The Role of European Trading Bloc - Term Paper Example

Trading Bloc: European Union Introduction The European countries first came together in 1951 by establishing the European Coal and Steel Community and then by forming the European Economic Community (EEC) through the Rome Treaty in 1957 that established the right of free movement of goods, capital, services and people between the member states. The Single European Act of 1986 emphasized further the issue of safety at work and introduced EEC actions on consumer protection and environment. The EEC was renamed and finally the European Union (EU), with monetary union and single currency, was formed by the Maastricht Treaty in 1992 by providing the EC more powers as also the obligation that issues that can be resolved at the national level will not be dealt with at the Union level. The Treaty of Amsterdam replaced the Maastricht Treaty in 1997, Beside the three founding treaties, a series of agenda and policies have guided various policy issues in the European Union. In 2004, eight central and eastern European countries were incorporated into the European Union (Cucic, 2000). The European Union has been the most successful trading bloc and the monetary union has been a huge success, with the Euro having become a stronger currency than the dollar, which has for long been the principal currency against which global trade has been conducted. In this paper, I will discus the various aspects of the trading bloc in Europe that has made it successful while also highlighting some of the disadvantages of the arrangement. Preferential Trading Arrangement (PTA) in the European Union Preferential Trading Arrangement (PTA) can be of many forms – customs union (CU), free trade zone, free trade agreements (FTA) and so on. However, in terms of definition, PTA, FTA and customs union are not the same. While PTAs are agreements between two or more countries to impose lower tariff rates for goods traded between them than on those traded outside, an FTA is a PTA that does not impose any tariff for goods traded between them but do so for goods traded outside and a customs union is an FTA in which the member countries impose a common tariff rate for goods traded outside (Panagriya, 1999). Thus, a PTA progresses to a FTA and then to a CU as the regional trading bloc develops. PTAs are aimed to bring about economic and social prosperity between member countries by hastening multilateral trade negotiations (Rosson et al, n.d). In practice, PTAs rarely eliminate trade barriers between member countries completely. For example, in the EU, competition policy restricts the flow of imports from member countries (Panagriya, 1999). PTAs often are accompanied with other policies. The EU has harmonized product standards, introduced competition and social policies like health standards (which are essential for the free movement of people within the union) and monetary union. The European Economic Community (EEC), now the European Union (EU) has had the most successful customs union for decades. Beginning with the Common Agricultural Program (CAP), which is a variable levy system that limits trade of agricultural products between member states, the EU established the common market with the Single European Act in 1993 some or all tariff and non-tariff barriers for movement of goods, capital, labor and services between member countries (Panagriya, 1999). Effect of WTO on European Union The General Agreement on Tariffs and Trade (GATT), established in 1947 which formed the World Trade Organization (WTO) in 1994, forbade member countries to pursue discriminatory trade policies against each other by abolishing the Most Favored Nations (MFN) clause. Yet, it accommodated PTAs with the condition that the regional trading blocs are formed not just for “lowering” tariff for one or some goods but with the aim to eliminate over the long term all tariff and non-tariff barriers between the member countries, without raising tariff rates for trade outside the union. From the early days of the GATT, MFN was a tool for developing countries to get preferential treatment for certain products from the developed world. On the other hand, the United States had consistently insisted on a multilateral framework for all trade negotiations while the EC tried hard to negotiate PTAs and FTAs. However, along with attempts by the United States, Canada and Mexico to form the North American Free Trade Agreement (NAFTA), which finally became a reality in the 1990s, the EC had also continuously expanded, with the addition of Greece in 1981, Portugal and Spain in 1986, and Austria, Finland and Sweden in 1995. Subsequently, it has also included countries from eastern and central Europe as well as the Baltic region. Since then, the EU has aggressively expanded as a trading bloc and finally into a monetary union while the resistance to the PTAs has all but disappeared. Since PTAs are by nature discriminatory, it has come under serious discussions repeatedly in the WTO (Panagriya, 1999). Reasons of Establishing European Union 21 of the 27 European countries that now form the European Union had faced the devastation of the World War II. After the War, in a bid to reconstruct the economies and to prevent such disasters, these countries wished to cooperate between themselves. A French economist, Jean Monnet, was the first to propose – on May 9, 1950, Europe Day – cooperation between nations to put the intermediate products used for the manufacture of weapons, that is