FORMATION OF A CUSTOMS UNION
PRACTICE 3
CONTENT
01 WELFARE ANALYSIS OF TRADE EFFECTS
02 TRADE CREATION, DIVISION OR SUPPRESSION
03 SINGLE MARKET = SINGLE CURRENCY?
04 CUSTOMS UNION INSUFFICIENT FOR SINGLE MARKET
POLICY MEASURES EQUIVALENT TO QUANTITIVE
05 RESRICTIONS
Q1 A - GRAPHS
Market equilibrium :
Price : Pw+T
Home prod : [0 ; S1]
Imports : [S1 ; D1]
Consumption : [0 ; D1]
Q1 A - GRAPHS
Market equilibrium :
Price : Pu (because
Pw+T > Pu)
Home prod : [0 ; S2]
Imports : [S2 ; D2]
Consumption : [0 ; D2]
Q1 A - WHAT IS TO UNDERSTAND
& WELFARE ANALYSIS
What we understand ?
The price falls from Pw+T to Pu
The home production falls from [0 ; S1] to [0 ; S2]
The imports increase from [S1 ; D1] to [S2 ; D2]
The overall consumption increases from [0 ; D1] to [0 ; D2]
Welfare analysis :
The consumer surplus increases by the following areas + (A, B, C1, D)
The producer surplus decreases by the area – A
Tariff revenue changes : 0 - C1 - C2 <=> - (C1 +C2) it’s a revenue loss
The net welfare variation is :
A - B - C1 - D - A - C1 - C2 <=> B + D – C2
Q1 A - SUBQUESTIONS I & II:
i- Explain how your answer to a) changes when price
elasticity of both demand and supply of Home Country
increase?
If the price elasticity of both demand & supply of Home
Country increase then : there is a greater trade creation.
This means that triangle areas B & D are getting
bigger
ii- Explain how your answer to a) changes if Country U
achieves a substantial reduction of production costs
(though W still remains as the most efficient producer)?
If Country U acheives a substantial reduction of
production costs this means that Pu curve will get closer
to Pw curve ; which implies a greater trade creation ( B &
D get bigger) & a smaller trade diversion since C2 area
will get smaller.
Q1 B - CUSTOMS UNION HOME &
COUNTRY W
Customs Union: Removal of trade barriers among their members and adoption of
common external tariff (CET) on trade with non-members
Trade creation: high-cost production replaced by imports from a lower-cost trade
partner -> welfare gain
NON-DISCRIMATORY TARIFFS TO
COUNTRY U AND W
Pw+t: lowest price possible
S1: home supply
D1: demand at price Pw+t
M1: import from country W
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
Pw: lowest price possible
S3: home supply
D3: demand at price Pw
M3: import from country W
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
CS: + (A+B+C1+C2+D+E+F+G+H+I)
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
CS: + (A+B+C1+C2+D+E+F+G+H+I)
PS: - (A+E)
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
CS: + (A+B+C1+C2+D+E+F+G+H+I)
PS: - (A+E)
GR: - (C1+C2)
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
CS: + (A+B+C1+C2+D+E+F+G+H+I)
PS: - (A+E)
GR: - (C1+C2)
CUSTOMS UNION BETWEEN HOME
AND COUNTRY W
CS: + (A+B+C1+C2+D+E+F+G+H+I)
PS: - (A+E)
GR: - (C1+C2)
+ (B+F+G) + (D+H+I)
-> Welfare gain
-> consumers can afford more
-> efficiency gain on production site
-> TRADE CREATION
Q2: TRADE CREATION, TRADE
DIVERSION OR TRADE Trade Creation:
SUPPRESSION Y-X/AC ↓ & M/AC ↑
Domestic Trade Creation:
AC= Y-X+M Meu/AC ↑
AC= apparent domestic consumption External Trade Creation:
Y= production (output)
Mno-eu/AC ↑
X= total exports
M= total imports
Double Trade Creation:
Meu= improrts from the EU
Mno-eu= imports from non-EU countries
Meu/AC ↑, Mno-eu/AC ↑, Meu/M ↑/ ↓
Trade Diversion:
Meu/AC ↑ & Mno-eu/AC ↓
Trade Supression:
Y-X/AC ↑ & M/AC ↓
RESULTS
Mno- MEU
MEU eu /MT
No
- + -/= + Yes Yes No Yes
- + + + Yes Yes Yes Yes
- + -/= + Yes Yes No Yes
- + - + Yes Yes No Yes
- + + + Yes Yes Yes No
No
- + + - Yes Yes Yes No
- + - + Yes Yes No Yes
- + - + Yes Yes No Yes
- + - + Yes Yes No Yes
- + - + Yes Yes No Yes
- + - + Yes Yes No Yes
- + -/= + Yes Yes No Yes
+ - - +/= No No No No
- + + + Yes Yes Yes No
Q3: DOES THE CREATION OF A SINGLE MARKET
REQUIRE THE ADOPTION OF A SINGLE CURRENCY?
