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2 EU Enlargement and Eastern EU Enlargement


Academic Research paper and Study of the Economy of Romania and Romanian Business

In general, economic theory of integration expects the same effects for the accession of the CEECs as for the former candidates (cf. Brasche 2003: 170). Therefore, it seems appropriate to start with a general overview on the theory of regional integration. Regional integration “may be defined as the institutional combination of separate national economies into larger economic blocs or communities” (Robson 2000: 1).[1] Following Brasche (2003: 45ff.) the main idea of regional integration is unleashing the forces of market and competition. This process is believed to result in an augmented welfare according to the Kaldor-Hicks criterion.[2] Against the ideal of a fully integrated world economy (first-best scenario), regional integra­tion represents a prag­matic second-best solution (cf. Smeets 1996: 46). Smeets distinguishes five forms of regional integration (cf. Table 2.1), varying in their respective depth (cf. ibid: 60).

Table 2.1: Forms of Regional Integration

Preferential Trade Area

Free Trade Area

Customs
Union

Common
Mar­ket

Economic Union

Reduced tariffs or free trade of certain goods

X

Complete
libe­ralization of trade in goods

X

X

X

X

Free Trade Area plus common external tariffs

X

X

X

Free movement of factors and services

X

X

Coordinated or common eco­nomic policy

X

Source: Smeets 1996: 60

Preferential Trade Agreements – PTA

A preferential trade agreement (PTA) reduces tariffs for certain goods only and has to be con­sidered as the lowest form of regional integration. The logical successor is the free trade area (FTA), which is also the most common form of regional integration worldwide (cf. Robson 2000: 3). Ta­riffs among its members are abolished but external tariffs continue to be set by every MS separately. An FTA is very likely to yield some first gains of trade by trade creation and trade diversion (cf. next paragraph). On the other hand, a possible trade deflection effect might cause tensions: imports from third countries into the FTA might be redirected through the MS with the lowest external tariff, thereby exploiting the tariff differential (cf. ibid: 28). This means additional tariff revenues for the low-tariff country and lower tariff-revenues for high-tariff countries plus a failure of their protective policy. Furthermore, without a common exter­nal tariff, improvements in the Terms of Trade (ToT) towards the rest of the world are not reach­able.

Custum Unions – CU

The next step of integration – the customs union (CU) – overcomes the trade deflection effect by a common tariff-policy (cf. ibid: 2). It still features the trade creation effect and the trade diversion effect. Additionally, the union can improve its ToT via its external tariff, depending on its size and hence, its bargaining power (ibid: 40f.).[3] Trade creation means increased con­sumption of cheaper foreign goods over which the trading partners enjoy comparative advan­tages (cf. chapter 2.1). At the same time domestic production of the respective goods de­creases while domestic production and exports of goods with own comparative advantages increase (cf. ibid: 19). This effect is very likely to increase overall consumption and to serve the pro­ducers of exported goods. Trade diversion means a shift from lower charged imports from third countries to higher priced union imports, because the new external tariff of the un­ion will typically raise prices artificially for third-party imports (cf. ibid: 19). This favors do­mestic producers in the union but might lower the utility of consumers. Though it de­pends on the very special conditions of the case some general conclusions could be drawn about when the trade creation effect is likely to dominate the trade diversion effect (cf. ibid: 27). First, trade creation increases in union size and the differences of unit costs within the union. Second, competitiveness plays a crucial role. Greater overlapping ranges, especially of high cost-products, offer more possibilities for trade creation. Third, the average level of tariffs before joining the custom union matters. If it is higher, trade creation is more likely to show up. The European Economic Community (EEC) has been a CU since 1968 (cf. ibid: 3).

