Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 4 Market Size and Scale Effects Trade and Competition Policies Theory.

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1 Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 4 Market Size and Scale Effects Trade and Competition Policies Theory and Politics of European Integration

2 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects Last Lecture Preferential Trade Liberalisation ·The PTA Diagram –Free Trade Equilibrium –MFN Tariff Equilbrium –Unilateral Trade Discrimination –Supply Switches –Welfare Effects ·Empiry: Is Trade Diversion an Issue? ·Welfare Effects of a Customs Union ·Customs Union vs. Free Trade Area ·WTO Rules and Customs Union/Free Trade Areas –Art. 24 WTO

3 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker An example Pre-PTA case (MFN tariff) ·Country A, B + C produce cars ·Country B + C export cars to A ·Country A imposes a tariff of 10% in imports of cars ·Prices: In country B+C the price for a car is 20,000 Euro, in country A 20,000 + 2,000 = 22,000 Euros ·The border price (price before tariffs) in country A is 20,000 Euros (equal to price exporters from A+B receive) ·The profits of the maximum-cost producer in A, B and C are zero, but the other producers realize positive profits (producer’s rents) ·The marginal utility of the last consumer of cars in A+B+C is zero, but the average consumer realises positive rents (consumer rents) Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

4 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Uniform MFN Tariff Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ PartnerHomeRoW Border price Border price PaPa P’P’ T T P P ’ -T X R’ X P’ XPXP M FREE p* XRXR Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects P’P’ P

5 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker An example The PTA case: prices ·A removes the tariff on cars for B, but maintains it for C ·The border price for country B equals the domestic price in A, but there is still a difference between the domestic and the border price of 10% for C ·Since the marginal producer in B can produce at lower costs than A prices fall in A depending on marginal demand ·Let’s assume prices fall in A by 5%. This implies that the border price for B’s exporters increase by 5%. This in turn implies that the domestic price in B for cars increase by 5% as well. ·The new price in the PTA is thus 21,000 Euros. ·The border price for exporters from C is consequently ~19,090 Euros. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

6 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Domestic Price and Border Price Changes Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ Border price MS PTA P’P’ T P” P ’ -T P ” -T X R” X R’ X P’ X P” M”M” P ’ -T P” domestic price falls to P’’ from P’, e.g. from 22,000 to 21,000 Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

7 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Domestic Price and Border Price Changes Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ Border price MS PTA P’P’ T P” P ’ -T P ” -T X R” X R’ X P’ X P” M”M” P ’ -T P” domestic price falls to P’ from P”, e.g. from 22,000 to 21,000 Partner-based firms see border price rise, from P’-T to P”, e.g. from 20,000 to 21,000 € Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

8 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Domestic Price and Border Price Changes Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ Border price MS PTA P’P’ T P” P ’ -T P ” -T X R” X R’ X P’ X P” M”M” P ’ -T P” domestic price falls to P’ from P” Partner-based firms see border price rise, P’-T to P” RoW firms see border price fall from P’-T to P”-T, e.g. from 20,000 to ~19,090 Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

9 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker An example The PTA case: quantities I ·At the lower prices consumer’s in A consume more. Let’s assume consumption increases from 20,000 to 21,000 (+1,000) there. ·Since the price has fallen in A, producers produce less there. Let’s say 17,500 instead of 18,000 (-500) ·Since prices have increased in partner country B, consumers consume less cars there. Let’s say 18,000 instead of 19,000 (-1,000). ·Since prices have increased in B, producers in B produce more. Let’s say 21,000 instead of 20,000 (+1,000). ·Thus, B exports 3,000 instead of 1,000 cars (+2,000) to A now. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

10 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker An example The PTA case: quantities ·Since the border price for C’s exporters has fallen, they export less cars to A. Let’s say 500 instead of 1,000 (-500). ·Thus, A imports 3,500 instead of 2,000 cars now. ·2,500 from B and 500 from C. ·The import increase by 1,500 cars is sometimes called “trade creation”. ·The replacement of exports from C by imports from B (500) is sometimes called “trade diversion” or better “supply-switching”. ·Note that this implies switching from suppliers with lower marginal costs in C to a supplier with higher marginal costs in B. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

