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
- What other examples of preferential trading areas are there? How close are they to the arrangement of the European Union?
- In each of the above examples, explain the type of preferential trading area that it is.
- 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?
- 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.
- Why is the UK’s decision so important for the global economy? Would it be in the interests of other economies? Explain your answer.
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
- Distinguish between a free trade area, a customs union, a common market and a monetary union.
- How is it possible that all five countries will gain from the establishment of a common market?
- 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?
- Why do some people worry about the consequences of free movement of labour with the EAC? How would you answer their concerns?
- What factors would need to be taken into account in deciding whether or not the five countries would benefit from forming a monetary 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
- What is a customs union? How does it differ from a common market and a monetary union, as we have in Europe?
- Russia wants to maintain its tariff on gas and oil supplies. Illustrate the effects of the imposition of a tariff. Does society gain?
- What are the arguments for and against retaining protectionist measures on trade with other nations?
- 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?
- What will be the impact of the customs union and its disputes on the accession of these countries to the WTO.
- Is it a good idea for Russia, Kazakhstan and Belarus to join the WTO? What conditions have to be met?