The completion of the EC single-market programme by 1992 is intended to reinforce the constraints imposed by import competition on domestic firms' price-cost margins through the removal of remaining barriers to intra-EC trade, and this strengthening of European competition is expected to result in a significant overall welfare gain. Some argue, however, that the disciplinary effect of imports from the rest of the world may be even stronger than that of intra-EC imports.

In Discussion Paper No. 474, Alexis Jacquemin and Research Fellow André Sapir estimate `structure-performance equations' on disaggregated data for more than 100 manufacturing sectors in France, Germany, Italy and the UK to investigate empirically the relative impacts of intra- and extra-EC imports on European industry. They regress the price-cost margin on a number of variables reflecting industry structure and conduct, employing an instrumental variable approach to deal with the problem that price-cost margins and import penetration are determined simultaneously. Jacquemin and Sapir distinguish between the effects on profitability of actual and potential imports, and further between intra- and extra-EC imports.

The authors measure actual import competition by `import intensity', i.e. the ratio of imports to apparent consumption. They model potential competition from intra-EC trade by dummy variables which take the value 1 for sectors characterized by strong non-tariff barriers and 0 otherwise, and that from extra-EC imports by the common external tariff. The remaining explanatory variables of the industry-performance equations include measures of the growth of industry demand, the importance of economies of scale, the intensity of R&D, the degree of product differentiation and the ratio of capital to revenue.

Jacquemin and Sapir's results indicate that only extra-EC imports currently exert significant actual discipline on price- cost margins, but that the removal of intra-EC trade barriers in sectors subject to high NTBs may reduce price-cost margins by about 15%. Even the removal of these barriers may lead to a greater increase in imports from the rest of the world than in imports from within the Community. The authors conclude that the completion of the internal market, if combined with a further opening to the rest of the world, will result in greater efficiency gains than the removal of internal trade barriers alone, although external liberalization may entail additional costs of adjustment.

Competition and Imports in the European Market
Alexis Jacquemin and André Sapir

Discussion Paper No. 474, November 1990 (IT)