11 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Quantity Changes: Supply Switching Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ Border price MS PTA P’P’ T P” P ’ -T P ” -T X R” X R’ X P’ X P” M”M” P ’ -T P” Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

12 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Quantity Changes: Supply Switching Domestic price Home imports MD RoW Exports Partner Exports XS P XS R MS MS MFN M’ Border price MS PTA P’P’ T P” P ’ -T P ” -T X R” X R’ X P’ X P” M”M” P ’ -T P” RoW exports fall, e.g. by 500 cars. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects Partner exports increase, e.g. by 3,000 cars. Home imports increase, e.g. by 2,500 cars.

13 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker An example The PTA case: welfare (country A) ·Consumers benefit from lower prices (times the quantity of consumption before the PTA) plus from higher marginal utility from further consumption. ·Producers lose from lower prices (times the new production level) and in addition from lower production ·However, the consumer gains are larger than the producer losses. ·But: The government loses tariff revenues. ·Note: By importing more from B, A has switched from the marginal supplier in C (20,000 Euros before the PTA) to a higher-cost supplier in B (21,000 Euros) (supply-switch or trade diversion). Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

14 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Today's Lecture - Overview Market Size and Scale Effects EU Competition Policies EU Trade Policies Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

15 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Today's Reading Market Size and Scale Effects ·Baldwin & Wyplosz (2009) “The Economics of European Integration”, McGraw-Hill, Ch 6. Competition and State Aid Policies ·Baldwin & Wyplosz (2009) “The Economics of European Integration”, McGraw-Hill, Ch 14. Trade Policies ·Baldwin & Wyplosz (2009) “The Economics of European Integration”, McGraw-Hill, Ch 15. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

16 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Market Size Matters European leaders always viewed integration as compensating small size of European nations. Implicit assumption: market size good for economic performance. Facts: integration associated with mergers, acquisitions, etc. In Europe and more generally, ‘globalisation.’ Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

17 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Sketch of economic logic liberalisation  de-fragmentation  pro-competitive effect  industrial restructuring (M&A, etc.) RESULT: fewer, bigger, more efficient firms facing more effective competition from each other. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

18 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Sketch of economic logic liberalisation  de-fragmentation  pro-competitive effect  industrial restructuring (M&A, etc.) RESULT: fewer, bigger, more efficient firms facing more effective competition from each other. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

19 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Monopolies and duopolies Firms are not price takes Elasticity of demand curve constrains price levels Profit maximum is achieved if prices are chosen in a way that marginal revenues equal marginal costs Duopoly: Price and production depends on expectations on behaviour of competitors Cournot-Nash-equilibrium: Optimum is achieved when symmetric firms produce same level of output Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

20 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic (background): Monopoly case Sales Price Marginal Cost Marginal Revenue Curve Demand Curve Sales Price Q’+1 P” Marginal Cost Curve CE D Demand Curve A B Q* Q’ P* P’ Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

21 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic (background): Monopoly case Sales Price Marginal Cost Marginal Revenue Curve Demand Curve Sales Price Q’+1 P” Marginal Cost Curve CE D Demand Curve A B Q* Q’ P* P’ Extra revenues of one unit: D + E – A. „marginal revenue“ Extra revenues of one unit: D + E – A. „marginal revenue“ Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

22 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic (background): Monopoly case Sales Price Marginal Cost Marginal Revenue Curve Demand Curve Sales Price Q’+1 P” Marginal Cost Curve CE D Demand Curve A B Q* Q’ P* P’ Profitmaximum: marginal revenue equals marginal costs. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

