Working Paper: CEPR ID: DP222
Authors: L. Alan Winters
Abstract: This paper examines international trade policy within a completed European internal market. The Ethier-Horn argument for internal tariffs in a customs union is shown to be inapplicable to most of the EC's existing, cost-increasing barriers to trade. The implications are examined of abolishing both Article 115, which prevents trade deflection, and Monetary Compensatory Amounts on agricultural trade. National production subsidies are examined in the context of the free intra-EC mobility of capital and skilled labor. Subsidies are doubly harmful to a small open economy in the presence of factor mobility. Moreover, even where rent-snatching subsidies may be profitable for the EC as a whole, subsidy wars could erupt between member states as they compete for rent-generating industries.
Keywords: EC; completing the internal market; subsidies; trade policy; factor mobility
JEL Codes: 422; 423
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Abolition of internal trade barriers (F15) | Trade efficiency (F14) |
| National production subsidies (D20) | Misallocation of resources (D61) |
| National production subsidies (D20) | Welfare losses (D69) |
| National production subsidies (D20) | Inefficiencies and increased costs (D61) |
| Subsidy wars (H29) | Inefficiencies and increased costs (D61) |