CUSTOMS UNION: PROTECTING TRADE TO WHAT EXTENT?
Introduction
Oftentimes, informal discussions about customs union are tackled in diverse and unframed arguments that make the view on its protectionist stance among members, technically speaking, in a misleading approach. Some would say that it protects the consumers or producers, others say protection is biased to rich countries in the union while few generalists would say the system is inefficient. They almost arrive at an appropriate answer but not quite in strict economic sense. In view of this, we will try to achieve academic-based finding in order to provide academic, may also relate to appropriate, resolution to the problem in question. Presented in the paper are definitions of key terms, evaluation of an example of customs union (which the oldest in the world) and laying the academically contemplated answer.
Customs Union Defined
Customs union is the third of the six stages of economic integration* among participant countries. The purpose of which is to increase economic efficiency and create political and cultural relationship among members*. It adheres to the principles of free trade area, wherein tariffs, quotas and preferences are eliminated to some/ all goods, within a pact that prohibits a member to export imported goods from non-member countries charged at lower tariffs (to win trade) and then re-export the goods without transformation in a zero-tariff customs union. Also called common external tariff, this mechanism of an upgraded free trade is aimed to make a fair trade to union members, that is, economic benefits of one (earnings on mark-up from the unknowing member) would not result to economic costs of the other (inferior quality, relatively unattractive prices in the world market)*.
Protectionism Defined
Protectionism is the reverse of free trade that restrains the flow of goods from one economic locale to the other by installing unattractive policies on tariffs, quotas and preferences to an outsider*. It is a policy that aims to protect and support economic insiders/ members from adverse consequences of the pre-determined unhealthy competition from outsiders like dumping practices*. It adheres to the importance and benefits of positive trade balance and import substitution* that can be supported by operating in a national level or transactions within trade members. Protectionism can be approached as modern and traditional. As the former set up tariff level to imported goods as to encourage local consumers to patronage the more competitively priced insiders’ goods, the latter do the same for the different purpose of lessening the tax burden of insiders offset from designed collection criterion against outsiders*.
Initial Evaluation from Definitions
To appreciate relationship analysis between customs union and protectionism, it is helpful to mention that customs unions are bargained through pacts and treaties among member countries as to stimulate economic advantages (gain; good to better) and support economic deficiencies (mitigate; bad to good) through reconciliation. Obviously, no country will enter membership if costs outweigh benefits in aspects of economic, political and cultural issues. With settled and reconciled provisions, economic agreement in customs union would not only reflect national but also union welfare. In this veil, it can be argued that the concept of protectionism is resolved while continuous national and union reviews/ amendments are certainly conducted to satisfy changing environment and economic goals of individual members or union itself. Thus, the concept is also maintained.
Further, the limited scope of customs union to mirror the optimal protectionist feature of completed economic integration should be noted. The protection is focused on the quantity of goods entering the member countries from members and non-members while there is no particular concern to quality of goods and currency exchange risks that indicates members’ minimal dependence/ contribution to the others or the entire union. And so, there is an apparent limitation as to protect positive trade balance (a member might not produce quality goods or possess strong currency leading to higher prices that may not attract other members) and import substitution (the in-need cost-driven member would lead to resort to non-member goods). As a result, provisions protecting members might be repealed or be made flexible because of its adverse effects to quality and price demands of others.
Lastly, the consequences of protectionism can be viewed in union and national level wherein trade-offs could ensue. This could happen especially when technological advancements in one member have produce goods similar or superior against those within the union. Of course, the idea of trade unionism is for members to maximize their welfare, that is, the absence of absolute advantage in one can be outsourced by transacting with the potent other. Middle East countries largely derive their gross domestic product (GDP) in oil industry while food and other agricultural suppliers are basically coming from other countries. As a result, it can devote its resources and labor to such activity but still able to acquire other necessary goods. For its part, customs union has its own group objectives reflective of the pact’s protectionist provisions. When a member withdraws support to one (thus, protecting its national welfare), it would create imbalance in the union system that could make it vulnerable against outsider’s infiltration.
