Economic Disintegration

My research projects under the umbrella of CITP are several, but one, in particular, reflects my thoughts on being inclusive: Economic Integration. This is a broad term that encompasses a wide range of policies that promote closer links between the economies of separate countries.

Wooton (1986) was my first research paper after completing my PhD (almost 40 years ago) and concerned preferential trading. This was a subject first introduced to me by Professor Peter Robson when I was an undergraduate student at the University of St Andrews. Peter specifically used the expression “economic integration” to capture the “formation of free trade areas, customs unions, common markets and full economic unions among groups of countries” (Robson, 1972). I was intrigued by the ambiguous welfare outcomes of economic integration, captured in Viner’s notions of trade creation and trade diversion (Viner, 1950), given that it represented a facet of the theory of the second best, where eliminating one distortion in an economy, while leaving others in place, might adversely affect welfare (Lipsey and Lancaster, 1956). Simply put, Viner’s concern was that, while full trade liberalisation on the part of a country may guarantee benefits, partial liberalisation—where tariffs on imports from some countries are eliminated but left in place on imports from other nations—need not. As a doctoral student at Columbia University, I was exposed to the persuasive arguments of Professor Jagdish Bhagwati who was concerned that preferential trading agreements diverted countries’ attention from multilateral trade agreements and the opportunities that non-discriminatory trade policies afforded less developed countries.

Beyond my interest in its theory and diagrams, economic integration was also an issue of public interest—the referendum ratifying the UK’s continued membership of the European Economic Community in 1975 was the first national poll in which I was old enough to take part, while I was a faculty member in Canada at the time of the negotiation of the Canada-US free trade agreement. Efforts at establishing new preferential trading agreements rapidly outpaced progress in multilateral trade talks with the General Agreement on Tariffs and Trade/World Trade Organisation, which long seemed in denial about the importance of preferential agreements, eventually acknowledging their role in the global trading system. WTO (2011)

Economic integration has never been a once-and-for-all policy—many agreements are characterised by continuing change, both in terms of their membership and the degree of integration. This is particularly the case for Europe where the number of member countries and the degree of integration seemed to be relentlessly increasing. I have long viewed the European project to be one of inclusivity, where increasingly heterogeneous nations found shared values and influence. My first direct engagement with the European project and some of the central figures of the CITP was a paper I wrote with Jan Haaland on the completion of the Single Market (Haaland and Wooton, 1993).

Since the UK referendum vote on 23 June 2016 that triggered Brexit, the direction of travel has reversed (at least temporarily) with the first major instance of economic disintegration. Fortunately, a preferential relationship remains between the EU and the UK, but as a free-trade agreement rather than a customs union. Jan Haaland and I have examined some of the implications of this change for the ease of trade between the countries and highlight the role of rules of origin in creating (intended or unintended) barriers to trade (Haaland and Wooton, 2021).

We wish to go beyond this analysis to examine how Brexit could affect trade within the UK should there be a majority in a future Scottish independence vote. At the time of the 2014 independence referendum, it was argued that independence would jeopardise Scotland’s membership of the EU. Now that the UK is no longer a member of the EU, an independent Scotland would face a number of trade options, including membership of the EU but this could be at the cost of its trade relationship with the remainder of the UK. This is an intriguing puzzle that lies at the heart of inclusive trade on these islands.

References

Haaland, Jan I., and Ian Wooton (1993) “Market Integration, Competition, and Welfare.” In L. Alan Winters (ed.), Trade Flows and Trade Policy after '1992’, Cambridge, UK: Cambridge University Press, pp 125-147.

Haaland, Jan I., and Ian Wooton (2021) “Divergent Integration,” CEPR Discussion Paper number 16040, Centre for Economic Policy Research, London.

Lipsey, R. G., and Kelvin Lancaster, (1956). “The General Theory of Second Best,” Review of Economic Studies. 24 (1), pp 11–32.

Robson, Peter (1972) “Introduction” in Peter Robson (ed.) International Economic Integration, Harmondsworth, pp 9-27.

Viner, Jacob (1950) “The Economics of Customs Unions” reprinted in Peter Robson (ed.) International Economic Integration, Harmondsworth, pp 31-47.

Wooton, Ian “Preferential Trading Agreements: An Investigation,” Journal of International Economics, August 1986, 21, 81 97.

World Trade Organisation (2011) “The WTO and preferential trade agreements: From co-existence to coherence” WTO World Trade Report.