Re-Union

The story is simple but the age is as much complicated as much developed it is. This tale is a tale of some island’s union which they have made a

great progress in political and economic relationships between each other, said in other words they are trying to act as one. Their union is

unique of its kind. This union has make big steps forward to a greater future where we can highlight the FTA (Free Trade Agreement), it worth’s

to mention that there are affords to bring this agreement in a world level.

So let we focus a little bit what this agreement is and its effects in countries economic profiles. The aim of this treat is to provide removal of any

barriers, taxes, tariffs, quotas or any other governmental restrictions on international trade which would allow the involved countries to more

easily exchange particular commodities.

For the most part free trade is considered a good thing because the lack of trade barriers makes exportations easy and relatively inexpensive. In

one hand countries can focus its resources more efficiently and achieve a higher real income. In the other hand despite the overall benefit of

free trade to a nation’s economy, there can be some significant disadvantages to the establishment of free trade agreement. So let we take

them one by one advantages and disadvantages of FTA in nation’s economy:

1. Advantages

i. Increased production

Free trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to production.

ii. Production efficiencies

Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity of goods.

iii. Variety of goods

Consumers with FTA they would have the chance of choosing between plenty products.

iv. Benefits to consumers

With the move of the tariff levels now the products will be cheaper for consumers to buy.

v. Employment

Employment will increase in exporting countries, as much they export as much jobs will be created.

vi. Economic growth

The countries involved in free trade agreement rising their export is related to jobs that will be created, with this new created jobs in economy

the unemployment will be decreased which occurs to rising living standards, increasing real incomes and higher rates of economic growth.

vii. Foreign exchange gains

When involved countries exports it receives foreign currency from the countries that buy the goods.

2. Disadvantages

Although FTA has benefits, there are a number of arguments which oppose free trade. These include:

i. Competitive environment

Obviously with no short-term protection policies by governments, domestic companies will be unable to competitive large and multinational

companies due to lack of capital. Even the grant programs offered by EU to SME’s didn’t have too much positive effect on SME because of

overdue bureaucracies and not established human capital in this firms.

ii. Expense

Even though free trade is primarily meant to lower costs on items, it can actually end up being quite expensive. There are complicated rules and contract conditions that go into the making of free trade agreements to protect the interests of the countries involved. As such, there is usually the need to establish several committees. For example, the NAFTA agreement involved a contract that was more than 1,000 pages long and more than 25 committees. In essence, free trade can be resource intensive, requiring multiple agreements, ways of enforcing rules and compliance among the partner countries.

iii. Depend on global market (link effect)

Free trade can also increase domestic economic instability as the local markets become depend on global imports. It basically decrease the self-sufficiency of a nation, so crisis in one our partner trade country can affect the economy in home (other) country. E.g. Recession in country “A”

leads to decreased demand for “B” country’s exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment.

iv. Unemployment

With FTA moving the barriers of trade, the will of investor to invest in other countries will be decreased, domestic investors being unable to competitive large multinational companies which leads to rising unemployment.

The best example of this it will be EU, European Union is one of the firsts who applied the free trade agreement with the countries that join in. Not as it is spoken joining EU it will bring drastic economic changes but indeed nothing to be felt. In essence inside EU are created two poles “sellers and buyers”.

It worth’s to have a look on unemployment rate and import/ export relation of some countries after they join EU:

Exports of goods (billion $) Imports of goods (billion $) Unemployment %

2009 2010 2011 2009 2010 2011 2009 2010 2011

Austria 1995 131,4 144.9 … 136.4 150.6 … 4.8 4.4 4.1

Belgium 1952 370 411,1 477,9 351,8 390,1 465,2 7,9 8,3 7,2

Estonia 2004 10,4 12,8 18,2 11,4 13,2 18,8 13,8 16,9 12,5

Finland 1995 62,9 70,1 78,8 60,9 68,8 83,8 8,2 8,4 7,4

France 1952 464,1 511,7 581,5 540,5 599,2 700,9 7,8 9,8 9,7

Hungary 2004 82,6 94,7 111,1 77,3 87,4 101,5 10 11,2 10,9

Ireland 1973 116,9 118,3 129,3 62,6 60,5 67,1 11,9 13,7 14,4

Italy 1952 406,7 446,8 523,2 414,7 486,6 557,5 7,8 8,4 8,4

Luxemburg 1952 13,9 16,3 13,7 20,4 26,0 24,0 4,6 4,8 5,1

Poland 2004 136,6 157,1 183,3 147,1 171,4 203 8,2 9,7 9,7

Portugal 1986 43,4 48,8 58,9 69,9 75,2 80,3 9,6 11,0 12,9

Slovakia 2004 55,6 64 78,5 55,2 64,4 76,7 12,1 14,5 13,6

Slovania 2004 22,3 24,2 28,5 23,8 26,4 30,8 5,9 7,3 8,2

Spain 1986 223,1 247,6 ---- 287,5 318,2 ---- 18,0 20,1 21,6

EU entryCountry

As it is shown above the free trade apply hasn’t been so effective in economic heeling of these countries, we still aware an unemployment rise

year by year. According to export-import relation most of the countries which are involved in free trade hasn’t been so successful in managing

the balance between imports and exports so the rise of exports it didn’t help the countries to heel unemployment, the inverse we may see in

Austria but according to IMF statistical data base in 2012 unemployment has been rise to 4.33% from 4.20% in 2011 even with an increase of

exports by 0.447%.

v. Sending backwards to Mercantilism

Mercantilism is a national economic policy that aims that a nation benefits by accumulating monetary reserves through a positive balance of

trade, for sure not all the countries can achieve a positive trade balance due to many reasons (e.g.: lack of capital).

vi. Using cheap labor

Large multination companies it will want to produce their goods in countries which can provide cheap labor therefore it will affect the home

country on unemployment. A rise in unemployment will lead to a reduce on purchasing power which it means a decrease on demand which it

will be follow with an decrease in supply and this decrease in offer leads to re-unemployment increase till the government will interfere in

market with:

Decrease in taxes --- which it will reduce the government revenues but it will be an increase on purchasing power so the firms will

increase the offer in this context demand and supply has become equal which it means a rise in consume tax revenues for the

government. The main problem it may come from the decrease of government revenues which it will lead to a decrease in public

expenditures follow with a decrease in investments. Even using debt as a tool to finance the public expenditures it will help to keep

economy in feet but what if this public expenditures doesn’t come back as we planned we will go back to tax rise because of debt

burden rise which it needs to be paid back. All this means we were played by circle going from A-Z and from Z-A.

Decrease in public expenditures --- as it was explained above.

vii. Losses on tax contributions

Removing the costume tariffs and making more easy exports and imports which mutually it will decrease the will to invest in other countries

which it will fulfill the markets with plenty different products. Here is the problem that it comes out in losses of tax contributions in countries

where products are sold. E.g.: a) - If one product is sold in the same market that is produced, the effects on economy and government revenues

as below:

Tax corporation

VAT

Profit tax

Income tax ( tax taken from employees )

10% of profit kept inside the economy where is invested by foreign investor

Inflow (foreign exchange )

Decrease in unemployment

Link effect inside the market (using the resources of the market where product is produced it will help to create domestic capital etc.)

b) -The inverse it will happen if the products will be imported:

VAT

Profit tax

Income tax

Low decrease on unemployment

Outflow

As we see in example (b) the government revenues and the effects in economy are lower than example (a), let we analyze example (b) more

carefully:

VAT – this tax will be appeared to consumers by firms which use the price mechanism, after all the real payers of this tax are only buyers

(consumer) so for firms is like a way out of being tax contributor.

Low decrease on unemployment – importer firms because of a no necessity they will just only use distribution department so it will not be a

great help on unemployment heeling and this firms do imports of plenty products not only one of them which it means they use the same labor

force for distribution.

