms with other members, which yields significant benefits. Countries can specialise in the production of goods/services in which they have a comparative advantage and this enables greater quantities of output to be produced and then traded.

Other benefits include the greater competition created. By engaging in trade, companies are no longer competing just with domestic firms, but with foreign firms as well. This helps to improve efficiency, cut costs and thus lower prices benefiting consumers. However, from a firm’s point of view there are also benefits: they have access to a much wider market in which they can sell their goods without facing tariffs. This creates the potential for economies of scale to be achieved. Were the UK to completely exit the EU, this could be a significant loss for domestic firms and for consumers, who would no longer see the benefits of no tariffs on imported goods. Membership of a preferential trading area also creates benefits in terms of potential technology spillovers and is likely to have a key effect on a country’s bargaining power with the rest of the world. As is a similar argument to membership of a trade union, there is power in numbers.

There are costs of membership of a preferential trading area, but they are typically outweighed by the benefits. However, estimates suggest that the cost of EU regulation is the equivalent of 10% of UK GDP. Furthermore, while the UK certainly does trade with Europe, data suggests that only 13% of our GDP is dependent on such exports. The future is uncertain for the European Union and Britain’s membership. There are numerous options available besides simply leaving this preferential trading area, but they typically have one thing in common. They will create uncertainty and this is something that markets and investors don’t like. Vince Cable warned of this, saying:

There are large numbers of potential investors in the UK, who would bring employment here, who have been warned off because of the uncertainty this is creating.

The impact of the UK’s decision will be significant and not just for those living and working in the economy. The world is no interdependent that when countries exist (or typically enter) a preferential trading area the wider economic effects are significant. While any change in the UK’s relationship with the EU will take many months and years to occur and then further time to have an effect, the uncertainty created by the suggestion of a change in the relationship has already sent waves across the world. The following articles consider the wider single market and the current debate on UK membership.

European Union: if the ‘outs’ get their way, we’ll end up like Ukraine Guardian, Vince Cable (16/5/13)
Conservative MP James Wharton champions bill to guarantee EU referendum Independent, Andrew Grice (16/5/13)
Nick Clegg shifts ground over EU referendum The Guardian, Patrick Wintour (15/5/13)
Cameron tells EU rebels to back referendum law Reuters, Peter Griffiths (16/5/13)
The EU and the UK – the single market BBC Democracy (4/3/13)
Single market dilemmas on Europe BBC News, Stephanie Flanders (14/5/13)
Lord Wolfson: I back the single market – but not at any cost The Telegraph, Lord Wolfson (19/1/13)
EU focuses on returning single market to health Financial Times, James Fontanella-Khan (8/5/13)

Questions

  1. What other examples of preferential trading areas are there? How close are they to the arrangement of the European Union?
  2. In each of the above examples, explain the type of preferential trading area that it is.
  3. What are the benefits and costs of being a member of a preferential trading area such as the EU? How do these differ to being a member of a) a free trade area and (b) a customs union?
  4. What options are open to the UK in terms of re-negotiating its relationship with the EU? In each case, explain how the benefits and costs identified in question 3 would change.
  5. Why is the UK’s decision so important for the global economy? Would it be in the interests of other economies? Explain your answer.
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A common market for East Africa

The east African countries of Kenya, Tanzania, Uganda, Burundi and Rwanda have been operating with a common external tariff for some time. The East African Community (EAC), as it is known, came into force in 2000. Initially it had just three members, Kenya, Tanzania and Uganda; the other two countries joined in 2007. As the Community’s site says:

The EAC aims at widening and deepening co-operation among the Partner States in, among others, political, economic and social fields for their mutual benefit. To this extent the EAC countries established a Customs Union in 2005 and are working towards the establishment of a Common Market in 2010, subsequently a Monetary Union by 2012 and ultimately a Political Federation of the East African States.

