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Chapter III. The Common Market
Entry Into the EEC: a Comment On Some of the Economic Issues
Published online by Cambridge University Press: 26 March 2020
Extract
This chapter surveys some of the main economic issues involved in the decision whether or not the United Kingdom should join the EEC on the terms set out in the recent White Paper [69]. Specifically, it covers those issues traditionally comprised under the headings of ‘static’ and ‘dynamic’ effects, with additional consideration being given to problems affecting exchange rate, monetary and regional policies. It is not a main purpose of this note to introduce much substantive new material; the aim, rather, is to survey the arguments and to draw attention to the relevant numerical magnitudes where estimates exist. In this spirit a select bibliography is also attached.
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- Copyright © 1971 National Institute of Economic and Social Research
References
Note (1) page 36 Reference in square brackets in this chapter are references to the corresponding items in the bibliography.
Note (2) page 36 It has been argued that this method of working imparts an implicitly hostile bias to the assessment of the likely gains and losses because the quantifiable static effects turn out to be negative while the dynamic effects remain essentially unquanti fiable. But this is not in fact to say that the dynamic effects are necessarily negligible relative to the static losses, but indicates rather that the methods available for detecting dynamic gains are too crude to pick up convincingly the effects which may be there. An advantage of the distinction is that it does indicate in a broad way the sort of magnitude any dynamic benefits need to attain, if the economic case for entry is to come out on the positive side.
Note (3) page 36 While it may seem reasonable to exclude the cost of a maximum transfer to the Community budget as illustrating an upper limit, it seems more reasonable to include than to exclude the wage-price spiral enect—so far as the balance of payments is concerned. In this case the balance of payments loss estimates should be raised.
Note (1) page 37 This overlooks the later extension of customs union theory to account for complications which bring the analysis under the general heading of ‘second-best’ theory (see, for example, Lipsey [3]). This extension inhibits welfare generalisations about the expected effects of resource reallocation.
Note (2) page 37 This is reflected, for example, in Leibenstein's tabulation (see H. Leibenstein, ‘Allocative efficiency versus ‘X- efficiency’, ‘American Economic Review, June 1966) of the ‘typical’ results of such exercises. Lundgren [18] suggests that this kind of result is not surprising and argues that so far from showing that the gains from trade are small, it indicates that the advantages of an international division of labour are so great that few obstacles are put in its way.
Note (3) page 37 An approximate measure of the welfare gains of trade creation (as in Johnson [14]) is to take one half of the tariff cut times the increase in imports. Following this arithmetic Williamson [72] arrives at a minimum static welfare gain of 0.06 per cent of GDP (one half of 10 per cent of 1.2 per cent GNP, the last figure representing his estimate of the (net) trade creation effect).
Note (1) page 40 On this basis, for example, the weight attributed to a totally prohibitive tariff would be zero.
Note (1) page 41 These averaged some 36 per cent on trade between the UK and the EEC. (See The Kennedy Round of trade negotiations, 1964-67, London, HMSO, July 1967, Cmnd 3347.)
Note (2) page 41 See H. G. Grubel and H. G. Johnson, ‘Nominal tariffs, indirect taxes and effective rates of protection: the Common Market countries 1959’, Economic Journal, vol. 77, no. 308, December 1967, and T. S. Barker and S. S. Han, ‘Effective rates of protection for United Kingdom production’, Economic Journal, vol. 81, no. 322, June 1971. Both studies use input- output data as the basis for calculating effective protection, the former employing 1959 data, the latter the more recent data available for 1963.
Note (3) page 41 The figure quoted for the UK is drawn from the study by Barker and Han, op. cit., and that for the EEC from Grubel and Johnson, op. cit., and they refer to the percentage excess of the arithmetic mean of effective protection rates over the average of nominal rates of tariff on all imports of manufactures, including those from the preferential area. When excise duties are omitted from the exercise, and the comparison of effective rates is confined to tariffs alone, the percentage excess of nominal over effective rates of protection rises for the UK from the 33 per cent figure quoted in the text to 87 per cent, and falls for the EEC from 61 to only 7 per cent. The average excess figure for the EEC, on either basis, but particularly on the latter, varies very considerably from country to country.
Note (4) page 41 These indicate that the affected industries are less com petitive at home under the present nominal tariff protection than they would be if all tariffs and excise duties, including those on their own products, were abolished.
Note (5) page 41 An earlier investigation, not reported on here, was conducted by the CBI in 1966/7. See [63].
Note (6) page 41 Board of Trade Journal, 8 July 1970.
Note (1) page 42 These conclusions are based on the mutual trade ranking. When the items are ranked by the third country export ratio mechanical engineering is shown to be one of the three best performers, rather than being among the worst, whilst in the case of iron and steel half the 24 items are conflicting evidence products, much the highest proportion for any of the nine industry groups.
Note (1) page 43 House of Commons Debates, 23 July 1971, col. 1847.
Note (1) page 44 A figure of an increase of £30 million, due to higher prices alone, in the value of UK exports of agricultural products to the EEC has been mentioned by the Minister of Agriculture (House of Commons Debates, 23 July, 1971, col. 1856).
Note (2) page 44 These statements apply to the balance of payments effects on ‘food’ account (including levies) alone, ignoring any reper cussions on other elements in the balance of payments. They clearly do not extend unambiguously to the welfare costs involved.
