The European Union Illuminated

Its Nature, Importance and Future

A. El-Agraa

• Publisher: Palgrave Macmillan
• Year: 2015
• ISBN:
  9781137533654
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The EU is under stress. Many believe in the euro's demise because they blame it for the 2008 financial crisis and the unwelcome austerity measures. Many resent the immigrants from the new EU member states, threatening the survival of the Single European Market. Many complain of a 'Brussels diktat', seeking an escape from joint EU decisions. Several member states want to unilaterally deal with the enhanced competition from the emerging markets, especially China, undermining the EU's 'common commercial policy', run by a single EU commissioner. And many in the UK want its exit from the EU, diluting EU unity and reducing its global influence. These concerns are either misguided or require a stronger EU to deal with them – this book aims to address these issues by considering the nature, importance and future of the European Union.

1

The EU within Regional Integration Worldwide

1.1 Introduction

The European Union (EU) is a voluntary association whose membership is open to all European nations, provided they have democratically elected governments. At the beginning of 2014, it comprised 28 such nations and it has been getting much closer to encompassing the whole of Europe. Moreover, the EU has decided that Europe’s traditional geographical designation should not be sacrosanct, and so has extended the right to negotiate membership to Turkey.

As an association of independent nations, the EU falls under the general umbrella of what is termed ‘regional integration’, precisely ‘international economic integration’ (IEI). This is because IEI is concerned with the creation of ‘clubs’ between some nations, to the exclusion of others, and clubs, by their very nature, discriminate against the non-members, the non-participants. Hence, the United Nations (UN), established in 1945 to promote cooperation between all governments, does not constitute IEI since its membership is open to all countries. Nor does the World Trade Organization (WTO), since its membership is for all nations that meet its conditions. Nor does the Organization for Economic Cooperation and Development (OECD), since, as a club of the richest countries in the world, it is open to all such nations and is therefore non-discriminatory. Nor does the Organization for Petroleum Exporting Countries (OPEC), founded in 1960 with a truly international membership, with the aim of protecting the main interest of its member nations, petroleum.¹ Nor does the Organization for Arab Petroleum Exporting Countries (OAPEC), established in January 1968.² All such organizations are for intergovernmental cooperation rather than IEI; therefore, except where appropriate, they will not be mentioned in this book.

IEI is in contradiction to ‘multilateralism’, under which all nations are treated equally, extending agreed ‘arrangements’ between them to the entire world. The WTO is the body entrusted to deal with IEI, but the WTO is based on the principle of ‘non-discrimination’; hence, any analysis of the nature and importance of the EU would be vacuous if it did not commence with a treatment of the EU within the context of IEI and what the WTO has to say about IEI.

Thus the first aim of this chapter is to provide a precise definition of IEI since what it means to those specializing in trade theory is very different from what one would expect on purely linguistic grounds. The second aim is to examine how IEI fits within the WTO guiding principles because there is a contradiction between its commitment to non-discrimination and IEI. The third aim is to briefly describe the various schemes of IEI that have actually been adopted worldwide and to set the EU within their broader picture. The fourth aim is to consider why most countries seek IEI, that is, to examine what economic and other benefits become possible as a consequence of IEI. The chapter ends by raising pertinent EU questions.

1.2 What is IEI?

IEI is one aspect of ‘international economics’ that has been growing in importance for about seven decades. The term itself has quite a short history; indeed, there is no single instance of its use prior to 1942.³ Since then, the term has been used at various times to refer to practically any area of international economic relations. By 1950, however, the term had been given a specific definition by international trade specialists to denote a state of affairs or a process that involves the amalgamation of some separate economies into larger free trading regions (author emphasis). It is in this more limited sense that the term is used today. It should be noted that IEI is also referred to as ‘regional integration’, ‘regional trading agreements’ (RTAs), ‘preferential trading agreements’ (PTAs) and ‘trading blocs’. And one should hasten to add that IEI should not be confused with globalization, which is concerned with simply the increasing economic interdependence between nations.

More specifically, there are two basic elements to IEI. The first is the discriminatory removal of all trade impediments between at least two participating nations, discriminatory because such removal is not extended to the non-participating nations, the ‘outside world’. The second is concerned with the establishment of certain elements of cooperation and coordination between the member nations. The latter depends entirely on the actual form that IEI takes. Different forms of IEI can be envisaged (see Table 1.1 for a schematic presentation) and many have actually been implemented

1.Free trade areas (FTAs), in which the member nations eliminate tariffs among themselves but retain their freedom to determine their own policies vis-à-vis the outside world, the non-participants. Recently, the trend has been to extend this treatment to investment.

2.Customs unions (CUs), which are very similar to FTAs except that member nations must conduct and pursue common external commercial relations – for instance, they must adopt common external tariffs (CETs) on imports from the non-participants.

3.Common markets (CMs), which are CUs that also allow for free factor mobility across the frontiers of the member nations, that is, capital, labour, technology and enterprises should move unhindered between them, and services should be provided likewise.

4.Complete economic unions, or economic unions (EconUs), are CMs that also incorporate the complete unification of monetary and fiscal policies, that is, the member nations must introduce a central authority to exercise control over these matters so that they effectively become regions of the same nation.

Of course, the member nations may opt for a complete political union (PU), that is, become literally one nation, with the central authority needed in complete economic unions being paralleled by a common parliament and other institutions needed to guarantee the sovereignty of one state. But this would take IEI beyond the purely economic. Nevertheless, IEI has to be borne in mind since it has implications not just for the EU, and not simply because of the unification of the two Germanys in 1990, but also for other parts of the world, such as the pursuit of the unification of the Korean Peninsula. Also, one should naturally be interested in its economic consequences (see below). More generally, one should stress that each of these forms of IEI can be introduced in its own right; hence, they should not be confused with stages in a process which eventually leads to either complete economic or political union.

