The European Community is now Eastern Europe's major trading partner and the natural focus of its political aspirations. In Discussion Paper No. 825, Zhen Kun Wang and Programme Director L Alan Winters quantify the impact of opening EC markets to its iron and steel producers under the `Europe Agreements', which eliminated quantitative restrictions on imports of European Coal and Steel Community products in 1992 and promised the complete abolition of their tariffs from January 1997.

The perfectly competitive demand and production structures of their partial equilibrium model will not realistically capture production decisions in this highly managed sector, but its results nevertheless illustrate the pressures on producers and workers and their inputs into political decision-making. Steel imports from the East have risen rapidly since 1989, but falling EC internal demand has provoked enough lobbying from domestic producers to secure the imposition of import quotas on specific products, even after the Agreements came into force; the threat of antidumping measures is therefore likely to induce substantial self-restraint from East European and other steel producers.

Wang and Winters model the effects of liberalization for a basic price system and bilateral quantitative arrangements. For each regime they consider the effects of abolishing tariffs alone and of both relaxing and eliminating quotas. For each `full liberalization' case they also simulate the cases where the East responds by maintaining constant production costs and by raising productivity by 20%. They find that preferential liberalization could yield net benefits as large as ECU 270 million for Germany, ECU 249 million for EC-North and ECU 25 million for EC-South, although significant cartelization within the EC could reduce these figures to around zero. If such cartelization does not reduce technical efficiency, it will raise EC profits substantially, so Eastern imports will entail correspondingly larger losses of profits. Eastern Europe will gain substantially from the liberalization, with potential employment in the sector projected to increase by 12% and output by 10%.

EC Imports from Eastern Europe: Iron and Steel
Zhen Kun Wang and L Alan Winters

Discussion Paper No. 825, October 1993 (IT)