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International Trade Policy: GATT, WTO

• WTO and the environment– The Committee on Trade and the Environment (CTE)

holds discussions once or twice a year– It is generally agreed that progress by the CTE in

addressing issues related to the environment has been slow

– Why?– Because decisions by the WTO are made by

consensus among the member countries – There is generally no consensus on

trade/environment issues– If decisions cannot be reached by consensus, they

can be reached by vote but contentious issues usually require a three-quarters majority or even unanimous vote

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International Trade Policy: GATT, WTO

• WTO and the environment– What are the environmental issues on which it is

difficult to reach agreement in the WTO?– Issues can be divided into three types: domestic

pollution, transborder pollution and global pollution1. Domestic pollution: pollution that is domestic in

nature and does not spill over national boundaries. Richer countries tend to have higher environmental standards than poorer ones. Poorer countries operating in the same industry/sector may therefore have a trade advantage

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International Trade Policy: GATT, WTO

• WTO and the environment1. Domestic pollution (cont’d): One country might spend

more on environmental controls in particular sectors than in another country and therefore the costs for firms in that sector would be higher. Therefore, the country with the lower environmental controls/standards would have a trade advantage over the other country. Can be seen as exploiting the environment for economic gain. However, is it not acceptable that different countries value their environment differently? Environmental diversity between countries is legitimate. Also, rich countries can afford to spend more on the environment – forcing poor countries to do the same would reduce their standards of living

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International Trade Policy: GATT, WTO

• WTO and the environment2. Transborder pollution: Pollution that spills over

national boundaries. Does a country being damaged by pollution from another have the right to ban imports from that country? Is trade policy the right instrument to use for environmental issues? If a country imposed import restrictions due to transborder pollution the losses from reduced trade are likely to be far greater than the gains from less pollution

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International Trade Policy: GATT, WTO

• WTO and the environment3. Global pollution: Argument - the WTO could

impose trade sanctions to reduce global pollution problems (e.g. ozone layer). But some countries could free ride by ignoring the agreements (bearing no costs) and yet get the benefits from low global pollution levels. The WTO then could impose trade sanctions against those free riders but this would be going against its overriding objective of free trade.

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European Union• Source: “International Economics: A European Focus”, Barbara

Ingham (available in the library)Chapter 12

• If a country is a member of a trade bloc, like the European Union (EU), it does not have complete freedom imposing protectionist measures

• The EU is an economically integrated area• Economically integrated area in an

institutional sense– one without internal legal and administrative

barriers that impede the free flow of goods, services, capital and people

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European Union

• One fundamental significance of economic integration (free trade and free movement of labour and capital): the increase of actual or potential competition– Likely to lead to: lower prices, greater

quality variation, wider choice, general impetus for change in the direction and intensity of innovation.

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Degrees of economic integrationStage Definition

Free trade area (FTA) -eliminating tariffs and quotas on trade among members

-members retain national tariffs against non-members

Customs Union (CU) -a FDA which harmonises tariffs in trade with non-members (common external tariff)

Common Market (CM) -a CU which abolishes restrictions on factor movements (free movement of goods, services, labour and capital)

Economic and monetary union (EMU) -economic and financial integration of members, single monetary and economic policy

Political union -political integration of members

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European Union• Guiding ideology: Avoiding another war and

restoring peace and stability in Europe• European Union: the processes of economic and

political integration have been linked from the start– European Coal and Steel Community (ECSC) (1951)

– founded to preclude another French-German war (European security – main aim)

– European Economic Community (EEC) Treaty (1957) strive for “an ever closer union among the peoples of Europe”

– Implicit desire to pursue political integration via economic means

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Origins of the EU: European Coal and Steel Community (ECSC) - 1952

• France and Germany pooled control over their coal and steel industries– Promoted by Robert Schuman (French foreign

minister)– Schuman’s proposal: two countries should

place these industries under a supranational authority

– Coal & steel: ‘commanding heights’ of an industrial economy

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Origins of the EU: ECSC (1952)

