Chapter 15

The EU: A Full-Fledged Economic Union

*1. Market access*: Tariffs and most nontariff barriers have been eliminated *2. Common market*: Barriers to cross-border movement of production factors—labor, capital, and technology *3. Trade rules*: Cross-national customs procedures and regulations have been eliminated, which has streamlined transportation and logistics within Europe *4. Standards harmonization*: Technical standards, regulations, and enforcements have been harmonized *5. Common fiscal, monetary, taxation, and social welfare policies*: is the ultimate goal over time

The European Union Today

*28 members* -Croatia became the 28th member of the EU on July 2013. -Founders members are Belgium, Italy, France, Germany, Luxembourg, and the Netherlands -18 countries in the euro zone. Lithuania joined January 2015 *New members such as Poland, Hungary, Czech Republic - are low-cost manufacturing sites* -Peugeot, Citroën (France) - factories in Czech Republic -Hyundai (South Korea) - Kia plant in Slovakia -Suzuki (Japan) - factory in Hungary

Free Movement of People

*All EU residents have complete freedom to travel, work, study, and live in another member state*. -Some preconditions, like local registration, in 1st 5 years -General rule: should receive equal treatment with natural citizens -*Schengen Agreement* = no border checks

Trans-Atlantic Trade and Investment Partnership

*Ambitious aim to cut non-tariff barriers, liberalize trade in services, and harmonize regulations* *Goals*: 100% reduction in tariffs 25% reduction in nontariff barriers -London's Center for Economic Policy Research estimates deal could equal $150 billion a year increase in EU economy, $122 billion US. -Original goal = November 2014 -Round 12 in Brussels Feb. 26, 2016

Free Movement of Services

*Core principles of the Single Market for services* -The *freedom to establish a company in another EU country* (Article 49 TFEU) -The *freedom to provide or receive services in an EU country* other than the one where the company or consumer is established (Article 56 TFEU). *Services Directive of 2006* -The general Directive covers services activities accounting for 46% of EU GDP, including in sectors like retail, tourism, construction and business services. -In addition to the Directive, a number of sector specific laws provide the rules for financial services, transport, telecommunication, postal services, broadcasting and patient rights.

Product Standards

*EU goal to have one unified system of essential standards on health, safety, environment and consumer protection, not differing national ones* Goods that meet EU standards will bear a "CE Mark" and can be freely traded, independent of national product standards and testing rules. Manufacturers will self-certify. -About 150 common standards being produced each year -Directives have been issued already on toys, construction and electromagnetic compatibility (Council Directives 88/378, 89/106 and 89/336) -Example - Toy directives. http://ec.europa.eu/growth/single-market/european-standards/harmonised-standards/toys/index_en.htm *US companies complain they have little influence on product standards to which they must conform to sell freely in EU.*

Free Movement of Capital

*Efforts to integrate free flow of capital include the European Central Bank and the "Euro."* Euro introduced in 2002 when national currencies were retired and replaced -14.25 billion new euro notes were printed and 50 billion coins -Opt outs include UK (pound), Denmark (kroner) and Sweden (krona), among others

Four Institutions that Govern the EU

*European Council* - Heads of State or Government of the EU Member States *European Commission* - represents the interests of the EU as a whole. *European Parliament* - represents the EU citizens and is directly elected by them. *The Council* - represents the governments of the EU Member States. *Court of Justice* *European Central Bank*

The Council

*Role*: Deciding on policies and adopting legislation *Members*: One minister from each Member State *Location*: Brussels and Luxembourg *The main decision-making body, it decides on economic policy, budgets, foreign relations, and admission of new member countries.* Also called the *Council of the European Union*

The European Council

*Role*: Defines political direction and priorities. *Members*: Heads of State from each Member State, the President of the European Council, and the President of the European Commission *Location*: Brussels

