Single Market (Trade) - Explained
What is a Single Market?
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Table of ContentsWhat is a Single Market?What is the History of the Single Market?Drawbacks to the Single MarketLeadership of the Single MarketAcademic Research on Single Market
What is a Single Market?
In a single market, there is a free flow of goods and services, free movement of labor and physical and intellectual properties for all concerned and freedom of movement. A working single market encourages competition and exchange, improves efficiency, increases quality and leads to price reductions.
The European single market, internal market or common market, is a single market that strives to preserve the freedom of movement of products, resources, services, and labor, as "four freedoms" within the European Union (EU).
The European Single Market is a structured agreement between sovereign states giving participants free access to their respective markets may also be described as the single market.
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What is the History of the Single Market?
The Single Market was created by the Treaty of Rome in 1957 in the former European Economic Communities (EEC). In 1986, with the Single European Act (SEA), the first significant reform in the original Treaty was made.
The EU, which constituted the former EEC, was established in 1992. Single markets typically grow gradually, often with only a few countries involved and then expand as neighboring countries see the advantages of accession and the costs of non-adhesion. The formation and extension, depending on the number of participants and their levels of development, usually involves highly complex negotiations. In less developed economies, the spectrum may be broader, relative to the single market, of goods and services as well as underdeveloped capital and credit markets. The primary objectives of the Single Market include:
- Passing rules that encourage the free movement and competitiveness of goods and services.
- Eliminating barriers to trade within the EU and prevent new ones from being established.
- Promoting a business-friendly environment focused on open, easy and consistent legislation providing a straightforward legislative framework.
During the processes of trying to meet the above objectives, the EU has provided benefits such as:
- Creation of trade in which free market access promotes trade.
- The exploitation of economies of scale by local firms as their markets expand.
- Lower production costs due to economies of scale.
- Technology transfer resulting from increased flows of investments among members.
- Transfer of skills across the single market.
- Mobility of labor.
Drawbacks to the Single Market
Despite the many benefits the single market poses, it has the following setbacks:
- Diversion of trade can result from a single market member, as more efficient non-members from local markets are overwhelmed.
- Lower wages earned as migrant labor may drive down local wages.
- Increasing negative externalities linked to freedom of movement, including infrastructure pressures, and insufficient supply of commodities such as healthcare and education.
- The trade rules may favor some members over others and some industries and sectors over others.
- The lost possibilities of exploiting closer relations with non-members through free trade deals (allowed at least in the European Single Market) between individual members and non-members.
- Members may look inward and their businesses can not adapt to global economic changes.
Leadership of the Single Market
The European Commission, responsible for supervising the application of EU legislation and acting on non-compliance under the Single Market Act, oversees the Single Market. In order to evaluate the implementation of policies and to evaluate areas in which policy development needs to be carried out, the Commission also collects information. The EU also publishes economic reports on the basis of research which are used to analyze and provide the basis for future recommendations on the effects of the implementation of legislation in various sectors. These studies frequently identify areas for development, as well as places where barriers have been faced by the commission.
Academic Research on Single Market
- How to make a market: Reflections on the attempt to create a single market in the European Union, Fligstein, N., & Mara-Drita, I. (1996). How to make a market: Reflections on the attempt to create a single market in the European Union. American journal of sociology, 102(1), 1-33. Theories about institution-building episodes emphasize either rational or social and cultural elements. Our research on the Single Market Program (SMP) of the European Union (EU) shows that both elements are part of the process. When the EU was caught in a stalemate, the European Commision devised the SMP. The commission worked within the constraints of existing institutional arrangements, provided a "cultural frame," and helped create an elite social movement. This examination of the SMP legislation, using an institutional approach to the sociology of markets, shows how the commission was able to do this by trading off the interests of important state and corporate actors.
- Foreign direct investment and the single market, Neary, J. P. (2002). Foreign direct investment and the single market. The Manchester School, 70(3), 291-314. This paper extends the theory of multinational corporations, identifying three distinct influences of internal trade liberalization by a group of countries on the level and pattern of inward foreign direct investment (FDI). First, the tariff jumping motive encourages plant consolidation. Second, the export platform motive favours FDI with only a single union plant relative to exporting, and may induce a firm which has never exported to invest. Finally, reduced internal tariffs increase competition from domestic firms, which dilutes the other motives and may induce a Fortress Europe outcome of multinationals leaving union markets even though external tariffs are unchanged.
- Regulatory competition in the single market, Sun, J. M., & Pelkmans, J. (1995). Regulatory competition in the single market. JCMS: Journal of Common Market Studies, 33(1), 67-89. Although regulatory competition has been hailed in some quarters as a superior alternative to Councildriven harmonization, little empirical investigation has been carried out to demonstrate how regulatory competition might work in actual EC practice, and therefore whether its expected benefits will, in fact, materialize. We construct a framework stylizing the iterative process of regulatory competition, and illuminate its emergence from five elements of the regulatory strategy of the EC1992 internal market programme. The framework presented shows that the process of regulatory competition is a complex and unpredictable one. Two case studies are provided to exemplify the difficulties. These practical limitations severely weaken the case for regulatory competition based on theoretical economic arguments. Moreover, a comparative costbenefit analysis of regulatory competition and harmonization suggests that, where relevant, regulatory competition and harmonization should be seen as complements, rather than substitutes. The demarcation between the two is best determined on a casebycase basis according to the principle of subsidiarity.
- A new strategy for the single market, Monti, M. (2010). A new strategy for the single market. Report to the President of the European Commission Jos Manuel Barroso, May, 10.