23 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Duopoly case, example of non-equilbrium Residual Demand Curve firm 2 (RD2) Firm 2’s expectation of sales by firm 1, Q 1 Demand Curve (D) MC Residual Marginal Revenue Curve firm 2 (RMR2) x2’x2’ p2’p2’ Firm 2 sales Residual Demand Curve firm 1 (RD1) Firm 1’s expectation of sales by firm 2, Q 2 Demand Curve (D) price MC Residual Marginal Revenue Curve firm 1 (RMR1) x1’x1’ p1’p1’ Firm 1 sales A1A1 A2A2 price Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

24 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Duopoly and oligopoly case, equilbrium outcome RD’ D MC x** p** sales A price RMR’ 3x** Oligopoly RD Typical firm’s expectation of the other firm’s sales D MC x* p* sales A price RMR 2x* Duopoly Typical firm’s expectation of other the other firms’ sales Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

25 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Bringing this to trade Brander and Krugman (1983) Building on Nash they combine increasing returns to scale, imperfect competition and trade Presentation of theory here in Breakeven- Competition (BE-COMP)-Diagram Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

26 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Breakeven-Competion (BE-COMP) Diagram Mark-up (  ) COMP curve BE (break-even) curve ’’ n’  mono  duo n=1 n=2 Number of firms Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

27 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Breakeven-Competion (BE-COMP) Diagram Mark-up (  ) COMP curve BE (break-even) curve ’’ n’  mono  duo n=1 n=2 Number of firms Mark-up (µ): Price mark-up over costs, depends on competition.Thus, BE curve slopes downward. Mark-up (µ): Price mark-up over costs, depends on competition.Thus, BE curve slopes downward. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

28 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Breakeven-Competion (BE-COMP) Diagram Mark-up (  ) COMP curve BE (break-even) curve ’’ n’  mono  duo n=1 n=2 Number of firms Breakeven (BE) curve: With increasing returns to scale only a limited number of firms can survive. Survival depends on markup µ. Slopes upward. Why? Breakeven (BE) curve: With increasing returns to scale only a limited number of firms can survive. Survival depends on markup µ. Slopes upward. Why? Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

29 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Details of COMP curve Marginal cost curve Typical firm’s sales price p" Monopoly mark-up Duopoly mark-up D R-D (duopoly) x mono x duo MR (monopoly) R-MR MC p' A B A’ B’ COMP curve n=1 n=2  mono  duo Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

30 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Details of BE curve: closed economy Sales per firm AC price Total sales CoCo Demand curve Mark-up (i.e., p-MC) oo x o = C o /n o MC euros BE nono p o  o +MC x’= C o /n’ x”= C o /n” A B BA popo AC o =p o n”n’ Home market COMP Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

31 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Outline of BE-COMP Diagram Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curveDemand curve COMP curve Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

32 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Outline of BE-COMP Diagram Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Average cost of representative firm equals price after adjustment of firm number Demand curve COMP curve Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

33 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Outline of BE-COMP Diagram Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Average cost of representative firm equals price after adjustment of firm number Demand curve Competition curve shows combination of mark-up and equilibrium firm number COMP curve Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

34 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Outline of BE-COMP Diagram Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Average cost of representative firm equals price after adjustment of firm number Demand curve Breakeven curve is upward shifting, since sales per firm fall with increasing firm number such that higher mark-up is needed to breakeven COMP curve Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

35 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Addressing European integration Assume that trade-to-non trade liberalization provides (i) each firm with a market of twice its side and (ii) double the number of firms in each market What happens to mark-up, equilibrium number of firms, average costs, price and demand? Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

36 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve After integration, each firm has (i) second market of same size and (ii) twice the number of competitors Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

37 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Competition effect: number of firms is 2n’, such that mark- up declines to A at given firm number. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

38 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Market size effect: BE curve shifts outward to the right. At given number of firms (point 1) we have no equilibrium). Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

39 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Smaller mark-up and higher competition reduces prices to p A. Below breakeven point for given number of firms. Industrial restructuring results in E’’ equilibrium number of firms. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

40 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Since each firm has a larger market in new equilibrium, average costs decline. Efficiency gain. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

41 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Welfare gain: C. Consumer benefit from (i) lower prices, (ii) higher consumption. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

