European Union Trade - Essay Example

European Union Trade EU's Trade Policy It was in 1957 that a formal vision of Common European Market was set in motion by the Treaty of Rome, with the aim of increasing economic prosperity and contributing to "an ever closer union among the peoples of Europe" (Wallace & Wallace, 2000). Thereafter the European Economic Community (EEC), started working towards the common interest of the European region. The common commercial policies are an important step towards safeguarding the interests of the region particularly while dealing with the outside world. After the treaty of Rome, a need was being felt to serve the interests of the customs union with a Common Customs Tariff (CCT) to deal with the third parties (Bretherton & Vogler, 1999). Established by Article 113 [133] of the Treaty of Rome, Common Commercial Policies therefore took shape in 1961 to safeguard the common interests of the EU nations (Bretherton & Vogler, 1999). This effectively meant that the EU region will act as one country while dealing with any other country/ organisation for trade and commercial interests. But the commonness envisaged within the policy kept eluding the European community for many years, because of the changes that the world went through during the period and the conflicts of economic interests within the EU nations. The delay in settling for a common European Monetary unit (EMU) is one such example. Euro, the common currency came into being in 1999, but Bordo and Jonung (1999) reported about some observer's apprehensions about EMU itself citing the lack of a central authority supervising the financial systems of EMU. The Common Commercial Policy expected a degree of autonomy and competitiveness from the member states, which has been achieved with limited success so far, as is evident from OECD (2007) 'EU country note', which states that competition in network industries remains patchy while implementation of the liberalization policies by individual countries are not in sync with the EU level as a whole. Bretherton & Vogler (1999) further suggest that the common commercial policy calls for common policies on tariff rates, international negotiations, liberalization, exports and trade protection measures; all based on uniform principles. Despite the differences in policy implementations, perception and other interests, today with a share of 18.10% in Goods and 26.4% in services, EU is a major trading partner with the world community, as is evident from the charts below. Fig-1: Share of EU in world trade1 Roarty (1996) states that in order to minimize the differences on trade barriers, efforts were also made in 1993 by creating a Single European Market (SEM). SEM's stated objective was to eliminate the non-tariff barriers restricting competition and resulting in fragmented European market. OECD (2007) points out that the income gap between EU and USA has kept widening since 1990 on account of decelerating growth in productivity and improper labor utilization by some of the larger countries in the EU. Wallace & Wallace (2000) point out towards a fundamental shortcoming in the framework of EU policy making. According to them, "Most studies of the EU concentrate on describing what happens in and through the special institutions of the EU, located in Brussels, Luxembourg, and Strasbourg: the European Commission; the Council of the EU; the European Council; the EP; and the ECJ. However, we should be careful not to regard these EU institutions as existing in a vacuum. Most of the policy-makers who devise and operate EU rules and legislation are from the member states themselves. They are people who spend the majority of their time as national policy-makers, for whom the European dimension is an extended policy arena, not a separate activity." Bretherton & Vogler (1999) also state that though the Common Commercial Policy has evolved through a complex interaction between the shifting composition of international trade, the external demands of various GATT rounds and adjudicative decisions of the European Court of Justice (ECJ), there has always been a degree of tension between the member states and the commission on the issue. In the highly competitive environment dictated by globalization, such differences on trade related issues appear to be quite natural amongst two countries, but for the EU, which aspires to be dictated by the common commercial policies of a group of nations, maintaining a delicate balance might prove to be quite a challenging task in times to come. Implications of phasing out Export Subsidies Export subsidies have been given by some developed nations, including some members of European Union to place the commodity at low prices in the international market. This is particularly true about the export of agricultural produce. Such measures had been resulting in export-import imbalances in trade and the lesser developed nations have raised demands against this measure at many international forums from time to time. It is not only the third world countries objecting to the subsidized export but the GATT disputes panels is also testimony to many high profile EU-US cases, over subsidized steel exports, wheat, canned fruit, oilseed, bananas and bovine growth hormones (Bretherton & Vogler, 1999). Hofheinz (1992) also argued that the subsidies being provided by the state were also resulting in decline in competitiveness in the domestic market as well. Such subsidies do generate high profits in the short term but also result in discouraging innovation and restricted productivity in the long-term. Continuous provisioning of export subsidies also violated some of the principles of the common commercial policy, which envisages uniform principles, in tariff rates and trade agreements. Therefore while announcing the phasing out of export subsidies by 2013, Peter Mandelson the EU Trade Commissioner called for equivalent commitments from others for similar subsidy reform. This underlines the effect broader implications of phasing out the export subsidies. Once the export subsidies are gone, two major implications will be; a. Goods and services from EU nations will become costlier at the international level b. There'll be surpluses