- Market power, productivity and the EU Single Market Program: Evidence from a panel of Italian firms, Bottasso, A., & Sembenelli, A. (2001). Market power, productivity and the EU Single Market Program: Evidence from a panel of Italian firms. European Economic Review, 45(1), 167-186. This paper provides empirical evidence on the impact the EU Single Market Program has exerted on market power and total factor productivity in a large sample of Italian firms. Both market power and total factor productivity are estimated by applying several extensions of the methodology developed by Hall. Main findings can be summarised as follows. Firstly, for the sample of 1992 most sensitive firms market power decreases by 50% in the SMP implementation period compared to previous years, whereas no clear pattern emerges for the other sub-samples of firms. Secondly, and less conclusively, only for the sub-sample of 1992 most sensitive firms a positive transitory shock to productivity growth rates is observed immediately after the announcement of the reform project. Overall, these results are consistent with the long standing view that economic integration reduces firms market power and increases productivity via the removal of non-tariff barriers.
- Valuing product attributes using single market data: a comparison of hedonic and discrete choice approaches, Cropper, M. L., Deck, L., Kishor, N., & McConnell, K. E. (1993). Valuing product attributes using single market data: a comparison of hedonic and discrete choice approaches. The Review of economics and Statistics, 225-232. This paper compares, via simulation, the performance of the multinomial logit and hedonic models in estimating consumer preferences for product attributes. We ascribe preferences over the attributes of houses to a population of consumers, and, by having them bid for a set of houses, calculate equilibrium prices. The resulting data are used to estimate the two models. We find that the gradient of a linear Box-Cox hedonic price function estimates marginal attribute bids at least as well as a linear logit model, although the difference between the two is small when some variables are not observed or are replaced by proxies. The logit model, however, outperforms the hedonic model in valuing non-marginal attribute changes. This is true when the researcher knows the true form of consumers' utility functions and when the utility function must be approximated.
- Effects of the single market on the Austrian insurance industry, Mahlberg, B., & Url, T. (2003). Effects of the single market on the Austrian insurance industry. Empirical Economics, 28(4), 813-838. The integration of European services markets and the implementation of associated European Union directives open up formerly closed national markets to competition from the Single Market. The purpose of this study is to measure the effects of liberalization on technical efficiency and the productivity development of the insurance industry. As an example we construct efficiency frontiers for the years 1992 through 1999 for the Austrian insurance industry using Data Envelopment Analysis. We use the resulting efficiency scores also to construct a Malmquist productivity index for the transition period. In search for effects from the Single Market, returns to scale, economies of diversification, and distribution channels we relate efficiency and productivity measures to several firm specific characteristics. For this purpose we use unbalanced and balanced panels of individual firm data.
- Banking Union as Holy Grail: Rebuilding the Single Market in Financial Services, Stabilizing E urope's Banks and 'Completing'Economic and Monetary Union, Howarth, D., & Quaglia, L. (2013). Banking Union as Holy Grail: Rebuilding the Single Market in Financial Services, Stabilizing E urope's Banks and CompletingEconomic and Monetary Union. JCMS: Journal of Common Market Studies, 51, 103-123.
- Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Markup Ratios in EU Industries, Badinger, H. (2007). Has the EU's Single Market Programme Fostered Competition? Testing for a Decrease in Markup Ratios in EU Industries. oxford Bulletin of Economics and statistics, 69(4), 497-519. We use a panel approach, covering 10 EU Member States over the period 198199, for each of three major industry groups (manufacturing, construction and services) and 18 more detailed industries to test whether the EU's Single Market Programme has led to a reduction in firms markups over marginal costs. We address explicitly the uncertainty with respect to the timing of the changeover and allow for a possibly continuous regime shift in a smooth transition analysis. Where regime shifts can be found, the velocity of transition is extremely high, making the linear model a justifiable approximation. We also test for discrete structural breaks in the time window from 1986 to 1996, taking up endogeneity concerns in a generalized method of moments framework. Markup reductions are found for aggregate manufacturing (although it is also suggested that markups increased in some manufacturing industries in the precompletion period at the end of the 1980s) and also for construction. In contrast, markups have gone up in most service industries since the early 1990s, which confirms the weak state of the Single Market for services and suggests that anticompetitive defence strategies have emerged in EU service industries.
- Adjustment to the European single market: inferences from intra-industry trade patterns, Brlhart, M., & Elliott, R. J. (1998). Adjustment to the European single market: inferences from intra-industry trade patterns. Journal of economic studies, 25(3), 225-247. In the runup to the 1992 singlemarket deadline, there were concerns that interindustry adjustment pressures among EU member countries would increase. Such expectations were due partly to a perceived reversal of the postSecond World War growth in intraindustry trade (IIT). Finds that average IIT levels continued to rise during the implementation of the single market. It is argued that the concept of marginal IIT(MIIT) is of greater relevance to adjustment than static IIT. Some evidence is shown to support this proposition, and a comprehensive set of intraEU MIIT indices is calculated for the 1980s. Since average MIIT levels in the 198892 period were higher than in the early 1980s, this analysis also supports the conclusion that, on average, adjustment to the single market was no more disruptive than that experienced during earlier stages of European integration. It also appears that the forces for interindustry adjustment are stronger in traditional, declining industries, whereas the expansion of relatively advanced industries tends to be more evenly shared by the EU member countries.
- Between economy and ecology? The single market and the integration of environmental policy, Weale, A., & Williams, A. (2014). Between economy and ecology? The single market and the integration of environmental policy. In A green dimension for the European Community (pp. 45-64). Routledge.