42 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic Integration: no-trade-to-free-trade: BE curve shifts out (to point 1). (Larger market effect) Defragmentation: PRE typical firm has 100% sales at home, 0% abroad; POST: 50-50, Can’t see in diagram. Pro-competitive effect: Equilibrium moves from E’ to A: Firms losing money (below BE). Pro-competitive effect = mark-up falls. short-run price impact p’ to p A. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

43 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic (cont.) Industrial Restructuring: A to E”, number of firms, 2n’ to n”. firms enlarge market shares and output, more efficient firms, AC falls from p’ to p”, mark-up rises, profitability is restored. Result: bigger, fewer, more efficient firms facing more effective competition. Welfare: gain is “C”. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

44 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts M&A activity is high in EU. much M&A is mergers within one member state about 55% ‘domestic’; remaining 45% split between: ·one is non-EU firm (24%), ·one firm was located in another EU nation (15%), ·counterparty’s nationality was not identified (6%). ·Empirical evidence: Single Market Programme reduced Price- Cost Margins by 4 per cent on average. ·High variance: ·- 15 per cent in office equipment sector ·-0.1 per cent in brewing Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

45 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts Distribution of M&A quite varied: Big 4: share M&As much lower than share of the EU GDP. I, F, D 36% of the M&As, 59% GDP. ·Except UK. Small members have disproportionate high share of M&A. This picture fits pretty well into theoretical expectations: Small countries suffer more from fragmentation of markets such that pressure for industrial restructuring is higher compared to countries with a larger market share Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

46 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

47 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts Why M&A mostly within EU? Why UK’s share so large? Non-harmonised takeovers rules. ·some members have very restrictive take-over practices, makes M&As very difficult. ·others, UK, very liberal rules. Lack of harmonisation means restructuring effects vary impact by member states. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

48 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Competition and State Aid Policy Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

49 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Competition and subsidies Two immediate questions: “As the number of firms falls, isn’t there a tendency for the remaining firms to collude in order to keep prices high?” “Since industrial restructuring can be politically painful, isn’t there a danger that governments will try to keep money-losing firms in business via subsidies and other policies?” The answer to both questions is “Yes”. See Chapter 14, 3 rd Edition. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

50 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Competition Policy Exclusive competency of EU; Commission controls. 2 aspects: mergers & anti-competitive behaviour. Economic integration yields less firms, higher concentration but more cross-border competition Creates incentives to collude and undertake anti- competitive measures Look at justification for putting competition policy at the EU level Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

51 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Anti-competitive behaviour Collusion is a real concern in Europe. dangers of collusion rise as the number of firms falls. Collusion in the BE-COMP diagram COMP curve is for ‘normal’, non-collusive competition Firms do not coordinate prices or sales Other extreme is ‘perfect collusion’ Firms coordinate prices and sales perfectly Max profit from market is monopoly price & sales Perfect collusion is where firms charge monopoly price and split the sales among themselves Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

52 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic effects Number of firms Mark-up COMP BE FT E” nBnB  mono B n=1n” A 2n ’ BB ”” Consider two cases: Perfect collusion: Firms set prices to monopoly level and divide profits equally. Price increases. Markup increases. More firms enter market. Eventually, zero profit condition restored, i.e. price equals average costs. n P’ Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

53 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic effects Number of firms Mark-up COMP BE FT E” nBnB  mono B n=1n” A 2n ’ BB ”” Partial collusion Less opportunities to cheat 2n’ is too high for all firms to break even. Industrial consolidation proceeds as usual, but only to n B. Zero profits earned by all at point B. Prices higher, p B > p”, smaller firms, higher average cost. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

54 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic effects (cont.) price Total sales Demand curve Number of firms Mark-up COMP BE FT pBpB Perfect collusion Partial collusion E” nBnB  mono B n=1n” p mono E” p” B CBCB A The welfare cost of collusion (versus no collusion) four- sided area marked by p B, p”, E” and B. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

