Customs Union

Question 1

What does trade theory suggest about free trade?

Answer 1

Trade theory says free trade will
maximise world production but import restrictions widely used to help domestic producers.

Question 2

Under the treaty of Rome…

Answer 2

Under the treaty of Rome (1958-) member states of the European economic community agreed to form a customs union called the EUCU (European union customs union) - includes the UK

Question 3

In a customs union, members must?

Answer 3

1. End all tariffs and quotas on trade inside the CU
2. Use a CET
3. Agree rules on sharing revenue from CET

Question 4

What does forming a CU do to trade?

Answer 4

Increases trade between member countries: imports are cheaper to home and exports are cheaper to partners’

Question 5

Is a CU economically beneficial for member countries? Why?

Answer 5

Not necessarily as CU theory depends on:

Whether the extra trade is Trade Creation (new trade).
And whether trade is diverted away, Trade Diversion

Question 6

Numerical examples: assumptions

Answer 6

1. World of 3 countries (home, partner, world)
2. Only one good
3. Given supply price unaffected by quantity for the good
4. Demand for good’s home country is given and unaffected by supply price changes
5. Focused on cost of supply

Question 7

Why is trade creation beneficial?

Answer 7

1. Production is switched to a lower cost source
2. Consumers pay lower prices
3. No loss of revenue to the government

Question 8

Caveats of trade creation?

Answer 8

1. Important assumption that workers and machines are flexible and can be switched to new jobs in export countries (not realistic)
2. Standard CU theory assumes perfect competition & no adjustment costs

Question 9

Negatives about trade diversion?

Answer 9

• Production moves to a higher cost source (inefficient use of world resources)
• governments lose tariff revenue

BUT consumers gain as price falls but not enough to gain offset tax loss

Question 10

What is a partial equilibrium model assumptions?

Answer 10

1. Focus on one market (homogenous good) - ignore knock on effects of any changes in other markets
2. Perfect competitions (no monopolies or multinationals)

Question 11

What is algebra TC?

Answer 11

CH < (1+t) CR

Question 12

Algebraically, TD if?

Answer 12

CH > (1+t) Cr > Cf

Question 13

Why is trade diversion harmful?

Answer 13

Production moved to a higher cost source (inefficient use of worlds resources)

Governments lose tariff rev