Several of the Europe Agreements (EAs) between the European Union (EU) and the Central and East European Countries (CEECs) – and the latters' corresponding agreements with EFTA – include special safeguard clauses for the iron and steel sector. In Discussion Paper No. 1002, Research Fellow L Alan Winters uses an eleven-region computable model of Europe's steel industry to investigate how this exemption affects producers, users and overall welfare. He calibrates this model – which, unusually, allows for excess capacity, non-marginal cost pricing, industry losses and producers' rents – on the trade restrictions in force in 1992. Removing excess capacity yields large efficiency gains, and steel users everywhere benefit substantially; if producers are also constrained to break even, prices rise substantially but gains to taxpayers and shareholders outweigh losses to users. These `re-equilibrations' indicate that CEECs are more competitive vis-à-vis Western Europe in long-run equilibrium under current regulations than they were in 1992.

Winters adopts this new base to simulate the introduction of the EAs and finds that opening EU and EFTA markets has a significant impact but less than correcting these production distortions. In the East, both output and exports to the EU rise, while domestic users lose as sales are diverted westwards. In the West, users benefit from reduced import prices and producers incur losses. Reciprocal liberalization by the CEECs has effects of opposite sign but smaller magnitude – since this is a much smaller market. This mutual market opening raises CEECs' output by 18%, and it reduces EU and EFTA output by 1.6% and 3.0%, while welfare rises by 112, 108 and 19 million ECU in the three blocs respectively. This overall pattern is also very robust to several sensitivity tests, although the precise numbers vary. Winters concludes that both sides should benefit but warns that market-based liberalization is essential to the realization of these gains; any attempt to integrate East and West European steel industries by planning is likely to fail – and most probably at the CEECs' expense.

The Liberalization of European Steel Trade
L Alan Winters

Discussion Paper No. 1002, August 1994 (IT)