coal and steel, to better use. The Treaty of Paris was signed between Belgium, the Netherlands, Luxembourg, France, Italy and west Germany to form the European Coal and Steel Community (ECSC). The ECSC had limited success, with the flourishing of industrial production, steel in particular (Europa). France was particularly worried that Germany would revive its coal and steel industries and once again begin its expansionist policies. To preempt any chances of such “military-industry nexus” that could fuel the nascent German nationalism, the ECSC had a political agenda that other European powers had. However, the concept found economic validity that soon developed into a trading bloc. The European trading bloc was formed primarily to prevent excess nationalism like that of Nazi Germany as well as protectionism by individual countries that would come in the way to the reconstruction of post-War Europe (Artis and Nixson, 2007). It initially began with a Western European concept, the end of the Cold War and the disintegration of east European states that were under communist regimes till then and were attempting to integrate into global trade made it imminent that the EU would expand over the years. The six countries then proposed the European Economic Community (EEC) that was to be a trade body that would enable free movement of labor, capital, services and people across the countries and form a custom union (a free trade zone with a common external tariff) to boost production in the member countries. The EEC was formed by the Treaty of Rome signed in 1957. All the member countries in EEC would have uniform import and export tariff rates and quota restrictions. Internal tariff rates between the six countries were eliminated in 1968. The revenues earned through external tariffs by the six countries would be shared equally between them. Another six countries formed the Euratom in 1957. In 1967, the ECSC, the EEC and the ECSC merged. The ECSC ceased to exist in 2002 after the end of the duration for the Treaty of Paris. The Euratom also ended in 2007 (Europa). After the customs union, the idea of the monetary union in Europe was proposed in 1970. The European Monetary Union (EMU) was formed in 1979 to minimize the currency fluctuations between currencies of the member states. This was deemed necessary to boost trade between the countries. It was realized that free movement of goods, labor, capital and services are hampered by the sudden fluctuations of currencies. By the single European Act of 1986, it was proposed that a single market would be formed by 1993 which was finally brought about by the Maastricht Treaty of 1992 with the formation of the European Union (EU). The monetary union was brought about by the member countries deciding to control inflation, cut interest rates, keep budget deficits and borrowings low and the exchange rate stable. The single currency, Euro, was simultaneously introduced in 2002 in Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland. The European Union now guides not only economic policies of member countries, like trade, fiscal and monetary policies, but also defense, judiciary and social sectors (Europa). It has been argued that formation of a customs union (CU) may give undue advantage to the member countries over those outside if a member country can import products from a low-tariff country within the union and then export to a high-tariff country. Or, inputs from the outside world may be imported into the low-tariff country within the union and then export to another which has higher tariffs with the external world. Therefore, the WTO has imposed rules of origin by which a product can be traded within the union with no tariffs only if a specified amount of its value addition originates within the union (Panagriya, 1999). Advantages of European Union The Common Agricultural Policy (CAP) and the Health and Consumer Protection Strategy have been used by the EU to improve public health in the member countries. Since production patterns of food in the member countries and trade between them have long term implications of the diet and food habits in countries, the EU has deliberately focused on these aspects. The CAP deals with the surplus food production in European countries and directives are made to control the type of food production so that “lifestyle diseases” associated with sedentary lifestyles and consumption of high cholesterol food may be reduced. However, such policies have often been accused of providing subsidies to European producers. The trade dispute settlement within the European Union has been more successful than that on a multilateral platform like the WTO because it is available to private parties while WTO negotiations are at a diplomatic and ministerial level only. However, it has also been argued because of the EU, multilateral negotiations of the GATT and WTO has been delayed (Panagriya, 1999). Subglobal arrangements like trading blocs are a step forward to take globalization of trade ahead. By foregoing sovereignty by the member countries, there is increase in effective sovereignty that they can eventually exercise in global trade (Artis and Nixson, 2007). Disadvantages of European Union Many policies of the European Union, like those for healthcare and insurance, are legally binding and, although directives and guidelines from the European Union do not have any legal powers, states are obliged to form legal frameworks for professional conduct, pharmaceuticals, technology and