Outflow – Capital outflow is a term that is used to describe the flow of domestic assets out of a nation and into other countries or it describes

the flow of capital that is gained from (a) nation to (b) nation homeland.

Looking carefully on FTA we realize this agreement isn’t the option for developing countries, in essence this countries are facing lot of problems

as: government expenditures rising and can’t be covered by government revenues so governments they look as the best option foreign or

domestic debt which it needs to be paid back and the ways which will be followed are raising taxes or using emission. The first one would have

affect’s on economy as decreasing the invests because the firms if they pay more taxes the will of investing will become low or this increase in

taxes would decrease the demand of goods, as much the income of consumers gets low as much they will avoid spending their part of income on

goods which in long term means a decrease in governments revenue (VTA), transferring capital out of state and unemployment rise. And

secondly using the emission as the best option to pay debt will rise the inflation which it decreases currency’s value and related to this the prices

will increase and people will avoid consuming goods so firms will decrease the production to balance demand with supply which it rises

unemployment and it brings low income into governments crate. As we see the FTA is the best option for advanced economies not developing

countries which are still in transaction. Let we have a look on some EU countries profile stats to have quite idea about the real problems which

lot of countries are coming across with:

Source: IMF, OECD

(Source: OECD)

Country

General Government Income %GDP

General Government Expenditure %GDP

Unemployment %

2009 2010 2011 2009 2010 2011 2009 2010 2011

72,2 10044,5

54,812,5 56,9 94,9 86,9

12386,3 91,7 126,3

26,3 76,262,7

97,5

47,1

48,4 66,848

88,8

69,1 99,8

41

51,2

12,4 51,4 91 77,4

99,5

85,8 71,2 127,7

26,1 71,9

58,4

93,3

40,4

44,3 62,7

51,1

79,5

72,8 102,4

0

61,8

0 0 0 0

133,6

0 0 0

30,2 82,7

0

96,8

0

56,3 75,1

0

104,9

General Government Debt (% of GDP)

2010 2009 2011

According to classic

school government

should avoid or in only

needed circumstances

should apply in money

borrowing from funds,

banks, governments etc.

But nowadays the limit

(norm) of debt has been

accepted 60% of GDP as

we see in graphic above

in most of EU countries

general government debt

has been risen year by

year and mostly of this

countries has excess the

debt allowance (allowed

norm of debt, Maastricht

criteria) this may be a

following of non-

sufficiency of government

general revenue (income)

to compare the government expenditures. Some countries as Czech Rep., Estonia, Finland, Luxemburg, Slovak Rep. and Sweden has achieve to

control the debt allowance and staying under the debt norm. Let we turn back to debt rising and effects of it into economic predicament to included

countries, the main problem of debt is paying it back and the paying back it has to be in three ways (a) tax rising (b) emission (c) a cut in

government expenditures as we see in table below lot of countries has risen the taxes which it brought a rise in tax burden in OECDi countries by

0.5% which it changes country by country and following the reform with cut in government expenditures.

Of course it worth’s to mention the unemployment as it was spoken above unemployment has been cramp for governments with its trends up and

down without nip or injection to heel it. Applying those fiscal policies it will not heel the actual financial predicament, just only make it worse as we

know government is the biggest consumer or in other words it may be expressed better as column of the house, if this column goes down all of

