How to establish the customs union? Experience of the European Communities

1. How to establish the customs union?Experience of the European Communities (Central American Subregional Meeting, May 2-3, 2005) Prof. Elżbieta Kawecka –Wyrzykowska Warsaw School of Economics, Poland

2. Contents 1.Definition of CU 2. Common customs tariff (CCT) 3. Other barriers on imports 4. Trade coverage of the CU 5. Trade liberalization in the CU 6. Rules of origin 7. Experience of Poland joining the EU 8. Institutions and their objectives

3. 1. Definition of CU According to GATT, a CU means: • the elimination of substantially all tariffs, and other forms of trade restrictions among the participating countries, • the establishment of uniform tariffs and other regulations on foreign trade with nonparticipating economies.

4. 2. Common customs tariff (CCT)2.1. Height of tariffs • Two criteria affect the level of CCT: • the GATT rule “the duties and other regulations of commerce … in respect of trade with contracting parties not parties to such union … shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce ... prior to the formation of such union”. • CCT should reflect well the pre-union level.

5. 2.2.What type of average tariffs? • All types of arithmetical averages have some shortcomings. • For measuring the “effectiveness” of tariffs, the unweighted average of duties is superior to their weighted average. • In the EC - an un-weighted average, in force on Jan.1, 1957, adopted.

6. 2.3. Decision on the basic duties • More arguments are for the applied duties than for the conventional duties. • The applied duties represent the actual burden of the duty for partners (and protection for domestic producers). • Applied duties were adopted by EEC.

7. 2.4. Length of transitional period • Transitional period - to lessen adjustments for domestic producers. • Its length and stages should take into account the level of national tariffs, their disparities, the size of the CU. • New, uniform, duties can be set up according to a common timetable or differently for the groups of products.

8. 2.5. CCT in the EEC: • For products on which the duties did not differ by more than 15% in either direction from the duties in the CCT, the CCT duties were applied at the end of the fourth year. • In other cases, the difference in duties was reduced – also after 4 years - by 30% . • At the end of the 2nd stage (in 8 years) this difference was again to be reduced by 30%.

9. Other reductions were negotiated. • The Commission could postpone the lowering or raising of duties. • Another option - several parallel timetab-les of tariff changes, based on the dispari-ty of customs duties (shorter transitional period for duties of similar level).

10. 3. Other barriers on imports from the third countries • GATT: “...substantially the same duties & other regulations ... are applied to trade of territories not included in the union”. • Barriers before CU - abolished or unified. • Trade regulations & procedures - unified. • For trade regulations, WTO agreements -a basis for common laws; for trade procedures – the EU Customs Code is a good example.

11. 4. Trade coverage of the customs union • GATT: CU covers “substantially all the trade”. So not necessarily all the trade. In the EEC, the CU applied to all goods. • The customs union operates easier & more efficient (less risk of counter-feiting) when it covers 100% of the trade. • The enabling clause - exceptions for less developed members of GATT.

12. 5. Liberalization of trade in the CU5.1. Elimination of customs duties • Members refrain from introducing any new customs duties . • Customs duties are progressively abolished. • Reductions of national tariffs in the CU can be in equal or very different installments, depending on the level of the basic duty rate, the sensitivity of a product etc.

13. 5.2. Elimination of other barriers to mutual trade • Detailed commitments in this respect have to be negotiated among the CU members. • They have to take into account the restrictiveness of individual barriers. • Such barriers should also be eliminated progressively.

14. 5.3. Experience of the EEC • 3 stages of the elimination of intra-duties. • The first reduction was to amount to at least 25% of the basic duty and the reduction at the end of the second stage - to at least 50% of the basic duty. • On 1 July 1968 free movement of goods was achieved, although only partially. Other trade obstacles were far from gone.

15. 5.3. Experience of the EEC • Internal controls - eliminated only on 1 Jan. 1993 and the EC forms one single frontier-free area for flow of goods (also for free flow of capital, persons and supply of services). • Elimination of internal frontiers required a lot of additional harmonization. • Still possible prohibitions on imports (exports) - on grounds of public morality, protection of health and life of humans, animals, etc.

16. 5.3. Experience of the EEC • Common rules on checks for confor-mity of products from third countries with the intra-EC rules on product safe. • Identical foreign trade procedures. • Close cooperation of national adminis-trations - to prevent infringements of customs rules for access to EU market.

17. 6. Origin of goods • Rules are used to determine when goods are entitled to trade preferences. • They are also necessary when different treatment for third countries is offered. • Also - to determine quota eligibility. • None method to determine origin has proved totally satisfactory.

18. 7. Experience of Poland joining the CU of the European Union • Elimination of barriers in trade Poland - EU relatively easy – due to free trade area negotiated in the 1990s with the EU. • No transitional periods on CU. • Harmonization of Polish law with EU law - achieved long before accession to EU (due to Poland’s participation in WTO Uruguay Round and due to FTA with the EU).

19. 8. Institutions, their objectives • An institutional system is necessary for common trade policy formulation, coordination and implementation, e.g. to take decisions on: • monitoring the CCT and other trade instruments, • participation in WTO multilateral negotiations.

20. 8. Institutions, their objectives • In the EU, a permanent executive body is the European Commission. • Main powers of the Commission: • proposals on secondary legislation, • ensures proper functioning of the EU secondary legislation, • administrates the EU legislation,

21. 8. Institutions, their objectives • is responsible for the administration of the EU budget, • represents the EU in third countries, • is appointed by a common accord of EU members, • has to be completely independent, • acts in the EU interest.

22. 8. Institutions and their objectives • Council of the EU consists of represen-tatives of members states (ministers), • is the main decision-making body, • adopts the laws (in many cases - jointly with the European Parliament), • meets regularly, usually every month or more often, if necessary.

23. 8. Institutions – voting system • European Commission works on the basis of simple majority voting. • In the Council - three voting systems: unanimity, simple majority and qualified majority of votes (QMV). • Weights - based mostly on the number of population of member states.

24. 8. Institutions – other issues • Efficient system of disputes settlement necessary: based on WTO mechanism or performed (as in EU) by an independent Court of Justice). • Financing mechanism necessary, e.g. based on GNP payments (percentage of GNP of each country equal the share of a country in total GNP of the CU).

25. 9. Lessons • 1. The EU experience is that CU itself does not guarantee the elimination of intra formalities; attempts are to replace the abolished barriers by new restrictions. • 2. Only the common market offers the chance to eliminate all intra-barriers.