Lecture 5 - Single Market

Adjustment Issues

In 58', widespread fears that CU formation may cause large job losses and factory closures (it didn't happen)

Golden age of fst economic growth and long transition period low unemployment

1950-1973: nearly 5% ann. growth

Impact on industrial specialisation

Strong industries in certain countries, increasingly dominated the Euro market.
Each country had different specialisations, for example German cars. They produced high quality innovative cars, inter-industry trade > there was labour transformation. May have caused job losses in some. Overall however, the whole market benefitted.

The UK has a car market, however it is made in smaller volume, reducing the ability to specialise.

Intra-Industry Trade (IIT)

Country simultaneously imports and exports products of the same industry see Appendix 1 for measure

Why?: IIT can enable consumers to have a wider variety in which they may prefer, i.e British Cars in Germany and vice versa
Another example: US and China, iPhones and Huawei (dated example as Huawei has been banned)

Conditions requires is that tariffs must be removed or lowered for IIT.

This is in contrast to inter-industry trade where IIT refers to Intra

Grubel-Lloyd index

The Grubel-Lloyd index of IIT measures how similar a countries exports are to its imports
From 0-1.0 where, zero is completely different and 1.0 is completely identical

France went from 0.61 to 0.73 to 0.83 by 1990. See Ballasa, B. 1975 (extended reading)

Why do IIT occur

  • Branded and product differentiation in a number of varieties
  • Consumer choice is usually praised in economics
  • Varieties may increase costs and reduce EoS
  • Under a Monopolistically Competitive market, it balances between the trade off between choice, and scaled economies at cheaper prices

Luxury brands, Chanel, Hermes, Prada example shows IIT because that individuals have unique tastes and fashions between brands hence why there is not a single homogeneous product

Whilst the branding and advertising increases unique appeals and exclusivity. It increases costs hence high prices to influence scarcity in the following markets.

Suppose France and Germany each produce 10 varieties each for domestic consumption

Forming a CU could:

  • Generate IIT in all varieties
  • More consumer choice
  • without sacrificing EoS
  • without disrupting employment?

A monopolistically competitive market leads to

  • Fewer domestic varieties produced, each on a larger scale and at a lower cost
  • Consumers get more varieties consumed with lower prices by the formation

Despite some domestic varieties lost, there is generally more consumer choice which is more desirable in the markets

EoS in the sofa industry

Average Cost (AC) is total cost divided by output

Splitting total cost into fixed and variable components

As output (Q) increases:
Fixed costs are spread across more units (AC ↓)
Variable cost per unit depends on marginal cost behaviour

Showing cancellation when expressing variable cost in terms of marginal cost (MC × Q)

Interpretation: when MC < AC, AC ↓ (economies of scale when MC > AC, AC ↑ (diseconomies of scale)

Lecture 5 - Part 2

The Single Market

  • What are the potential gains from an SM?
  • What actions were taken to establish the SM?
  • What were the economic impacts of the SM?

EEC market remained a "non-Europe"

What are NTBs (non-tarrif barriers):

  • Physical barriers, border controls. Schengen areas
    This includes logistical challenges such as large traffic flows from HGVs leading to congestion at borders etc
  • Tax barriers: VAT organised nationally
    What is classed as tobacco product, alcohol/alcohol free.
  • Technical barriers: customs, national rules
  • Government 'buy domestic measures' especially for services. However elimination could increase GDP by 5% (Cecchini)

Standard gains from integration

  1. Partial equilibrium: ignore impact on other markets
  2. Two large countries: ignore ROW
  3. Perfectly competitive markets: firms are price takers, prices reflect the model of Supply and Demand
  4. Comparative static analysis: all other factors remain constant (ceteris paribus)

ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide6.png
ECON1013_EconomicIntegrationI/ECON1013_images/ECON1013_L5_Single Market/Slide7.png

Standard Gains from Market Integration

Before Integration (Autarky)

  • Two countries: France and Germany
  • Each has its own supply (S) and demand (D) curves
    • France: equilibrium at price Pf
    • Germany: equilibrium at price Pg
  • Since Pg > Pf, France could export to Germany
  • However, a non-tariff barrier greater than (Pg − Pf) prevents trade
    → Markets remain isolated and no gains from integration

After Integration (Trade Opens)

  • Barrier removed → a single market price Peu forms
    where
  • France exports, Germany imports

France (Exporter)

  • Price rises from Pf → Peu
  • Producers gain (produce more, receive higher price)
    Producer surplus: +a + b
  • Consumers lose (pay higher price)
    Consumer surplus: −a
  • Net welfare gain = +b

Germany (Importer)

  • Price falls from Pg → Peu
  • Producers lose (produce less, receive lower price)
    Producer surplus: −c
  • Consumers gain (pay lower price, consume more)
    Consumer surplus: +c + d
  • Net welfare gain = +d

Trade Quantities

  • France exports: q₂ − q₁
  • Germany imports: q₄ − q₃
  • At equilibrium: (q₂ − q₁) = (q₄ − q₃)

Overall Outcome

Country Price Change Producer Effect Consumer Effect Net Welfare
France Pf → Peu +a + b −a +b
Germany Pg → Peu −c +c + d +d
Total — — — +b + d

Result:

Integration allows resources to shift efficiently between countries, increasing total welfare by b + d.

MEMORISE THIS STUFF

1985 Single Market programme

The programme aimed to revitalise the EC market tin order to stimulate growth and employment accross the region.
The 85 white paper included 300 'nuts and bolts' measures to incorporate into each national law by 1993. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:51985DC0310

Actions to create the SM

  1. End intra-EU frontier controls: previously added 2% to costs. There is new VAT rules, but all exports are VAT exempt
  2. Harmonisation of technical barriers: replacement of 28 national standards with one EU standard or mutual recognition of each other's standards (ISO)
  3. end 'discriminatory public procurement'. All state bodies to always buy from cheapest source, including imports from EU. (Home bias for example, focusing on domestic goods). Freedom of information online
  4. Streamline patent protection: 1977 European patent, avoids manufacturers or innovators from having to file it in every single office.
    1. More recently: 2012 unitary patent agreed; 3 languages, 25 countries. Protected across the bloc. Reduces costs, incentivises innovation.

Empirical Estimates of SM Gains

  • Harrison et al. (1994): +2.6% GDP assuming 2.5% barriers removed
  • European Commission (2003): +1.8% GDP one-off gain vs. Cecchini’s +5% prediction
  • Straathof & Linders (2008): +2–3%, argue SM impact falling with globalisation

Critiques & Extensions

  • Gaps in assessment, esp. services (Pelkmans 2008, p.28)
  • Dynamic effects (innovation, productivity) often ignored
  • CEPII (2011): potential further gains +14% GDP → S&L likely underestimate
  • 2011–12 Single Market Acts: introduced further deepening measures