Austria 48.5 48.1 48 52.6 52.6 50.6 4.8 4.4 4.1

Belgium 48.1 48.6 49.4 53.7 52.5 53.3 7.9 8.3 7.2

Czech Rep 39.1 39.3 40.3 44.9 44.1 43.4 6.7 7.3 6.7

Denmark 55.2 55.1 56.1 58 57.8 58 6 7.5 7.6

Estonia 43.5 40.8 39.3 45.5 40.6 38.2 13.8 16.9 12.5

Finland 53.4 53 53.9 56.1 55.8 54.8 8.2 8.4 7.8

France 49.2 49.5 50.8 56.8 56.6 56 9.5 9.8 9.7

Germany 44.9 43.3 44.3 48.1 47.5 45.3 7.8 7.1 5.9

Greece 38.2 39.7 40.9 53.8 50.2 50.1 9.5 12.6 17.7

Hungary 46.9 45.2 53 51.4 49.5 48.8 10 11.2 10.9

Ireland 34.8 35.6 35.7 48.8 66.8 48.6 11.9 13.7 14.4

Italy 46.5 46 46.1 51.9 50.5 49.9 7.8 8.4 8.4

Luxemburg 42.7 42.7 43.7 43.5 42.6 44.3 4.6 4.8 5.1

Netherlands 46.3 45.6 46.4 51.3 49.9 50.4 4.5 4.5 5.3

Poland 37.2 37.5 38.5 44.5 45.4 43.6 8.2 9.7 9.7

Portugal 39.6 41.4 44.7 49.8 51.3 48.9 9.6 11 12.9

Slovak Rep 33.5 32.4 33.4 41.5 40 38.2 12.1 14.5 13.6

Slovenia 42.9 44 43.8 48.9 50 50.2 5.9 7.3 8.2

Spain 35.1 36.4 35.5 46.3 45.7 44.1 18 20.1 21.6

Sweden 54 52.4 51.5 54.9 52.5 51.3 8.3 8.4 7.5

U.K 39.9 40.1 40.5 51.2 50.3 48.7 7.6 7.8 8

house it will follow it. As much strong it is the column as much strong (healthy) it

will be the house (economy) with all of those problems governments are facing,

lack of options to heel the financial predicament and FTA not being the best

option for all countries except the advanced ones. So in name of heeling the

actual financial predicament and making stronger this column for a healthy

economy what if we choose:

Setting limits for imports and exports!!

With FTA moving the custom tariffs and make products move free around world

but still this doesn’t make it the solution of all financial predicaments of

countries. Also the lack of option to heel the economies and getting the

economies out from this cramp of solutions maybe we have the only one

solution to apply closing the borders for this category of products as Food,

Beverages and Tobacco production. These goods are low cost produced and it

can be produced in every country. For sure we can’t produce every kind of these

products in every country for so many reasons so first of all we have to create economic areas to produce this kind of products but before let we

focus in imports and exports of OECD countries.

Indicator 3: Trade balance of goods (in USD, by SITC)

SITC 12: Tobacco and tobacco manufactures

Time 2007 2008 2009

Country

Austria 66475508 28495530 -135608384

Belgium -123310689 -71513764 -72387789

Czech Republic -95684466 212779457 133366919

Denmark 83059592 157753080 170087765

Estonia -53996005 -25553080 -27097087

Finland -170416984 -240408003 -141511220

France -1834266190 -1551110200 -1525731511

Germany 2186448000 2783152000 2211122245

According to the data stats of OECD expressed in the tables below, most of

countries are having year trade balance closed with a trade deficit on this kind of

products. Most of these countries didn’t achieve to manage the resource

allocation even these products are low cost and producible in every country.

The FTA some countries it has convert them in producers and most of them

buyers. So closing boundaries for this category of good it will help in heeling the

financial predicament and also unemployment issue that lot of countries are

facing. With all the problems that we explained from the beginning of this

journey with Re-Union, which wants to introduce with a solution which can help

on economic heeling. First of all we have to go back to explain the economic

areas which are separated in groups as below:

These groups are created only for European continent and all

the countries which are not involved in groups above they

will act as one economic area. To create these groups we

were based on countries population where as minimum

norm for every economic area is defined at least 15 million

also politic relations between countries inside the same

group was the primary priority. With this arrangement it is

aimed to relief economies form the actual cramp and making FTA acceptable in every countries economy. Applying Re-Union for this kind of

categories as is mentioned above it may be a forth option for the governments to stay on their feet’s. As it is mentioned the problems that

governments are facing are multiplying by every day’s that passes and real challenge for them is finding a solution, a solution for recovery but of

course we can’t raise the taxes every time we want or we can’t go to emission and obviously general government debt is getting bigger year by

year. So as the only solution for the moment let we close all imports & exports for Food, Beverages & Tobacco goods, which are low cost to be

produced and producible in every economic area. So let we see advantages of Re-Union in economic areas:

Greece 38649651 118592223 -130633382

Hungary -137925000 -152062000 ..

