Although the European Union has extended trade liberalization to several countries of Central and Eastern Europe under the `Europe Agreements', lobbying by various powerful interest groups has led to the exclusion of a number of `sensitive' sectors. In Discussion Paper No. 1000, Programme Director Damien Neven reviews the literature on the political economy of trade liberalization and finds that lobbying is most effective when industrial interests are very narrow, or wide but concentrated regionally, or facing inelastic import demand or highly elastic export demand. He then examines recent trade flows to determine the sectors that are most vulnerable to Eastern competition. Imports into (exports from) the EU have risen (fallen) further for Southern than for Northern members. The `sensitive' sectors are not those that have suffered the greatest rises in import penetration at the EU level, and these changes are poorly correlated across member states. Intra-industry trade with the East has risen further for the Southern members, suggesting that their relative factor endowments are similar. Trade flows' factor content suggests the East has a comparative advantage over all EU members in industries with high inputs of capital and unskilled labour. Revealed comparative advantage suggests that West European concerns about Eastern competition in `sensitive' sectors are misplaced.


In Northern Europe, most vulnerable sectors are concentrated in poorer regions with high unemployment. In Spain, they are also concentrated geographically, but mainly in areas with high employment in services in which total unemployment is currently low. Neven concludes that different factors are driving the political economy of protection in different parts of the EU. In the North, regional lobbies and interest groups representing capital and labour are likely to be active and politically effective. In the South, in contrast, where regional disparities are less important and intra-industry trade with the East may be more important, concerns about specific factors may play a greater role.

Trade Liberalization with Eastern Nations. How Sensitive?
Damien Neven

Discussion Paper No. 1000, July 1994 (IT)