David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 28 International trade
Of course, in the short run the adjustment may be painful. Workers lose their jobs and must start afresh in
industries in which they do not have years of experience and acquired skills. But the principle of targeting
tells us that, if society wants to smooth this transition, some kind of retraining or relocation subsidy is
more efficient than a tariff.
Why do we have tariffs?
Aside from the optimal tariff argument, there is little to be said in favour of tariffs. Economists have been
arguing against them for well over a century. Why are tariffs still so popular?
The EU Single Market
II
The European Community was founded in 1957 as a free trade area - abolishing tariffs and
quotas on trade between member states. Over the next 50 years, the EC was enlarged. The
original six - West Germany, France, Italy, Netherlands, Belgium and Luxembourg -were joined by Denmark,
Ireland and the UK in the 1970s, by Spain, Portugal and Greece in the 1980s, and by Austria, Finland and
Sweden in the 1990s. The European Community (EC) became the European Union (EU). In 2004 the EU
admitted the Baltic republics (Estonia, Latvia, Lithuania), the countries of central Europe (Hungary, Poland,
Czech Republic, Slovakia, Slovenia) and the Mediterranean islands of Malta and the Greek part of Cyprus.
Bulgaria and Romania were admitted in 2007.
EU enlargement was not initially accompanied by any change in its fundamental structure. Member states
still set national policies. Harmonization was usually thwarted for two reasons. First, since each country did
things differently, it was hard to find a single set of regulations for all member states. Second, it was political
dynamite. No country wanted to adopt the policies of others.
In the 1980s, the member states set a deadline of 1992 for establishing a single EU market among member
states, in particular involving: (a) free capital flows between members; (b) removal of all non-tariff barriers to
trade in the EU (different trademarks, patent laws, safety standards that made it hard for imports to compete
with domestic goods even when tariffs were zero; ( c) ending of the bias in public sector purchasing to favour
domestic producers; (d) removal of frontier controls (delays); and (e) progress in harmonizing tax rates.
Examining the effect of these measures is of interest because it reminds us that tariffs and quotas are not the
only form of trade protection.
Non-tariff barriers are
different national regulations
or practices that prevent free
movement of goods, services
and factors between countries.
By removing non-tariffbarriers, the Single Market aimed to allow countries
to exploit their comparative advantage more fully.
A second inefficiency in small and segmented national markets is that firms
cannot fully exploit economies of scale. As barriers came down, firms got
larger and costs fell. Two-way trade in the same industry increased, not just
in goods but also in services such as banking.
The Single Market intensified competition in two ways. First, competition between forms of regulation led on
average to lower levels of regulation. For many continental European countries, the Single Market led to
substantial deregulation from initial levels that had been very high. Second, a larger market enabled large
firms to enjoy scale economies without the high market share and potential monopoly power that this would
have meant in small, segmented economies.
Quantifying the gains
How large were the gains in practice? In 2002 the European Commission estimated that during 1992-2002
the first decade of the Single Market had raised members' GDP by 1.8 per cent above what it otherwise would
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