Iceland -19735298 -21658839 -17826141

Ireland -2569150 -10245678 -27890072

Luxembourg -79961676 -76880194 -60099930

Netherlands 3463720652 2920713880 ..

Norway -101994131 -150223726 -139454788

Poland 333393464 651236700 ..

Portugal 356856758 447816377 432745992

Slovak Republic -209211536 .. ..

Slovenia -76975565 -104719223 -99025390

Spain -1622170544 -1797213072 ..

Sweden -124608315 -115673113 -100652492

Switzerland 245635478 363611777 298561268

Turkey 341673428 312855902 357022092

United Kingdom -89184030 123268236 -78786642 Group 1 Group 2 Group 3 Group 4 Group 5 Group6

Slovenia Estonia Belgium Norway Switzerland Czech Rep.

Croatia Latvia Netherlands Sweden Austria Slovakia

Bosnia & He Lithuania Luxemburg Finland Hungary Ukraine

Montenegro Belarus Denmark

Albania Group 7 Group 8 Group 9 Group 10

Kosovo Serbia Greece Spain Ireland

Macedonia Romania Bulgaria Portugal Iceland

Moldavia Cyprus U.K

Malta

Advantages:

Applying Re-Union for sure it will be an option on economic heeling and real help to recovery the economies as below:

1. Decrease in unemployment

With the new invests that will be conducted inside the economic area it will help to reduce unemployment.

2. Tax contribution

General government incomes (revenues)will increase due to invests that have been conducted in economy of country as corporate tax, income

tax (from employees & employers) etc. which it will help government to manage debt services, debt payments and government expenditures.

3. Link effect inside economy

Investors to produce their product they may need row material so for this categories of goods row materials can be founded in every economic

areas, buying them inside the market would be help to increase domestic capital which it can be used back as an investment in economy and

also being another plus for decrease on unemployment & increase tax contributions.

4. Competition

It will help to create a market based on competition inside economic area.

5. Increase in GDP

Because of invests made inside the economy area the GDP for countries it will be increase the inverse it would happen with FTA which decreases

the will of investors to invest and just being an approve of idiom “Big fish eats the small fish” .

6. Foreign currency exchange

Involved countries in foreign invests it will receive hard foreign currency from here it is invest, also in the country where is invested it will be

entry of foreign currency.

7. National Income goes up

With invests new job opportunities will be created, with created new jobs for many people means a rise in income which it will help in raising NI

(national Income). This raise will leads consumers to consume more which it helps in raising the demand so with this raise in demand the firms

will go to a raise in offer and new jobs will be created, more taxes being paid etc.

8. Economic growth

The increase in the market value of the goods and services produced by an economy over time.

After a compare of advantages and disadvantages of FTA in conclusion of our journey we realized that FTA it’s not an option for developing

countries either non-developed countries, for sure an option for developed countries. Also we highlight the economic problems that

governments are facing and lack of solutions in their hands. Of course it was brought a new idea as an option for an economic heeling the Re-

Union which of course it may have disadvantages for firms (companies, corporates) but in theory stands healthy but in way to avoid

disadvantages of Re-Union for firms it is suggested to apply stimulating policies as below:

AVT 8-10% for 3 years

Machineries that will be used by firms AVT 0%

50% off of sale tax for 3 years

Minimizing the red tapes

Construction materials that will be used for building the factories with 50% AVT off

1 year import permit allowance for firms for a market recognition

Prepared by: ERGYS NEZIRI

Finance Department 9 Eylul University

ergysneziri@gmail.com

i http://www.oecd.org/newsroom/tax-burdens-on-labour-income-in-oecd-countries-continue-to-rise.htm