patients rights in accordance with the guidelines. However, not all issues among the member states regarding healthcare policies and markets are easily resolved without the implementation of free trade and fair competition. Member states have the right not to implement certain EU guidelines if it is felt that it has negative impacts on national health. This has resulted in frequent disputes between the EU member states. Besides the direct policies related to health, many of EU policies, like those related to internal market, trade and competition, also has implications for the healthcare systems in the member countries. For example, anti-trust regulations in pharmaceuticals apply to the healthcare systems as market principles are being introduced into many of the countries where the sector has traditionally been defined as public. Policies regarding research public health, bioethics, as well as training and education in healthcare are also covered (Cucic, 2002). It has been argued that trading blocs like the European Union, which are based on PTAs, liberalize trade preferentially, through trading arrangements within the union, while diverting trade from low-cost sources outside the union. As a result, this discriminates less efficient manufacturers within the union to more efficient ones outside, leading to a lower welfare choice (Panagriya, 1999). Such trade diversions are minimum when the trading partners under the PTA are within geographical proximity and are “natural trading partners”, that is they already undertake a lot of trade between themselves. Yet, empirical evidence has shown that the “natural trading partner” hypothesis is false and trade diversion is dominant and accumulating for most trading blocs. For the European Community in the 1980s, it was found “overall, the evidence suggests massive trade diversion resulting from the membership expansion” (Wei and Frankel, 1986, cited in Panagriya, 1999). However, the rules of origin imposed by the WTO aims to guard against trade diversion. Besides, empirical evidence also does not prove that transport costs are significant. Hence, trade between countries that are in geographical proximity, like those in the EU are, have any advantage of trade between countries that are far from each other (Panariya, 1999). The success of a trading bloc depends crucially on the governance and coordination. With the successive expansion, the coordination has become all the more cumbersome, with some even arguing that the last phase of expansion in 2007, of that of the former Yugoslavia and Turkey, should have been postponed. The exercise has become all the more difficult to coordinate because of the monetary union as some countries, like Italy, are more susceptible to strains of adjustment than others (Artis and Nixson, 2007). Economic integration is highly dependent on legislation. The EU provides broad directives on the legislation that member countries have to implement. The structure of the European Union has three supranational institutions – the European Parliament, the Commission and the European Court of Justice – to oversee the legislation. But, with the expansion, the coordination and monitoring of legislation has become increasingly difficult. Conclusion The European trading bloc was initially formed on the premise of a combination of political, social and economic agenda in the post-world war II era. The predominant agenda, however, was to restrain Germany from becoming a political power once again and to collectively become a regional economic power in the Cold War regime. Formed initially by six European countries, the bloc now includes 27 countries, following expansion since the end of the Cold War, collapse of Communist regimes in east Europe and integration of new countries in east and central Europe and the Balkans. The bloc, which began with the European Coal and Steel Community, became the European Economic Community and finally European Union, growing from a simple trading bloc to a monetary union with a single currency. The customs union has preferential trading arrangement with no tariff barriers between member countries, within the purview of the WTO that requires that the member countries do not simultaneously raise tariffs on countries outside. However, it has been found that PTAs often lead to trade diversions and the creation of subglobal trading blocs deter multilateral trade negotiations and globalization of trade, by protecting low-efficient producers within the union in preference to high-efficiency producers outside. Although trade disputes are more easily solved by the EU than at a multilateral organization like the WTO, the success of a trading bloc – particularly a large one like the EU – is critically dependent on coordination and governance. With expansion and deepening of the union, the strains of adjustment are become more and more critical. Works Cited Cucic, Strasimir, European Union Health policy and its importance for national convergence, International Journal for Quality in Healthcare, 2000, Vol 12 NO 3, pp 217-225 Europa, European Union, http://ec.europa.eu/ireland/general_information/ireland_eu/eu/index_en.htm Rosson, C P et al, Preferential Trading Arrangements: Gainers and Losers from Regional Trading Blocs, http://www.ces.ncsu.edu/depts/agecon/trade/eight.html Panagriya, Arvind, Regionalism in Trade, World Scientific, 1999 Artis, Mike and Frederick Nixson, The economics of the European Union: policy and analysis, Oxford University Press, 2007 Read More