Note (1) page 46 In the absence of figures, general statements are apt to be misleading. For example, a change in the Community budget structure away from CAP expenditures and towards other items (technological, industrial and regional policies), which the White Paper suggests (ibid. page 42, para. 8) might happen and which would result in greater UK gross receipts from the Community, is double-edged. An expansion of such expenditures seems most likely to take place in the context of an overall increase in budget expenditures, and while the ratio of our contributions to receipts should improve in these circumstances, it is not at all clear that our net contributions would fall.
Note (2) page 46 Williamson [72] has taken this approach about as far as it can go in the existing state of knowledge, and although his results are suggestive they are clearly highly speculative.
Note (1) page 47 Other aspects of the EEC, such as the movement towards common commercial, fiscal and legal procedures, might be held to add something to the freedom from uncertainty about tariffs which is an important aspect of the argument.
Note (2) page 47 The original Major and Hays estimates were subsequently revised. The new estimates were published in National Institute Economic Review no. 55, February 1971, page 92.
Note (1) page 48 Productivity is, however, defined as output per employee, no account being taken, as would be preferable, of hours worked. It appears that other sources, notably OECD, which allow similar series to be constructed (but with some difficulty) give numerically different, though in general qualitatively similar, kinds of results.
Note (2) page 48 Among the EEC countries, the Belgian improvement is most notable, productivity growth in fact more than doubling between the two periods. As it turns out, however, United Kingdom productivity growth also improved sharply after 1958. The figures are: for Belgium, productivity growth of 2.6 per cent per annum between 1950 and 1958 and of 6.0 per cent between 1958 and 1970; and for the UK, for the same two periods, productivity growth of 1.5 per cent and 3.1 per cent respectively.
Note (3) page 48 See, for example, the speech by the Rt Hon. Roy Jenkins in the House of Commons on 22 July (House of Commons Debates, 22 July 1971, col. 1695); also A. Shonfield, ‘The dialogue of the deaf on Europe’, The Times, 1 April 1971, page 16; and Williamson [72], page 19, postscript.
Note (1) page 49 For example, in September 1960, Italy had made general increases in its rate of rebate of the general turnover tax on exports but these were reduced progressively in the following year from a maximum rate of 7.5-8 per cent to 6.5 per cent. Germany introduced some substantial rebate changes in mid- 1963; Belgium in April 1965 and May 1967; and the Nether lands at the beginning of 1968. See Board of Trade Journal 23 September 1960 and 16 March 1962, and OECD, Border tax adjustments and tax structures in OECD member countries, Paris, OECD, 1968.
Note (1) page 50 Cf. I. B. Kravis and R. E. Lipsey, Price competitiveness in world trade, New York, NBER, 1971.
Note (2) page 50 Some equations were computed relating the ratio of export to domestic prices to the ratio of exported to total output of manufactures. The results indicated a poor fit in several cases, and for two EEC countries (Germany and France) a positive relationship, which was also found for the United Kingdom. The exercise yielded no important general conclusions.
Note (3) page 50 ‘Report to the Council and the Commission on the realisation by steps of economic and monetary union in the Community’, Bulletin of the European Communities, no.11, 1970, supplement. [38]
For a fuller description of the Plan, see National Institute Economic Review, no. 55, February 1971, pages 69-71.
Note (1) page 51 Movement of skilled and unskilled workers and clerical and administrative employees, as well as other non-qualified people, and also technicians of lower grades is practically free. This freedom however does not apply to professionals in the same way, since in many professions the academic or other qualifications acquired in any of the present EEC countries are either not at all, or not necessarily recognised in the others (or some of the others).
Note (2) page 51 Quotations from the Treaty of Rome included in this article are taken from the translation prepared by the Foreign Office of the official and authentic text in the languages of the signatories. This translation was published as ‘Treaty setting up the European Economic Community’ [29].
Note (3) page 51 The flow figures exclude oil companies in 1969 and insurance companies as well as oil companies in 1958. The figures for book values exclude throughout oil and insurance companies and banks.
Note (1) page 52 The formal undertaking is as follows: ‘We are prepared to envisage an orderly and gradual run-down of official sterling balances after our accession.
‘We shall be ready to discuss after our entry into the Communities what measures might be appropriate to achieve a progressive alignment of the external characteristics of and any practices in relation to sterling with those of other currencies in the Community in the context of progress towards economic and monetary union in the enlarged Community, and we are confident that official sterling can be handled in a way which will enable us to take our full part in that progress.
‘In the meantime we shall manage our policies with a view to stabilising the official sterling balances in a way which would be consistent with these longer term objectives.’
According to Ministers, ‘we have given no undertakings as to how fast or by what means these developments could or should be brought about’ (the Prime Minister in House of Commons Debates, 11 June 1971, col. 1236) and ‘have also made clear that three conditions would need to be satisfied. First, any proposal would have to be acceptable to official holders of sterling… Secondly, it should not impose an unacceptable burden on our own balance of payments. Third, it should promote the stability of the international monetary system.’ (the Chancellor of the Duchy of Lancaster, op. cit., 9 June 1971, col. 1044.)
Note (1) page 55 H. Lind and C. Flockton, [96], page 72.