in the domestic market, if the exporters fail to lift the export quota on account of less demand for 'costlier' goods and services from this region. c. This may result in production cuts, subsequently in resulting in retrenchments and job losses. d. As a chain reaction, rates of inflation may also go high. But all such effects will result only in the situation (hypothetical!) when EU sticks to dilution of export subsidies but there is no reciprocation from countries outside the EU. But when the international community too reciprocates in good measure and also reduces subsidies and tariffs of agreed upon items EU will have to bear lesser impact. A study conducted by OECD came to the conclusion that the level of subsidies in EU has certainly come down since the mid-1980s, but still they remain high in international comparison (Hoeller et al, 1998) Fig-2: Extent of Subsidies by EU Therefore in the new regime EU has agreed to further phase out export subsidies by 2013, in order to agree on a set of rules to regulate markets. This will also ensure minimizing in barriers to fair trade and compatibility with world trade rules. But this decision cannot achieve the due result in isolation. It has to be matched by equal measures by some other major countries like USA and Japan in reducing their share of export subsidies as well. The day, EU made the announcement of phasing out export subsidies in Hong Kong, there were commitments from USA to phase out subsidies on cotton. USA and Japan also announced to extend duty and quota free market access for most imports from the third world. Therefore, the net effect of phasing out export subsidies would be; i. More competitive environment for export goods and services from EU nations. ii. Need for more emphasis on quality and value addition in their products by manufacturers and producers from EU countries. This would help them in taking on the competition from other regions. iii. The share of EU may come down slightly in the world trade adopt more successful strategies for grabbing this share of market. iv. EU and the individual companies and organizations will have to do lot more marketing communication efforts to remain in contention for retaining and increasing its share of the export market. v. As of now many non-governmental organizations and interest groups have been raising their voice against the trade disparities on account of 'unfair' subsidies to agriculture and farm products. The opposition of these groups is bound to become less vociferous, once the subsidies are phased out. vi. Governments of EU countries will have additional funds to pump in towards development of infrastructure and other public welfare schemes. vii. The labor market too will continue to be more vibrant with opportunities for growth for the workforce. viii. The level of profits of the producers and manufactures will surely be down during the initial years of the phasing out, and depending upon how the company or organization readies itself to take on the challenge; the situation might improve in the long run. Term of International Trade EX WORKS (EXW): This term signifies that the responsibility of seller is to make the goods available in good condition at the 'works' site, i.e. at the seller's premise. Therafter the buyer is supposed to carry the goods to its desired place. From seller's premise to buyer's location all the carrying costs and risks are to be borne by the buyer. Free on Board (FOB): In this type of arrangement seller loads the consignment at the port of shipment nearest to it. Such costs and risks are borne by the seller, till the consignment is loaded into the ship. Thereafter, it becomes the property of the buyer to complete the rest of the journey. In the earlier days most of the consignments were brought in by ship through the sea-route. But now aerial, road and rail network has improved and it also lends the helping hand in transporting goods from one place to another. The FOB in such cases means till the goods are loaded into the vehicle (aircraft, truck or goods train) at a place nearest to the seller. Thereafter the buyer is to take care of it. Delivered Duty Paid (DDP): Under such an arrangement, the seller is responsible to deliver the goods/ consignment at the door of the buyer. This type of agreement is generally done to deliver delicate equipment (e.g. costly glassware) or consignments of sensitive nature (e.g. nuclear reactor parts), because the seller is supposed to have the expertise in handling such consignments. Under DDP agreement transit costs, duties, toll taxes, road taxes, VAT etc. are all borne by the seller. But in case the agreement is something like 'Delivered Duty Paid exclusive of VAT and/or taxes', in such case, all the excluded items will be paid by the buyer while rest being paid by the seller. References: 1. Albarran, S.Muoz & Hamdouch M. (2006). External Relations: The European Union Common Commercial Policy. Available online at http://www.abgs.gov.tr/tarama/tarama_files/30/SC30EXP_Common%20Commercial%20Policy.pdf (Apr 27, 2007) 2. Bretherton, Charlotte and Vogler, John (1999). The European Union as a Global Actor. Routledge, London. 3. EU (2005). The Doha Development Agenda: EU move on export subsidies takes Doha forward. Available online at http://ec.europa.eu/trade/issues/newround/doha_da/pr181205_en.htm (Apr 27, 2005) 4. Hoeller, Peter; Girouard, Nathalie and Colecchia, Alessandra (1998). The EU's Trade Policies and their Economic Effects. OECD, ECO/WKP (98)7. 5. Hofheinz, P. (1992). Europe's tough choices now, Fortune International, 14 December, 1992. 6. Mercer, Chris (2006). EU states squabble over export subsidy cuts. Available online at http://www.foodnavigator.com/news/ng.aspn=67118-export-subsidies-eu-commodities (Apr 24, 2007) 7. OECD (2007). Economic Policy Reforms: Going for Growth 2007 - European Union Country Note. Available online at http://www.oecd.org/dataoecd/48/19/38088845.pdf (Apr 26, 2007) 8. Roarty, Michael J. (1996), Trade policy in the EU: prospects for the millennium. European Business Review Volume 96, Number 1,1996. 9. Wallace, Helen and Wallace, William (2000). Policy-Making in the European Union. Oxford University Press, 4th ed, Oxford Read More