The Southern African Customs Union (SACU) Test Analysis
It is the oldest customs union in the world created in 1969 (replaced 1910 union pact) and composed of Botswana, Lesotho, Namibia, South Africa and Swaziland*. It resembles our definition above on customs union and traditional protectionism since non-member exports are obliged to pay a levy for the purpose of member-state revenues. The proceeds are kept by South Africa and later distributed to the respective government of the members*. Although, there is a questionable equity of the proceed sharing as South Africa’s share is not computed but is obtained on the residual (the proceeds net after other member’s computed share is exhausted). This information could be one factor that sparks the amendment of the trade pact in 1994* about proceeds sharing.
The SACU maximizes the competitive advantage of member countries as to support continuous economic exchange. South Africa as the coordinating country within the union is fitting due to its relatively earlier independence from colonization* making it more adapted and resistant to economic problems, thus, more able decision maker of resource allocation. In addition, it is more advanced and developed* compared to other member-countries particularly in terms of infrastructure* that suit movements of goods. On the other hand, other members who has limited experience about the consequences of being autonomous, as most of them achieved independence at least on 1960s*, are bounded with flourishing natural resources like diamond, minerals, agricultural products, water, energy and labor* that are tradable within themselves and the relative economically developed South Africa. Thus, members enjoy the optimal benefits of their resources wherein exports provide a large share for their respective country’s GDP*.
Also, the union protects members to secure government funding to address local issues in public welfare. As the economy of members, except maybe South Africa, can only do limited economic activities due to underdevelopment*, crisis in education, health and security could occur. Since these issues are chained in a vicious cycle, undermining the importance of one (education) can aggravate the situation of the other (sexual intercourse incidences leading to proliferation of AIDS). Worst, the effects would unravel at times when exports are in low quality or import orders are minimal. Being a member in the union safeguards their future funding to address such needs because there is a sure importer of their produced. In reverse, however, being an independent economic entity in the world market, importers could act opportunistically against their products or show a pattern of intermittent importation that leads to detrimental effects on local spending and making it impossible to save for emergency situations. The union provides a venue of exchange and measurable country share of SACU revenues for their governments to effectively govern and serve its constituents.
Finally, cultural differences and discrimination are non-factors to consider in the effects trading that even concretize harmony and flexibility among members. Perhaps this could have a far-reaching impact than any other motivational returns achievable in customs union. Although several parts of the world exhibit national integration for focused modernization, South Africa remained culturally diverse with at least five major ethnic groups* in the region alone. It is an indication that traditional beliefs, religion and customs are emphasized and protected in the local and national level. In an illustration, incidences of aborigine farmer murders by commercial white farmers happened that is said to be culturally motivated*. To minimize and avoid these incidences, SACU tighten countries around South African economic jurisdiction, since it is relatively economically independent and operates one of the world’s top stock exchanges, for members to easily bear conflicts and resolve policy differences.
Findings
The purpose of customs trade is inter-member economic efficiency and socio-political harmony. In reverse, protectionism, in strict economic sense and according to our definition, aims for effective (opposite of unhealthy) competition for the purpose of positive trade balance and import substitution. But the question is: is it possible for a unionized economy to obtain efficiency (let us dropped the cultural and political factors because of their intricate nature to resolve their purposes) by discriminating (restrictive trade barriers) non-member imports and internalizing economic activities? For the purpose of our discussion, let us view efficiency as optimal allocation and acquisition of union resources to achieve development across member-countries.
Except for some parts of South Africa, the whole union is inefficient in using information technology to modernize its economy. Instead of developing this undermined area, the focus of members is to improve the factors of production applied in their respective competitive advantages (diamond mining, mineral exploration, agricultural cultivation). However, by limiting their inputs to traditional means to arrive at dynamic and unpredictable ends, speedy and effective resolution of member issues serves as untapped dogma to eradicate health and poverty problems. Of course, they are supplied through importation by advanced countries and benefited at both ends: technology transfer and revenue generation through high tariffs. However, maintaining the union system of focused production could lead to low tech intellectual capital and offer efficiency of acquired technology for the limited few, possibly concentrated on metropolitan areas in South Africa.