ABOLISHMENT OF THE OBSTACLES THAT
PREVENT THE FREE MOVEMENT OF
GOODS, SERVICES, PERSONS AND
CAPITAL
THE SINGLE MARKET IS BASED ON THE
FOUR FUNDAMENTAL FREEDOMS
Q3: DOES THE CREATION OF A
SINGLE MARKET REQUIRE THE
ADOPTION OF A SINGLE
CURRENCY?
THE ESTABLISHMENT OF A
SINGLE CURRENCY IT IS NOT A
MANDATORY REQUIREMENT
ADOPTING THE SAME
CURRENCY CAN ENHANCE THE
SINGLE MARKET
Graph extracted from the European Comission official Website
Dark blue: Countries that belong to the European Single Market
Ligh blue: EEA but not EU
Q4: WHY DID THE CREATION OF THE CUSTOMS UNION
TURN OUT TO BE INSUFFICIENT FOR THE CREATION
OF A TRULY SINGLE MARKET IN EUROPE?
Eliminated tariffs and quotas on goods traded
within member states
Applied common external tariffs on imports
from non-member countries
Did not remove non-tariff barriers
Limited free movement of goods, services,
persons and capital
Q5 - POLICY MEASURES EQUIVALENT
TO QUANTITIVE RESTRICTIONS
Quantitative restrictions: measures that directly limit the amount of goods that
can be imported or exported between member states
Measures equivalent to quantitative restrictions (MEQRs): various national rules
and regulations that indirectly prevent the free movement of goods, don’t directly
restrict trade
DASSONVILLE CASE 1974
Belgian importers Benoit and Dassonville imported whiskey originated in
the UK from a French supplier into Belgium
imported without certificates because the importing goods where already in
free circulation within the European community and the certificates were
difficult to obtain
Belgian law: spirits designated to a specific origin (whiskey from UK) can
only be imported with a certificate of origin from the exporting country (UK)
to prove authenticity
COURT JUDGEMENT
Belgian requirement of certificate of origin hinders the intra-community
trade and is considered to be a MEQRs -> prohibited by Article 30 of EEC
Treaty
Article 36 allows exceptions like protecting industrial or commercial
property but the Belgian rule exceeded what was necessary to ensure
the authenticity of the product
-> foundation for EU’s single market and free movement of goods
CASSIS DE DIJON CASE 1979
German company Rewe-Zentral AG wanted to import French liquoir Cassis
de Dijon with 15-20% alcohol content
German law on the Monopoly in spirits: requires minimum alcohol content
of 25% to be legally sold in Germany
Rewe argued with the violation of Article 30 of EEC Treaty
COURT JUDGEMENT
German rule considered MEQR because it prevents the sale of products
produced in other member states
Not justified as an exception (Article 36) because Germany could have
used less restrictive measures like appropriate labeling
Court established the principle of mutual recognition: products lawfully
produced in member states should be allowed to be sold in other
member states
RELATIONSHIP TO TODAYS FREE
MOVEMENT OF GOODS
Both cases are a foundation for the free movement of goods
within the EU and highlight indirect barriers of MEQRs
prohibition of MEQRs ensures that Member States cannot use
technical standards or certification requirements to protect their
domestic markets by hindering the free flow of goods in the EU
THANK YOU FOR
LISTENING!
SOURCES
[Link]
law/meqr-eu-law-whose-interests-are-protected/8164226 t
[Link]
Kenton Will. (2022, February 26). European customs union: Meaning, history, FAQs.
Investopedia.
[Link]
[Link]
[Link] )
Martínez Lage, S. (2013, January 29). El “Cassis de Dijon” y la unidad del mercado nacional.
Círculo de Empresarios.
[Link]
nacional/
