The trade preferences extended to Central and East European countries (CEECs) under the Europe Agreements (EAs) may span 5–7 years, and multilateral liberalization in the most sensitive textiles and clothing (T&C) products will probably not take place until the third phase of the Multifibre Arrangement's abolition, in 2002–4. In Discussion Paper No. 1004, Cristina Corado notes that T&C producers in the CEECs have in part offset the negative effects of their shortcomings in supply and marketing on production and employment by undertaking more outward-processing trade (OPT) for EU firms seeking to move labour-intensive stages of their production abroad. She maintains that conventional measures of the structure and performance of trade do not accurately reflect these firms' true competitiveness in Western markets: OPT now accounts for two-thirds of their `exports' to the EU, and the average quality is usually lower for `direct' imports than for OPT, and this may be undermining the CEECs' T&C production.

Corado draws some lessons from Portugal's transition to full EU membership for the development of EU–CEEC trade under the EAs. Portugal attracted substantial OPT in the first two years, when it faced fewer tariffs than `direct' imports, but this trade soon moved elsewhere when firms' incentives changed. Whether OPT moves out of the CEECs – to the former Soviet Union or beyond – once the bias against `direct' exports no longer applies will largely depend on how their labour costs change in the mean time. Also, EU trade policies also current favour OPT over direct investment in the CEECs, which might rise substantially as domestic markets grow and access to Western markets improves. If the Commission adopts the proposed regulation to curtail OPT outside the EU, however, the CEECs may be more vulnerable to OPT exit when it ceases to enjoy its favoured status than Portugal was at the equivalent stage; indeed, if it is applied strictly to protect employment, the resulting diversion of OPT from the CEECs to EU South may have a greater impact than the EAs themselves.

Textiles and Clothing Trade with Central and Eastern Europe: Impact on Members of the EC
Cristina Corado

Discussion Paper No. 1004, August 1994 (IT)