European Parliament

*Role*: Directly elected legislative arm of the EU. Devise EU legislation, supervise EU institutions, and decide on the EU budget. *Members*: 751 elected representatives who meet in session every month. *Location*: Strasbourg, Brussels, Luxembourg -Only positions elected by European citizens. -Each state elects a certain number based on population w/total max = 751 -5 yr terms -Control over immigration, some law enforcement, some trade policy and agriculture, -approves EU BUDGET -Parliament assent is required for many international agreements -Elects President of European Commission

The European Commission

*Role*: Executive arm of the EU that proposes laws, policies, agreements and promotes the Union. Responsible for implementing decisions of the Parliament and the Council. *Members*: One Commissioner from each Member State *Location*: Brussels -Headed by President elected by Parliament. -Current = Jean-Claude Juncker -Over 25,000 civil servants on payroll.

European Court of Justice

*Role*: Interprets and enforces EU laws and settles legal disputes between member states. Rules on how to interpret EU law. Ensures EU countries apply EU law in the same way *Members*: 28 independent, appointed judges, one from each country, sitting in chambers of 3-5 usually *Location*: Luxembourg *National courts are obligated to follow EU law and the ECJ decisions (similar to precedent of US Supreme Court)*

European Central Bank

*Role*: To manage the euro and euro area monetary policy, promote price stability, etc. *Members*: Euro area national central banks *Location*: Frankfurt, Germany

Harmonization: Directives & Regulations

*Treaty of Rome* identifies four principal means to harmonize laws: -Regulations -Directives -Decisions -Recommendations -Opinions *Supremacy Doctrine*: similar to US federal and state law—*EU law is superior to laws of member state in areas where integration has occurred*. -EU law takes precedence. -A "*regulation*" is a binding legislative act. It must be applied in its entirety across the EU. (art. 249 EC) -A "*directive*" is a legislative act that sets out a goal that all EU countries must achieve. However, it is up to each country to devise its own laws on how to implement this. (art. 249 EC) -A "*decision*" is binding on those to whom it is addressed (e.g. an EU country or an individual company) and is directly applicable. For example, when the Commission issued a decision fining software giant Microsoft for abusing its dominant market position, the decision applied to Microsoft only. -*Recommendations and opinions* have no binding force. They allow the institutions to make their views known and to suggest a line of action (recommendation) or to make a statement (opinion) without imposing any legal obligation on those to whom it is addressed.

EU Challenges

-Agriculture/ food safety: GMOs, pesticides, chlorinated chickens, geographic indicators -"Buy American" rules in government contracting -Different car safety standards -Ukraine situation; relations with Russia -Revelations about American espionage activity -Lots of veto players-US Congress must approve; Council of EU and Parliament must approve.

Implications for the Firm: Rationalization of Operations

-By restructuring and consolidating company operations in the EU, managers can develop strategies and value-chain activities suited to the region as a whole, not just individual countries. -Goal is to cut costs and redundancy, and increase efficiencies via scale economies. -Firms centralize production and marketing, instead of decentralizing them to individual countries.

TTIP: Why Now?

-Counterbalance to growth of BRICS. -EU-US agreement would set global regulatory standards. -Collapse of Doha Round is leading to more regional FTAs and potentially a more fragmented global trade system.

EU: Off the Table

-Data privacy -Audio-visual: France has "cultural exception" limiting # of Hollywood movies shown there to protect subsidized domestic film industry. France threatened to veto TTIP negotiations unless audio-visual services were excluded. -Financial Services (although US may be softening on this topic) -Intellectual property harmonization

Implications for the for the Firm: Trade Barriers

-Factor tariff and non-tariff trade barriers into any international business strategy. -This will impact cost and return on investment. -NAFTA partners Mexico and Canada have FTAs with the EU already. -US firm can export from these countries to the EU and pay reduced tariffs or duty free.

Implications for the Firm: Regional and Marketing Strategy

-Firms cut costs by standardizing products and services. -It is easier and much less costly to make and sell a few product models rather than dozens. -An economic bloc facilitates the standardization of products and streamlining of marketing activities because member countries tend to harmonize product standards and commercial regulations. -J. I. Case Company once produced seventeen versions of its Magnum model of farm tractors to comply with varying national regulations regarding the placement of lights, brakes, and other specifications. -The harmonization of EU product standards allowed the firm to standardize its tractor and produce only a handful of models appropriate for serving the whole EU market

WTO Exceptions: Custom Unions and FTAs

-GATT Art. 24 states *"the provisions of the Agreement shall not prevent...the formation of a customs union or free trade area."* -The *EU is a customs union* and it has FTAs with many countries in the world, including Canada and Mexico.