• ECSC (1952)– France, West Germany, Italy, Luxembourg, Belgium and

Netherlands– This created a free trade area for coal and steel – Price, trade and production in the hands of a ‘high authority’– It enabled the six countries to protect their industries more

from US competition– Greater output reduce costs through greater economies

of scale increased competitiveness

• From these small beginnings the EU developed• ECSC: showed co-operation under a supranational

authority

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Origins of the EU: The Treaty of Rome (1957)

• Situation:– Germany continued to grow substantially – It joined Nato and began to rearm– By 1955: coal and steel were no longer crucial

sectors in Europe’s economy– ECSC – not enough to ensure another war did not

occur– European leaders turned attention to further

integration• June 1955: six nations of the ECSC met to

start a process of further integration, leading to the signing of the Treaty of Rome in 1957

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Origins of the EU: The Treaty of Rome (1957)

• Treaty of Rome (1957)– committed the six members to deep economic integration– established a customs union: phased withdrawal of all tariffs

between the members and imposed customs tariffs on all goods coming into the community (completed in 1986)

– Allowed provisions for free flow of goods, capital (capital market integration) and labour (free labour mobility) in the future between countries

– Creation of a number of important institutions: European Commission, European Council of Ministers, European Parliament, European Court of Justice

– Envisaged the creation of a number of common policies: Common Agricultural Policy, Competition Policy, Social Policy, Transport Policy, Regional Policy

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Origins of the EU: EEC (1958)

• 1st January 1958: European Economic Community (EEC) came into existence after the signing of the Treaty of Rome (Treaty of Rome refers to the EEC treaty)

• Non-EEC countries of Western Europe: seven formed the European Free Trade Association (EFTA) IN 1960– Founders: Austria, Switzerland, Norway, Sweden,

Denmark, Portugal and the UK– By mid-1990s: just two of these countries remained

outside the EEC

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Enlargements of EEC (1973-1995)

• 1973:Ireland, UK, Denmark

• 1981:Greece

• 1986:Spain, Portugal

• 1995:Finland, Sweden, Austria

→ 15 member states

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Increasing the pace of economic integration

• The EEC was nothing more than a customs union by the end of the 70’s.

• By 1985: EU firms had duty free access to other nations but not free trade – Barriers: differing technical standards, regulations

etc.

• As the economic climate improved, Jacques Delors exploited the moment by proposing a very large step forward – the Single European Act

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Single European Act (SEA)

• SEA signed in 1986 and came into force in 1987• Committed member governments to remove all

substantial barriers to trade by 31st Dec 1992: a genuine common market– Free movement of goods, persons, services and capital

• It also allowed for the widening of Community responsibilities to include the environment, R&D, regional development and foreign policy.

• It brought important institutional changes – unanimity to majority voting for single market issues

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The Maastricht Treaty (1992)

• Formally called the Treaty on European Union was signed in Maastricht in 1992

• Among others things, it set out a detailed programme for Economic and Monetary Union (EMU) and laid down a timetable for the creation of a single currency by 2002: the Euro

• The treaty also covered moves towards political and social union, and established a framework for co-operation in foreign policy between member countries

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EU Enlargement

• 10 new members:– Cyprus, the Czech Republic, Estonia, Hungary,

Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, joined formally on 1 May 2004,

• Applicant countries:– Bulgaria and Romania: part of the second

wave of negotiations in February 2002 failed to accede in 2004 because they were not ready. They have now completed negotiations and are due to join the EU on the 1st January 2007

– Croatia and Turkey: negotiations open this year

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Topic 1

• What we have covered under topic 1Topic 1: International Trade Theory and Policy

a. Interdependence and the gains from trade: production possibilities frontier, Theory of Comparative Advantage

b. Theory of Competitive Advantagec. The Instruments of Trade Policyd. Arguments for protectione. Benefits of tradef. GATT, WTOg. EU: Free Trade Area, Customs Union