European Trade Policy - Essay Example

A. The European Union has a Common Commercial Policy. Carefully explain and assess the implications of this ment in relation to EU's trade relations with the rest of the world The European Union trade is based upon a Customs Union as set upon by Article 9 of the Treaty of Rome. In this framework, the community employs a Common Customs Tariff (CCT) and a Common Commercial Policy (CCP). EU defines Customs Union as an agreement among its members for free trade with each other and employment of a single common external tariff and trade policy towards third countries. In short, the Union wants to have a single unified means of trading with non-EU countries leading to formulate a "common external barrier" wherein third country goods receive the same customs and commercial policy treatment wherever they enter the Community. On the basis of Article 133 of the European Community (EC) Treaty, the European Commission negotiates on behalf of the Member States in consultation with a special committee- the so-called "133 Committee". The 133 Committee is composed of representatives from the 25 Member States and the European Commission. Its main function is to coordinate the trade policy of the EU. The 133 Committee discusses the full range of trade policy issues affecting the EU, from the strategic issues surrounding the launch of rounds of trade negotiations at the WTO to specific difficulties with the export of individual products, such as textiles, and considers the trade aspects of wider EU policies in order to ensure consistency of policy. In this Committee, the European Commission secures endorsement of the Member States on all trade policy issues. The major formal decisions (for example agreement to launch or conclude negotiations) are then confirmed by the Council of the European Union. It is said that the objective of the EU's Common Commercial Policy is to contribute, in the common interest, to the harmonious development of world trade, the progressive abolition of restrictions on international trade, and the lowering of customs barriers. Actually, the CCP is principally about ensuring external trade conditions, which do not create distortions of conditions among member states, and about prevention external factors from harming integration within the Community. Art. 113 lists a number of measures included in the CCP: tariff rates, conclusion of tariff and trade agreements, uniformity in measures of liberation, export policy and measures to protect trade. Art. 113 is not exclusive, just a list of examples. The EU has interpreted that the CCP "includes the same elements as the external trade policy of a state", meaning that the CCP may include trade regulation, as well as trade liberalization measures and defensive measures against unfair commercial practices. As examples of defensive measures we can mention Anti-dumping Regulation, Illicit Practices Regulation and Counterfeit Regulation. EU's Common Commercial Policy covers all the main measures affecting trade in goods and services and almost all trade-related issues, Trade-related areas partially covered by the common trade policy include: company law, indirect taxation, standards and other technical regulations, and enforcement of intellectual property rights. The Community policy on imports is determined in the following way: "imports into the Community are free from quantitative restrictions but only where more restrictive rules are not applicable". Restrictive rules apply for textiles and agricultural products. (Aarkog, 2005) B. In December 2005, the EU Commission announced that it would be phasing-out all export subsidies currentyl granted to exporters in the European Union. Critically discuss the likely implications for EU exports of the phasing-out of export subsidies. 60% World Trade Organization (WTO) members, which includes the European Union, are engaged in trade negotiations referred to as the Doha Development Agenda (DDA). The main aim of the negotiations is to minimize barriers to internal trade in agriculture, manufactured products and services. One of the significant call by the 2001 Doha declaration was the "reduction, in view to phase out, all forms of export subsidies". This call was renewed again in 2004 during the negotiation for the "Framework for Establishing Modalities in Agriculture". Under pressure from virtually every other participant in the WTO negotiations, the EU took the historic step of agreeing to abandon export subsidies over time. The EU agreed to this after having been guaranteed that the export subsidy elements within the US's export credit and food aid programs are similarly disciplined. From the preliminary viewpoint, the move is likely to cause significant changes in EU's trade as they are the largest user of export subsidies. Between 1995 and 2001, global export subsidies amounted to over $34 billion cumulatively, of which 89% is from the European Union (USDA, 2004). Under comparison, the U.S. spent just over $556 million during that same period to support its dairy products and $10 million for its poultry. Added together, this only represents about 1.4% of the total global world export subsidies. EU's reliance on subsidies for agriculture stems from the Common Agricultural Policy (CAP). The CAP supports producer prices at levels above world market prices, stimulating production in the EU and resulting to large exportable surpluses of many commodities. The EU has been actively subsidizing the disposal of surpluses in many commodities to the world market thus distorting trade flows. By using export subsidies, the EU has also been expanding its world market share in agricultural products. Figure 1 gives a representation of the effects of export subsidies both on the world market and in net exporting countries: Figure 1: Effects of Export Subsidy on EU and the Global Market For the purposes of this analysis, it is assumed that the EU is a net exporter of a product. This trade position could be a result of domestic subsidies that have moved the supply curve from the original So to S (EU-Market Graph). The export volume is the difference between the quantity demanded and supplied at prices Pw. With different domestic prices, the export supply schedule can be derived (XS). Respectively, the foreign market that is a net importer of the product, demands it from a global market according to imports schedule MD. The imports are also depicted as the difference between supply and demand in the foreign market as indicated in the graphs. Globally, the markets balance so that exports equal imports. This analysis is a combination of partial equilibrium analysis in single markets (EU, Foreign) and a general equilibrium analysis globally. From the EU perspective, the export subsidy is a higher price PE given to domestic producers with the resulting effect of increasing the global supply. This subsidy moves the XS curve right to XSE due to the increased supply from the EU market. To absorb this increasing supply in the foreign market, the price of imports in foreign markets decreases to PF. The export subsidy drives a wedge between the price the EU producers get (PE) and the importers pay (PF). The monetary costs of the subsidies are represented by the shaded area. The effects of reduction in the subsidy can be analyzed from the illustration above. Reducing a subsidy of a product in the EU market moves the XSE curve to the left, reducing imports and decreasing the price producers get in the EU market. This scenario is also highly likely to increase the price the countries pay for imports, i.e. there is an increase in the world market price. In the EU market, the supply decreases and manpower is able to move from agriculture to other industries. The movement of resources into and out of a line production may cause minimal price cycles for factor costs but this is rather negligible. As factors of production move from agriculture to other industries, the agricultural sector is able to stabilize and the demand picks up without any major disruptions in price levels or factor costs. These possible scenarios render the consumers paying lower real prices for the raw material component of their food. There have been quantitative researches conducted regarding the effects of phasing export subsidies to the EU even before it has actually taken place. Table 1 summarizes the results of the studies: Study OECD 2000 Binfield et.al. 2001 Gohin & Meyers 2002 Jensen & Yu 2005 Kerkela et. al. 2005 Wheat EU Price -3.0 -7.0 0.0 NA -1.0 EU Production NA 0.0 -0.3 -0.6 -5.4 EU Consumption NA 0.0 -0.4 NA 0.1 EU Exports 14.0 3.0 0.4 -21.5 -13.0 Coarse Grains EU Price -14.0 -9.3 -2.3 NA -1.0 EU Production NA 0.0 -2.3 -3.6 -5.7 EU Consumption NA 0.0 1.5 NA 0.1 EU Exports -59.0 NA -71.6 -7.0 -16.5 Beef EU Price -14.0 -17.0 1.6 NA -0.4 EU Production -6.5 0.0 -0.2 -3.3 -3.0 EU Consumption NA 0.0 -0.2 NA 0.1 EU Exports -72.0 -70.0 -14.2 -3.1 -16.6 Pork/Poultry EU Price 2.0 NA -0.4 NA -0.3 EU Production -4.7 NA 0.2 0.4 -1.2 EU Consumption NA NA 1.5 NA 0.1 EU Exports -32.0 NA -35.4 -8.3 -6.9 Dairy EU Price -7.3 NA NA NA -0.3 EU Production NA NA -2.0 -1.0 -4.4 EU Consumption NA NA 2.9 NA 0.1 EU Exports -49.0 NA -56.6 -58.2 -20.0 Milk EU Price -10.0 -17.0 -18.7 NA -0.9 EU Production 0.0 NA -2.3 -0.2 -3.0 EU Consumption NA NA -2.3 NA -0.3 Table 1. Impacts of Export Subsidy Elimination to the EU (differences in percentages from the benchmark) Generally, the phasing out of export subsidies will significantly decrease domestic prices and will have negative impacts in both production and exports. It is important to remember that these studies differs in assumptions and parameters modeled but it can be seen that they are rather consistent with each other. C. Assess the significance of these terms of sale: Ex-Works, free on board(FOB) and Delivered Duty Paid (DDP) in international trade. Ex-Works The Ex-Works (EXW), which is an International Commerce Term (Incoterm),means the seller minimizes their