The second question is: would the union model provide positive trade balance and import substitution options to members? Positive trade balance is relatively easy to obtain when the economy is under control. However, the optimal level could not be realized or determined partly due to being risk-averse of the insiders of a possible undue non-member competition. With this approach, import substitution is unthinkable for products such as computers, cars and other high end commodities. As a result, the union remains dependent on the world economy including its risks, although in a calculated and conservative manner. In effect, sub-optimal result of trade balance and exemption of independent goods are the limited gains and policies attributable and affordable to the union. Beyond that, it should adapt some form of universal unionism to be able to lure foreign investments to overcome the boundaries that impede its full realization of the benefits of its natural resources and capabilities.
Lastly, could a competition-averse economy obtain efficiency? A competitive market structure is often referred to as the most efficient structure among the four common types. In contrast, monopoly is a price-maker that could not weaken purchasing power of consumers but also require additional monitoring costs from the government. Oligopoly can also exhibit the monopolist actions that could even produce more aggravation since producers are manipulating the price in orchestra and makes it difficult for the state to determine economic resolution. SUCA consumers can be supplied with inferior goods and may have little product choice to rationally allocate their resources depending on their purchasing power. The union would generalize that poverty covers all walks of life that supplying inferior goods is justified. Without international competition of the union produce, quality and resource control is likely be undermined by member producers due to poverty given issues while commodities are heavily viewed according to price and conceived continuity of endowments. As a result, resources are depleted (misuse of land leading to environmental degradation) while people are phased sub-optimal lifestyle (uneducated, non-resolution of AIDS problem).
Direct Attack to the Question: Are Customs Union Really Protectionist Device?
Yes, if the bargain states that restrictive trade policies against outsiders are limited to competitive advantages present in members. In this way, only those goods that connote unhealthy competition to the union, because they only serve as substitutes that could exhibit dump prices/ inferior quality, are discourage to enter the trade zone. As a result, technological advancements in the world market can be integrated in the union economy fostering efficiency, positive trade balance and import substitution, although not all of these are attainable at the present time because infrastructure development and societal upheaval are prerequisites, in the long-run success of union objectives.
Yes, if performance evaluation of union results are bounded and not overestimated as to undermine its protectionist feature. When a certain economic policy is instituted by a group of interrelated and culturally homogenous countries, economies of scale is a benefit that is easily decipherable in the making. However, differentiation and quality in production is questionable that expecting too much of the created union’s efficiency and positive trade balance especially in the national level can lead to hopelessness. Consumers might be forced to see themselves as government’s partner to solve economic problems that depriving them of these product features is generally acceptable. On the other hand, viewing them as full-time clients, the union must open their borders (thus, eliminating protectionism) to entertain a wide-array of similar products/ services although customized in their inherent attributes.
Yes, if the union promotes equality with regards to individual member voice and effectively blending its stand against the voice of majority for the benefit of the whole union. At some point in time, one country in the union might think of diversification of producing a good that is already monopolized by most of the members. It has the technology (diamond detector and refinery) and support of the government including foreign investors that implementation can create local jobs and improvement in trade balance. As a result, friction would ensue between the welfare of one nation (that possibly eager to end poverty and stop health impediments) and the welfare of the existing manufacturing-nations. In view of this, only a good decision maker can leverage short- and long-term benefits to keep economic dependence and socio-political ties of the conflicting members.
Yes, if cultural and political beliefs of the union does not impede the attainment of economic gains due to the sole threat of foreign influence. Since protectionism is bias to economic side of trade, avoiding competition from fear of cultural imperialism of insiders minimizes its economic significance. It is concern to increasing trade balance and protecting the local economy although it can be argued that shaking the culture could result to negative trade result (costs of war and shift of public motivation to work thus higher labor costs), therefore, adding worth to the existence of union. However, replacing the rationale of being competition-averse of the union due to cultural protectionism alone is bound to defeat the restrictive outsider policies in economic protectionism.
Conclusion
To determine if customs union is really protectionist device, there is a need to define the meaning of key terms, identify the causes of disturbance or variables that may affect our answer, use a platform for analysis (SACU), enumerate findings that reflect enlightenment that supports / disputes the earlier identified variables, and attack the question based on the major discoveries. Our situational and indirect answer gives us the idea that customs unions vary in the level of protectionism enjoyed/ suffered by member’s) depending on the flexibility of union trade provisions, extent of similarities/ differences of economic policies of members in their nations and the extent of cultural and political dominance (that are commonly shared and protected) over economic gains lingering in the world trade arena and globalization.
Credit:ivythesis.typepad.com
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