As a digression, it should also be noted that there could be sectoral integration, as distinct from general across-the-board IEI, in particular areas of the economy, as was the case with the European Coal and Steel Community (ECSC, see Chapter 2), created in 1951, and which is fully explained in Chapter 2. But sectoral integration is considered to be only a form of cooperation because it is inconsistent with the accepted definition of IEI and also because it may contravene the rules of the General Agreement on Tariffs and Trade (GATT), which in 1995 began to be run by the WTO (see below). Sectoral integration may also occur within any of the mentioned schemes, as is the case with the EU’s Common Agricultural Policy (CAP, see Chapter 4), but then it is nothing more than a ‘policy’.

Table 1.1 Schematic presentation of economic integration schemes

It has been claimed that IEI can be negative or positive.⁴ Negative IEI refers to the simple act of the removal of impediments on trade between the member nations. Positive integration relates to the modification of existing instruments and institutions and, more importantly, to the creation of new ones so as to enable the market of the integrated area to function properly and effectively and also to promote other broader policy aims of the scheme. Hence, at the risk of oversimplification, according to this classification, it can be claimed that FTAs require only negative integration, while the remaining types need positive integration. This is because, as a minimum, they need the positive act of adopting common external trade, which entails long negotiations and compromises, and investment relations. However, in reality this distinction is over-simplistic not only because practically all existing types of IEI have found it essential to introduce some elements of positive integration but also because theoretical considerations indicate that no scheme of IEI is viable without certain elements of positive integration. For example, even the ECSC deemed it necessary to establish new institutions to tackle its specified tasks (see below and Chapter 2).

1.3 IEI and WTO rules

Given that IEI is a concern of the WTO, a few words on the organization and what it has to say about IEI are in order. Note that the WTO is the successor of the GATT. The GATT was signed in 1947 after the failure to create the International Trade Organization (ITO)⁵ and became effective in 1948. Its aim was the ‘substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis’ (GATT preamble). Under the Marrakech Agreement of 15 April 1994, it was replaced by the WTO on 1 January 1995, which deals with broader issues. Therefore, one need not refer to the GATT, unless there are compelling reasons for doing so.

The general aim of the WTO is, as mentioned, to supervise and liberalize trade and investment worldwide. It does so by regulating the trade between the member nations and freeing restrictions on capital movements. Note that not all countries are members, due to strict conditions for joining. In January 2014, the WTO had 159 members. The WTO also provides a framework for the negotiation and formalization of trade agreements between the members. And, vitally, it acts as a dispute resolution platform for problems arising amongst the members and for ensuring that they adhere to WTO agreements.

To liberalize world trade, the WTO conducts what is called ‘Rounds of Negotiations’. The first such Round was held in Geneva in April 1947 and lasted for seven months. The latest round is the ninth and it started in November 2001, but is yet to be concluded. Table 1.2 provides a brief summary of the Rounds, their outcomes or achievements and the number of countries taking part.

There are four basic WTO principles: (a) trade liberalization on a most-favoured-nation (MFN) basis (the lowest tariff applicable to one member must be extended to all members); (b) non-discrimination; (c) transparency of instruments used to restrict trade (now called tariffication) to enable informed negotiations on their reduction or complete elimination; and (d) the promotion of growth and stability of the world economy. More generally, these principles are reduced to three: nondiscrimination, transparency and reciprocity.

Given that nondiscrimination is a basic principle of the WTO, it is natural to ask why IEI is tolerated by the organization. The GATT’s Article XXIV⁶ allows the formation of IEI schemes on the understanding that (a) they may not pursue policies which increase the level of protection beyond that which existed prior to their formation, (b) tariffs and other trade restrictions (with some exceptions) are removed on substantially (increasingly interpreted to mean at least 90 per cent) all the trade among the member nations and (c) they get established within a reasonable period of time, understood to be within a decade. Due to this article’s importance, Box 1.1 provides the full text of item 5 of Article XXIV. The drafters of Article XXIV believed that the combination of these conditions would lead to benefits for the countries participating in IEI, while, at the same time, not impacting adversely on the non-participants.

Box 1.1 GATT’s Article XXIV.5

Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area; provided that:

(a)with respect to a customs union, or an interim agreement leading to the formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be;

(b)with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement, as the case may be; and

(c)any interim agreement referred to in sub-paragraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.

Source: GATT (1986).

There are more serious arguments suggesting that Article XXIV is in direct contradiction of the spirit of the WTO.⁷ However, it can be argued that if nations decide to treat one another as if they are part of a single economy, nothing can be done to prevent them from doing so, and that IEI schemes, particularly the EU at the time of its formation in 1957, can have a strong impulse towards liberalization. In the EU case, the setting of CETs by 1969 (see appendix to Chapter 2) happened to coincide with the GATT’s Kennedy Round of tariff reductions (by about 35 per cent) in 1967. However, experience suggests that IEI can be as...

Table of contents

• Cover
• Title
• Introduction
• 1  The EU within Regional Integration Worldwide
• 2  The Passage to the EU
• 3  Decision-making in the EU
• 4  EU Policies
• 5  The EU General Budget
• 6  Economic and Monetary Union
• 7  The Importance of the EU
• 8  The Future of the EU
• Appendix: The Causes of the 2008 Financial Crisis
• Notes
• References
• Author Index
• Subject Index