55 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Competition Policy To prevent anti-competitive behavior, EU policy focuses on two main axes: Antitrust and cartels. The Commission tries: to eliminate behaviours that restrict competition (e.g. price-fixing arrangements and cartels) to eliminate abusive behaviour by firms that have a dominant position Merger control. The Commission seeks: to block mergers that would create firms that would dominate the market. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

56 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economics of cartels euros Quantity C’C P’ P = AC a b Demand curve Suppose price without cartel would be P. Cartel raises price to P’. Consumers lose: -a-b; ‘rip-off’-effect Producers gain: a. Net loss: b. “technical inefficiency” Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

57 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker The vitamin cartels (Box 11 ‑ 1) In 2001, EU Commission fined 8 companies for their participation in cartels that eliminated competition in the vitamin sector (vitamins A, E, B1, B2, B5, B6, C, D3, Biotin, Folic acid, Beta Carotene and carotinoids) for more than ten years. The European vitamins market is worth almost 1 billion euros a year. The firms fixed prices, allocated sales quotas, agreed on and implemented price increases and issued price announcements in according to agreed procedures. EU can fine firms up to 10 % of total annual sales. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

58 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker The vitamin cartels (Box 11 ‑ 1) (cont.) They also set up a mechanism to monitor and enforce their agreements and participated in regular meetings to implement their plans. This included the establishment of formal structure and hierarchy of different levels of management, often with overlapping membership at the most senior levels to ensure the functioning of the cartels, the exchange of sales values, volumes of sales and pricing information on a quarterly or monthly basis at regular meetings, and the preparation, agreement and implementation and monitoring of an annual "budget" followed by the adjustment of actual sales achieved so as to comply with the quotas allocated. Hoffman-La Roche of Switzerland received the largest fine (462m euros) for being the cartel ringleader, which also included BASF and Merck (Germany), Aventis SA (France), Solvay Pharmaceuticals (the Netherlands), Daiichi Pharmaceutical, Esai and Takeda Chemical Industries (Japan). Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

59 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Exclusive territories More common anti- competitive practice is ‘exclusive territories’ Nintendo example; high prices in Germany vs UK. Prevent arbitrage within the EU (illegal). European Commission fined Nintendo and the 7 distributors 168 million euros. euros Quantity P Germany P UK D Germany D UK MC MR Germany MR UK Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

60 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Exclusive territories German demand curve steeper, i.e. higher willingness to pay (lower price elasticity) UK has flatter demand curve (e.g. more opportunties to substitute, higher price elasticity) Profits are maximized where marginal revenue and marginal costs curve intersect This implies requesting higher price in DE relative to UK euros Quantity P Germany P UK D Germany D UK MC MR Germany MR UK Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

61 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Abuse of dominant position Firms that are lucky or possess excellent products can establish very strong positions in their market. Not a problem, per se position may reflect superior products and/or efficiency e.g. Google’s triumph However dominance may tempt firm to extract extra profits from suppliers or customers Or arrange the market to shield itself from future competitors. E.g. hiding the programm code. Illegal under EU law ‘abuse of dominant position.’ e.g. Microsoft with media software charge high price of Word, etc. where the competition has been driven out of biz (WordPerfect, etc.), but give for free all software where there is still competition. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

62 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Merger control Initially P=AC. Merger implies lower AC to AC’, but raises the price to P’. CS=-a-b; ‘ripoff’ PS=+a+c Net welfare = -b+c ; ambiguous, ‘efficiency defence’ Laissez-faire (in US and increasingly in EU); if free entry then P driven down to AC’ eventually. Overall gains as in BE-COMP diagram. euros Quantity C’C P’ P=AC a b c Demand curve AC’ Williamson diagram Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

63 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker State aid economics Look at two cases: Restructuring prevention. Unfair competition. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

