Thursday, November 21, 2019

Gino Gancia, Giacomo AM Ponzetto, Jaume Ventura      
CEPR DP No. 14121 | 15 November 2019

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. This is due to differences in economic size and factor endowments that can trigger disagreement over the value of unions between and within countries, as well as the growth of trade between countries that are increasingly dissimilar. 
These are the conclusions of a new CEPR study by Gino Gancia, Giacomo Ponzetto and Jaume Ventura, who have developed a theoretical framework to study the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Among the findings:

  • Political support for international unions can grow with their breadth and depth, as long as member countries are sufficiently similar. 
  • But support for international unions can become weaker as member countries become more dissimilar in terms of economic size and factor endowments. 
  • An intra-union pattern of comparative advantage due to differences in endowments increases the value of the union but it also creates winners and losers. This redistribution may undermine support for the union even when the country as a whole would benefit from membership. 
  • Differences in economic size imply that in the presence of any cost of integration, larger economies would prefer a shallow union, while smaller ones prefer deeper integration.
  • If disagreement over the value of a union is between winners and losers within countries, domestic redistribution may suffice to solve it.
  • It is possible that some countries lose as a whole from further integration. If then the disagreement is between countries that differ in size and income, solving it requires some form of international redistribution. This may be more difficult to achieve, given that such policies tend to be politically costly and hard to implement.
  • Despite the prominence of migration in media and political narratives, in 2017 only 3.3% of EU citizens were living in a country other than their country of citizenship – very small numbers. In contrast, intra-EU trade in goods (19.6%) and services (7.4%) add up to 27% of the total GDP of the European Union – which are not small numbers. Clearly, we still live in a world in which trade in goods and services is quantitatively more important than migration.

The expansion of the World Trade Organisation (WTO) from 23 to 164 countries, the enlargement of the European Union, especially after 2004, the rise of China and the emergence of global supply chains have all fostered trade between an increasingly diverse set of countries. While all these phenomena raise the potential gains from trade, this study shows that they may also undermine the political support for the process of economic integration.

Figure 1: Perceived benefits from EU membership. 

Note: Shares of responses to the question: “Taking everything into consideration, would you say that (your country) has on balance benefited or not from being a member of the European Union?” Source: Eurobarometer.

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