Completing the European Internal Market: Some Notes on Trade Policy

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 of abolishing both Article 115, which prevents trade deflection, and Monetary Compensatory Amounts on agricultural trade are examined. National production subsidies are examined in the context of the free intra-EC mobility of capital and skilled labour. 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.