European Economic Integration

Ricardian Theory of Comparative Advantage
- A country should specialize in the production and export of the good where its comparative advantage is greater and import the product where its comparative advantage is lower.
- This leads to a win-win scenario for trading nations.
Heckscher-Ohlin Theorem
- A country should specialize on a commodity whose production is intensive in the factor in which the country is relatively abundant.
- This concept serves as a source of comparative advantage and indicates that trade will improve welfare in both economies by acting as a substitute for international mobility of factors.
Intra-industry Trade
- Countries can benefit from trade in close substitutes, which are similar but slightly different products.
Economies of Scale
- Free trade enables firms to operate on a larger and more efficient scale, which allows them to capture learning effects over time, thereby reducing costs.

Infant Industry
- New industries may struggle to compete with established firms and require time to gain experience or to reach a sufficient size to benefit from economies of scale.
- Challenges include ensuring that these industries can be competitive at world prices and that the benefits of protection exceed its costs.
- Risks include politicized selection of protected industries and continued protection of non-viable industries.
Second Best
- In scenarios where perfect competition is violated in some regions, it may not be optimal for others to maintain this condition, and protection could potentially lead to welfare improvements.
- Decisions around transitioning to free trade should be made on a case-by-case basis.
Optimal Tariff
- Imposing a tariff on a widely used good can decrease consumption, leading to a drop in world price, with foreign producers sharing some of the cost.
- However, this can trigger retaliation from other countries.
Strategic Trade Theory
- It posits that countries can gain a comparative advantage regardless of their initial production factor endowments.
- This advantage can be fostered through active trade policies and investments in high-tech sectors.

Import Tariff
- A tax or duty on imported goods, which can be specific, ad valorem, or compound.
Quota
- A quantitative restriction on imports of a specific product or from a specific country.
Voluntary Export Restraint (VER)
- A self-imposed restriction by the exporting country to avoid harsher measures from the importing country.
Dumping
- Occurs when an exporter sells a product in a foreign market at a price lower than its domestic price.
Export Subsidies
- Forms of assistance to exporters, including direct payments, tax incentives, and low-interest loans.
Technical Barriers to Trade (TBT)
- Regulations that specify modifications to products to ensure they meet safety, health, and environmental standards, affecting market access.

Definitions:
- Total utility = area a + area b
- Total revenue = area c + area d
- Total expenditure = area b
- Total cost = area d
- Consumer surplus = area a
- Producer surplus = area c

Increase of Imports ($9M$)
Lower Price ($9T$)
Price Elasticity of Imports
Trade Creation
- A numerical example should illustrate how these dynamics play out in practice.

Diagram showing demand ($ ext{MD}$), supply ($ ext{S}$), and export supply ($ ext{XS}$).
Welfare Effects:
- Price increase from $P0$ to $P1$ results in a decline in consumer surplus ($-a-b$), increase in producer surplus ($+a$), and total loss quantified by price and quantity effects ($-b$).

When a specific tariff ($T$) is levied, foreign export supply decreases, affecting the equilibrium in home economy:
- Home economy will reduce imports, consumers will face a higher price ($P_T$), and producers will receive higher prices to incentivize increased production.

Decline in welfare effects on a global scale due to tariffs, including detailed breakdown of impacts on both foreign and home economies:
- Total loss includes considerations for consumption and production shifts.

The holder of the import licence can derive rents that are capped in a similar manner to an equivalent tariff.
Assessing the welfare impacts of quotas vs. tariffs, with detailed diagrams to illustrate outcomes.

Bilaterally negotiated agreements that create horizontal supply characteristics equivalent to import quotas should be evaluated thoroughly, including welfare effects.

Overview of how a non-discriminatory tariff affects export and import prices and quantities across varying economy sectors.

Defines key concepts of trade creation and trade diversion introduced by Canadian economist Jacob Viner, with detailed numeric examples illustrating tariff impact and trade structure shifts within a customs union.

Effects of implementing a discriminatory (preferential) tariff, including impacts on welfare from imports and price shifts in both home and partner economies.

Historical context regarding the three stages of tariff elimination, the irregularities encountered during the transition phases, and the socio-economic factors that affected these outcomes.

Explanation of trade deflection mechanisms and the role of rules of origin alongside the potential drawbacks of administrative burdens leading to protectionist tendencies.

Insights into how customs unions represent a form of codified discriminatory liberalization while presenting dynamic arguments favoring CU as a means to achieve larger cohesive economic units.

Discussion of legitimate public policy goals served by technical specifications, alongside criticism of how they may function as de facto protectionism post-tariff removal, often referred to as 'euro-sclerosis.'

Several notable cases, including Germany’s beer purity law, Italy’s pasta law, and landmark ECJ rulings (e.g. Dassonville, Cassis de Dijon) demonstrating the legal and practical implications of TBT in international commerce.