64 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Restructuring prevention Consider subsidies that prevent restructuring Specifically, each governments make annual payments to all firms exactly equal to their losses i.e. all 2n’ firms in Figure 6-9 analysis break even, but not new firms Economy stays at point A This changes who pays for the inefficiently small firms from consumers to taxpayers. Number of firms Mark-up COMP BE FT BE 2n’n”n’ E’ A 1 E” '' AA Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

65 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Restructuring prevention: size of benefit Pre-integration: fixed costs = operating profit = area “a+b” Post-integration: operating profit = b+c ERGO: Breakeven subsidy = a-c Net Benefit: b+c+a-c=a+b Sales per firm AC Price Total sales Demand curve Numbe r of firms Mark-upeuros x’ COMP BE FT 2n’ p’ C’CACA pApA x A = 2C A /2n’ pApA a bc E’ A A A MC E’ Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

66 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Restructuring prevention: welfare impact Sales per firm AC Price Total sales Demand curve Numbe r of firms Mark-upeuros x’ COMP BE FT 2n’ p’ C’CACA pApA x A = 2C A /2n’ pApA a bc E’ A A A MC E’ d Change producer surplus = zero (profit is zero pre & post) Change consumer surplus = a+d Subsidy cost = a-c (producer’s loss) Total impact = a+d – (a-c)= d+c Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

67 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Does it make sense to subsidize? Static welfare gains resulting from inefficiency of imperfect competition, i.e. differences between average and marginal costs Higher production = higher welfare under increasing returns to scale However, subsidizing loss-making enterprizes creates dynamic losses -> reduced innovation and technological progress Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

68 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Only some subsidise: unfair competition If Foreign pays ‘break even’ subsidies to its firms All restructuring forced on Home 2n’ moves to n”, but all the exit is by Home firms Unfair Undermines political support for liberalisation Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

69 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU policies on ‘State Aids’ 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition. EU founders considered this so important that they empowered the Commission with enforcement. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

70 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Trade Policies Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

71 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Trade: Facts Two-thirds of EU25 exports are to other EU25 nations. More than 90% of this is actually among the EU15 trade (10 new Member States are fairly small economically). Add all other European nations, three-fourth of Europe’s trade is within Europe. North America and Asia are the EU25’s main markets outside Europe, each accounts less than one-tenth of EU exports. Africa, Latin America and the Middle East are not very important. The pattern on the import side is very similar Rounding off, three-fourth of EU imports are from Europe, with the fourth quarter split into two more or less even groups of nations – Asia, and all other nations. Trade with non- European nations is balanced. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

72 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts: Patterns of Trade Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

73 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts: Differences across Member States: non-EU trade Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

74 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Composition of imports and exports, aggregate trade Manufactured goods 90% of total exports (half of all exports being machinery and transport equipment). Import side, two-thirds on manufactured goods. EU-25 is a big importer of fuel (18 % of imports). Only 6% food and agriculture. Other types of goods play a relatively minor part in the EU’s trade. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

75 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Composition of imports and exports, aggregate trade Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

76 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: Institutions and trade in goods Recall: Customs Union requires common trade policy Trade policy among the ‘first pillar’ since Rome Treaty European Commission has the right to set tariffs and negotiate on trade issues at WTO EC Trade Commissioner negotiates, has a mandate assigned by the council of ministers Council has final say Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

77 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Trade Policies: other areas World trade negotiations involve far more than trade in goods. Trade-related intellectual property rights (TRIPs) Trade-related investment measures (TRIMs), Service trade Technical Barriers to Trade (TBTs), trade facilitation, etc. Treaty of Rome only gave Commission power over trade in goods Treaty of Nice (& Amsterdam) extended Commission’s authority to some aspects of Services trade and TRIPs, & made QMV the rule in Council on such matters. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

78 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Contingent protection WTO allows members to raise tariffs to: Counter ‘unfair’ trade practices, e.g. Antidumping measures, e.g. penalty tariffs Countervailing duties, e.g. ‘voluntary agreements’ of ‘price-undertakings’ ·Firms charge higher prices, but EU loses tariff revenue Provide temporary protection “safeguards” Widely applied by US and EU The various WTO articles on these require a procedure; in EU the Commission is in charge of these procedures, but the final decision is subject to QMV approval of the Council. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