Testing

-Main concern of North American companies is recognition of US, Canadian and Mexican tests because often must have product retested to sell in EU. -EU is working on EU testing standards for testing and certification under common rules and procedures and to recognizing *"equivalent technical regulations"* of other nations.

Free Movement of Goods

-Member states have eliminated customs duties among themselves. Article 30 TFEU -Quotas on trade between member states are also prohibited except in emergency and other limited situations. Articles 34-37 TFEU -The right of free movement applies to goods that originated in the EU and to those that have lawfully entered it. Articles 28-29 TFEU TFEU = Treaty on the Functioning of the EU

Measures of Equivalent Effect

-Member states have not just eliminated tariffs and quotas, but also agreed to eliminate 'measures of equivalent effect'. Articles 30, 34-35 TFEU -Interpreted by European Court of Justice and the Commission to prohibit administrative fees at borders; country of origin or 'foreign origin' labels; minimum and maximum retail pricing controls; requirement of local manufacturing, etc.

Harmonization Principles

-Once adopted, harmonized standards must be followed. -But some directives contain a list of options from which member states may choose when implementing which leads to different national laws on the same so-called harmonized subject. -Plus TFEU allows member states to adopt laws that are more demanding. -So harmonization is often less than complete

Conclusion

-The EU and NAFTA have stimulated many regional agreements and free trade areas that are increasing trade and economic development. -In 1990, there were about 50 regional economic integration agreements. -Today there are over 400.

What is the level of trade between the EU and the US? What FTA's exist?

-The EU and the US have the largest trading relationship in the world, accounting for ~ 1/3 of global trade and ~ 50% of global GDP. -The US and EU are each other's largest trading partners- ~$2.6 billion in goods and services exchanged each day. -In 2012, EU-US trade in goods alone was over 500 Billion euros.

Common Tariff System

-The EU has established a common customs tariff for its trade with the rest of the world. -Articles 206-207 Treaty on the Functioning of the EU (TFEU) -Tariff rate and customs duties will not change, regardless of port of entry, but other factors may influence decision. -The customs agencies of each member state administer the regulations which can result in different classifications and valuations for the same item of trade.

Court of Justice Cases re Article 36

1. Can Britain seize pornography from Holland based on public morality? Inflatable sex dolls made in Germany which could lawfully be made in Britain? -Britain may seize pornography from Holland based on public morality but not inflatable sex dolls made in Germany which could lawfully be made in Britain. 2. Can Germany stop the importation of Heineken beer from Holland because it fails to meet German purity standards? -Germany cannot stop the importation of Heineken beer from Holland because it fails to meet German purity standards. 3. Can Italy block pasta made from common wheat instead of durum wheat? -Italy cannot block free trade in pasta made from common wheat instead of durum wheat. 4. Can France continue a public health ban on UK beef imports after the EU Commission decided to return to free trade following the 'mad cow' outbreak? -France could not continue a public health ban on UK beef imports after the EU Commission decided to return to free trade after the 'mad cow' outbreak.

Ordinary Legislative Procedure

All three major institutions are involved in making EU law - "*ordinary legislative procedure*"

The Problem of Nontariff Trade Barriers

Nontariff trade barriers remain the biggest barrier to trade within the EU Article 36 TFEU permits national restraints on imports and exports on the grounds of: -Public morality, policy or security -Protection of health and life of humans, animals or plants -Protection of national treasures with artistic, historical or archeological value -Protection of industrial or commercial property

The European Union and the Regulation of Business: The Four Freedoms

Refers to a body of law originating in the Treaty of Rome: -Free Movement of Goods -Free Movement of Services -Free Movement of Capital -Free Movement of People.