risk by making the goods available at their own premises. The buyer loads the goods then arranges and pays for transport, customs clearance and insurance. Under this Incoterm, if you are selling goods, you are responsible for making the goods available to your buyer from your premises or an appointed place (such as a factory or depot). Once you have made the goods available you are no longer responsible for them. The buyer must arrange and pay for the transport having taken delivery of the goods. The buyer is responsible for the goods, and anything that happens to them having taken delivery of them. EXW means that the buyer carries all the risk and bears the entire cost for the movement of the goods once they are made available at the seller's premises. Sellers and buyers add words and terms to the EXW Incoterm. For example, "EXW-loaded" is sometimes added to the contract wording if the seller is to load the goods. However, if you choose to add words or clauses to your contract, you must make clear in writing who carries out or pays for the extra work and who bears the risk.Because the responsibility for moving goods is entirely up to the buyer, EXW can be used for all types of transport. (Businesslink, 2007a; Wikipedia Online, 2007a) Free On Board (FOB) The Free On Board (FOB) is also an Incoterm which means that the seller is responsible for arranging and paying for delivering goods to a carrier. The seller's risk ends when the goods are delivered to the main carrier. The buyer pays for the main carriage. Under the FOB Incoterm, as the seller you are responsible for delivering the goods to a carrier chosen by the buyer. This means that you are responsible for the goods until they pass the rail of the ship at a named port of shipment, after which the buyer assumes costs and risks. The seller arranges all export documentation and has to bring the goods right up to the point of passing over a ship's rail at a named port of shipment.As the buyer, the costs and risks associated with the goods only become your responsibility when the goods pass across a ship's rail. If the seller doesn't intend to load the goods, FCA or Free Carrier, should be used instead of FOB. FOB is used only for sea or inland waterway transport. (Businesslink, 2007b; Wikipedia Online, 2007b) Delivered Duty Paid (DDP) In international trade, the seller has to pay all costs and cover all risks involved in bringing goods to the named place of destination. While the Ex-Works (EXW) represents the least responsibility for the seller, the Delivered Duty Paid (DDP) Incoterm represents the highest responsibility forthe seller. The obligations of the seller/s is that they must deliver the goods to a named destination, unload and clear them for import. The seller has responsibility for all costs and risks linked to bringing the goods to the named destination. The seller must pay all duties, taxes and charges in the country of import. Some taxes, such as VAT, can be excluded from the seller's obligations and transferred to the buyer. This variation to the Incoterm should be written into the sales contract. DDP is not used if the seller is unable to arrange an import licence. DDP cover all modes of transport. However, if goods are delivered on board a ship or on a quay, then other terms such as theDelivered Ex-Ship and Delivered Ex-Quay Incoterms must be used. (Businesslink, 2007c; Wikipedia Online, 2007c) References: Aarkog, B. (2005). A Constitution for Europe. Retrieved February 18,2007 from http://helmer.hit.uib.no/brit/EU-CONST-EN-cc/TITLEV-THEUNIONSEXTERNALACTION.html Binfield, J., T. Donnellan, K. Hanrahan, and P. Westhoff (2001). "The MTR and WTO Proposal: An analysis of their effect on the EU and Irish Agricultural Sector." Proceedings of the FAPRI-Ireland 2003 Outlook Conference, Teagasc, Dublin. Business Link (2007a).Ex Works. Retrieved April 18,2007 from www.businesslink.gov.uk Business Link (2007b). Free On Board. Retrieved April 18,2007 from www.businesslink.gov.uk Business Link (2007c). Delivered Duty Paid. Retrieved April 18,2007 from www.businesslink.gov.uk Gohin, A. and Meyers, C. (2002). The Phasing Out of EU Agricultural Export Subsidies: Impacts on EU Agriculture. NRA Economie et Sociologie Rurales: France Jensen, H.G. and W. Yu (2005) 'Modelling the EU sugar policy - A study of policy reform scenarios', Working Paper no. 13/2001, Danish Research Institute of Food Economics (FOI). Kerkela, L., Lehtonen, H. and Niemi, J. (2005). The Impacts of WTO Export Subsidy Abolition on the Agri-Food Industry in the EU: A Preliminary Assessment. Government Institute for Economic Research: Finland OECD (2000). A Forawrd Looking Analysis of Export Subsidies in Agriculture. OECD Working Paper: OECD Archives Wikipedia Online (2007a) Ex Works. Retrieved April 18,2007 from www.wikipedia.com Wikipedia Online (2007b) Free on Board. Retrieved April 18,2007 from www.wikipedia.com Wikipedia Online (2007c) Delivered Duty Paid.. Retrieved April 18,2007 from www.wikipedia.com Read More