After more than 40 years of central planning, the introduction of international market forces to the East European economies requires caution. The liberalization of their internal markets has already led to widespread disruption, which the removal of trade barriers may exacerbate. Maintaining the direction, structure and volume of import and export flows is important to transforming economies, whose foreign trade data reflect changes in productive sectors and in the legal provisions governing monetary and fiscal enactments. The CMEA was primarily a political construct imposed by the Soviet Union, however, so the integration of Eastern Europe need not have been economically viable in the post-war period and may not be so today.

In Discussion Paper No. 659, Marian Guzek, Józef Biskup and Elzbieta Kawecka-Wyrzykowska assess the costs and benefits to Poland of entering into a free trade agreement with Czechoslovakia and Hungary. They model the removal of tariff and non-tariff barriers to mutual trade both in one step and as a three-step project over several years to avoid market disruptions. They estimate the resulting gains to Polish exporters and reductions to fiscal revenues. They also use an input-output model with 43 branches to assess the savings to the economy as a whole as imports from the partner countries increase and domestic prices and production costs fall.
The authors find that participation in such a free trade area will benefit Poland, which must be prepared to negotiate cooperatively over the precise details of the agreement. Their results indicate that both the costs and the benefits of introducing free trade will be unevenly distributed among individual sectors and branches of the economy. Noting the shortcomings of their trade data and their need to use highly aggregated indicators, however, the authors caution that their results should be viewed only as indicators of trends and orders of magnitude.

Creation of a Free Trade Area Czechoslovakia Hungary Poland: Consequences for the Polish Economy
Marian Guzek, Józef Biskup and Elzbieta Kawecka-Wyrzykowska

Discussion Paper No. 659, April 1992 (IT)