Common Market

A common market grants the additional rights for the free movements of factors, i.e. labor, capital and enterprises. Integrated factor markets shall foster further benefits from integration by promoting “increased specialization according to comparative advantages among countries with different economic characteristics” (ibid: 5) and a relocation of factors. An even more developed form of regional integration is the economic union, featuring “the integration or harmonization of a range of policies” (ibid: 3). Both of them might be complemented by a mon­etary union. Indeed, a CU is not sufficient even for granting a single product market: It “re­quires the removal of a host of regulatory barriers, of fiscal barriers and of discrimination in public procurement and public works” (Pelkmans 2001: 68). In contrast to the EFTA, Euro­pean integration aimed from the beginning at the creation of an economic union (cf. Smeets 1996: 61). European integration at its current state is designed as having two steps. First, joining the EU and its Single Market[4], and second, joining its monetary union (cf. Breuss 2002: 247). However, both of these steps can be considered here as a form of economic union, according to Table 2‑1.[5]

Positive Integration vs. Negative Integration

Regional Integration can be achieved as either positive or negative integration. While the first form denotes the creation of new institutions (or the modification of the preceding institutions according to the union’s purpose) the latter refers simply to the abolishment of barriers to trade and factor movements (cf. Markusen et al. 1995: 2). In practice both forms occur.

Each subsequent step of integration is expected to feature additional benefits for the participating economies or to unfold the benefits partially achieved by preceding steps of integration to their full extent. Some of these effects will now be shortly introduced to facilitate a better understanding of the economic framework of the EU and EEUE. Chapter 2.1 introduces the trade approach to regional integration by giving an overview about the most important trade effects: gains from trade (chapter 2.1.1), specialization through trade (chapter 2.1.2), increasing market size (chapter 2.1.3) and allocational optimization (chapter 2.1.4). Chapter 2.2 com­pletes the theoretical overview with a short introduction into the development approach to­wards regional integration. The next two chapters focus on the par­ticular European project. Chapter 2.3 contains a brief description of the Single Market’s main features (chapter 2.3.1) and a short overview about the evidence (chapter 2.3.2) while chapter 2.4 discusses the expecta­tions (chapter 2.4.1) and first evidence (chapter 2.4.2) legated to the first wave of East­ern European EU Enlargement in 2004. The last chapter (2.5) summarizes the reasoning of chapter 2 and derives some stylized facts from both theory and evidence of regional integra­tion and EEUE for benchmarking purposes in the subsequent parts of this paper.

Footnotes

[1] In literature, different names for this concept are used. International (economic) integration, economic integra­tion, regionalism, regional integration or simply integration are the most common terms. This paper will use the term regional integration for the general issue and European integration with regard to the EU.

[2] Brasche says literally „per Saldo“ (net welfare). This is just the idea of the Kaldor-Hicks criterion, which sug­gests, that an outcome B is to be preferred to an outcome A, if its net value is higher than the net value of A. The net value is calculated by summing up all gains and losses induced by a change from A to B. It has to be pointed out, that – in a sharp contrast to the often used Pareto criterion – Kaldor-Hicks efficiency favors changes that might produce also losers from change, as long as the gains of the winners outweigh the losses of the losers. For regional integration and globalization issues, economic theory typically refers to the Kaldor-Hicks, and not the Pareto-criterion, what might produce controversies about the (expected) distribution of benefits and losses.

[3] On the other hand, this could work also the other way round: increasing tariffs on union exports might worsen the ToT for some of the MS as Roberts (ibid: 40f.) reminds. Anyhow, the bargaining power on world markets ought to increase with the union’s size: the bigger the union market is, the more it will be able to influence the world markets.

[4] When referring to the EU’s Single Market the terms common market, internal market or single market are typi­cally used equivalently. For the sake of uniformity, this paper will stick to the designation as Single (European) Market (SEM); at least when it comes to EU issues.

[5] Some doubts have been expressed, whether the EU and its predecessors really fit into such classifications (e.g. Hitiris 2003: 49) or not. These critics are mainly based on the special institutional design of the European project even from its times as a CU and the subsequent steps of integration, which were accompanied by hybrid forms from the typologies point of view. Anyhow, for the concern of this paper such niceties can be considered insigni­ficant.