Recent changes in economic relations between OECD and Central and East European Countries (CEECs) may have major implications for the traditional economic ties between developed and developing countries. In Discussion Paper No. 1001, Olivier Cadot and Jaime de Melo assess the likely prospects for EU–LDC relations, focusing in particular on French interests. The Treaty of Rome Association and the Yaoundé and Lomé Conventions have provided EU members with greater stability in their relations with former colonies, while direct transfers of aid have helped political elites in the African, Caribbean and Pacific (ACP) countries to retain power. The benefits of preferential access to EU markets have been small, however; indeed, this non-reciprocal, preferential trade regime may have harmed the ACP countries by condoning – if not encouraging – the use of discriminatory incentives in regional agreements among themselves, while successive rounds of multilateral tariff reduction have eroded the preference afforded them by the EU. Nor have they benefited in terms of trade or investment: their share in EU imports from developing countries fell from 13.4 % in 1958 to 7.4 % in 1974 and halved again by 1992, and flows of French direct investment to them have been and remain very small.

Cadot and de Melo then show that the Europe Agreements may also offer the CEECs little benefit in terms of market access, since they exclude important `sensitive' sectors and offer little beyond the tariff reductions agreed under the GATT for the others. ACP countries' fears of trade displacement are probably misplaced, since they compete directly with the CEECs in few products. Redirection of aid and/or foreign direct investment (FDI) poses a more serious risk, and French data suggest that FDI to the CEECs is rising fast, but the size of the flows remains small and there is no evidence of crowding out. Cadot and de Melo conclude that this decline in the ACP countries' relative importance to the EU should have little effect on their economic performance, since their benefits from preferential access have always been small.

The Europe Agreements and EC–LDC Relations
Olivier Cadot and Jaime de Melo

Discussion Paper No. 1001, August 1994