This Common Market came into force on 1 July 2010, with free movement of labour being instituted between the five countries. The plan is also to do away with all internal barriers to trade, although it may take up to five years before this is completed.

The following articles and videos look at this significant opening up of trade in east Africa and at people’s reactions to it. Will all five countries gain equally? Or will some gain at the others’ expense?

Articles
East African Countries Form a Common Market New York Times, Josh Kron (1/7/10)
Dawn of an era for East Africans The Standard, John Oyuke (1/7/10)
5 East African countries create common market The Associated Press, Tom Maliti (1/7/10)
FACTBOX-East African common market begins Reuters (1/7/10)
Bold plan to have single EAC currency by 2012 Daily Nation, Lucas Barasa (1/7/10)
East Africa’s common market begins BBC News, Tim Bowler (30/6/10)
East Africa: Poor Road, Railway Network Holding Back Integration allAfrica.com, Zephania Ubwani (1/7/10)
Challenges for one East Africa Common Market The Sunday Citizen, James Shikwati (4/7/10)

Videos
Common market barriers NTVKenya (on YouTube) (2/7/10)
The fruits of E.A.C. NTVKenya (on YouTube) (2/7/10)

The East African Community (EAC)
Official site
Wikipedia entry

Questions

  1. Distinguish between a free trade area, a customs union, a common market and a monetary union.
  2. How is it possible that all five countries will gain from the establishment of a common market?
  3. Distinguish between trade creation and trade diversion. Under what circumstances is the establishment of a common market more likely to lead to (a) trade creation; (b) trade diversion?
  4. Why do some people worry about the consequences of free movement of labour with the EAC? How would you answer their concerns?
  5. What factors would need to be taken into account in deciding whether or not the five countries would benefit from forming a monetary union?
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A Customs Union or the Soviet Union?

Russia and Kazakhstan have been discussing the formation of a trade agreement for some time and an agreement is now in place. From July 1 2010 a customs union between these two countries will be launched. Belarus has also been in talks with the Russian government, but as yet, it will not become a member, due to disputes with Russia. Belarus was hoping that the customs union would free it from export duties on oil, but this has not been the case. The gas dispute between Russia and Belarus has continued, although a meeting is taking place to try to resolve the issue.

President Alexander Lukashenko has said that Belarus will sign the Customs Unions documents if Russia cancels petroleum products duties now and oil duties from January 2011. He said:

“As a goodwill step, we propose removing customs barriers and customs duties on petroleum products now, and we will wait until the beginning of next year regarding oil duties; but the duties must be removed from January 1.”

Although the customs union between Russia, Kazakhstan and Belarus formally began on January 1 2010, it will not work fully until these disputes have been resolved. The following articles consider this agreement and the likely impact on the countries’ negotiations to join the WTO.

Russia, Kazakhstan agree customs union minus Belarus Reuters (28/5/10)
Russia hopeful of settling Belarus gas dispute Reuters (19/6/10)
Belarus to sign customs union documents, if Russia cancel oil duties RIA Novosti, (18/6/10)
Creation of customs union should not hinder Russia’s entering WTO RIA Novosti (17/6/10)
Kazakhstan ‘moving to re-instate Soviet Union’ with customs unions with Russia Telegraph, Richard Orange (11/6/10)
Russia, Kazakhstan launch customs union without Belarus AFP (28/5/10)

Questions

  1. What is a customs union? How does it differ from a common market and a monetary union, as we have in Europe?
  2. Russia wants to maintain its tariff on gas and oil supplies. Illustrate the effects of the imposition of a tariff. Does society gain?
  3. What are the arguments for and against retaining protectionist measures on trade with other nations?
  4. Assess the likely effects of the customs union on (a) the individual members and (b) other nations. Who do you think will benefit and lose the most?
  5. What will be the impact of the customs union and its disputes on the accession of these countries to the WTO.
  6. Is it a good idea for Russia, Kazakhstan and Belarus to join the WTO? What conditions have to be met?
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