79 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: MFN Tariffs MFN tariff structure reflects comparative advantage of EU industries Low tariffs in manufacturing ·Exception: textiles and clothing High in food and agriculture, especially diary products Interest groups matter Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

80 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU’s MFN tariff structure (Common External Tariff – CET) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

81 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: Preferential Agreements EU has special deals with 139 nations; often more than one per partner. Each can be very complex... Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

82 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

83 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential agreements: logic ‘Hub’ and ‘Spoke’ System EU is a regional ‘hub’ in ‘hub’ and ‘spoke’ system of trade deals ·Morocco is a typical case: 71% of exports to EU, but only 1% of EU imports from Morocco ·Asymmetry gives EU high leverage in dealing with these nations Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

84 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: European circle European-Mediterranean area: West, Central and Eastern Europe = Single market in industrial goods; ·EU + EEA + Swiss bilateral agreements Euro-Mediterranean Association Agreements: ·Morocco, Algeria, Tunisia, Egypt, Israel, the Palestinian Authority, Lebanon, Jordon, Syria and Turkey. ·Asymmetric (EU cuts its tariffs faster) FTAs in manufactures, by 2010. ·Turkey unilaterally in Customs Union in manufactures. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

85 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: European circle (cont.) European-Mediterranean area (cont.): Asymmetric dependence (e.g. 70% of Morocco’s exports to EU, but <1% of EU to Morocco) EFTA’s “FTA union” with EU; EFTAns mimic EU to avoid discrimination against EFTA-based exporters. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

86 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Former Soviet Republics & Western Balkans Partnership and Cooperation Agreements (PCAs). These are GSP+ (GSP=Generalised System of Preference). Russia, Ukraine, Georgia, Belarus, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan. Asymmetric tariff reduction without requiring PCA partners lowering theirs. Stabilisation and Association Agreements (SAAs). Former Yugoslavian states. Croatia has started membership; others likely to follow. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

87 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential arrangements with former colonies Colonial preferences conflicted with Common External Tariff EU made exception for these nations to avoid imposing new tariffs; signed “unilateral PTAs” ·Yaoundé Convention and Arusha Agreement When UK joined 1974 exceptions extended to many Commonwealth nations. ·“ACP nations” (Africa, Caribbean & Pacific); the new agreement = Lomé Convention. ·Duty-free but subject to quota for sensitive items (sugar, banana, etc.) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

88 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential arrangements with former colonies These didn’t help the ACP nations much c.f. Asian success without tariff preferences When Lomé Convention renewed in 2000, the EU and the ACP nations agreed to modernise the deal Cotonou Agreement; eventually reciprocal free trade stepwise reduction of tariffs on ACP nation side general outline of principles details fixed in bilateral Economic Partnership Agreements (EPAs) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

89 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Generalised System of Preferences (GSP) 1971 GATT provision allows tariff preferences. EU grants GSP to almost all poor nations. General GSP. “Super-GSP” more generous on market access. ‘Everything but Arms’ (EBA) for least developed nations. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

90 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Generalised System of Preferences (GSP) (cont.) On paper, EBA grants zero-tariff access all goods, except arms and munitions. Goods in which these nations’ are most competitive are in fact excluded from the deal. Tariffs on bananas, rice and sugar – products where these poor nations could easily expand their EU sales – are to come down only in the future. Moreover, even though all tariffs on these items will be gone by 2009, the exports quantities are limited by bilateral quotas. 49 nations qualify for EBA in principle in 2005. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

91 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Non-regional FTA Mexico, Chile, and South Africa, done. Ongoing with Mercosur and the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

92 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Finally, non-preferential trade Only 6 main nations: US, CAN, JAP, AUS, AT, KOR But about 1/3rd of EU imports are not granted some sort of preferential treatment Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

93 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker NEXT LECTURE December 3, 2015 Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy