The EC single-market programme will cause non-member suppliers' relative position to deteriorate as EC firms gain in competitiveness, although this may be mitigated for EFTA countries by their participation in the European Economic Area (EEA). The single market is usually modelled in two steps: a simple reduction in trade costs; and `full integration', which also affects the competitive climate and firms' behaviour. In Discussion Paper No. 828, Research Fellow Jan Haaland notes the consensus that this second stage is essential for EC member countries to experience significant gains, while the EFTA countries gain relatively more from the first. He applies a general equilibrium model to analyse both forms of integration for the EC and for the entire EEA and also an intermediate case: full integration within the EC with only a reduction in trade costs between the EC and EFTA. EFTA also gains substantially in this case but could reap significant additional gains from full integration.

It is widely expected that the single market's greatest effects will be in sectors in which scale economies, product differentiation and imperfect competition feature prominently, and Haaland's results confirm substantial growth in skill-intensive engineering in both the EC and EFTA. The reduction of trade costs will clearly raise the level of trade, but full integration should also eliminate trade based on imperfect competition (or `reciprocal dumping'), so its overall effect may be positive or negative. His results indicate <MI>some<D> growth in intra-EC trade, but the main feature is the fall in home market prices and the rise in home sales as domestic firms lose their monopoly positions. There is also evidence of trade diversion, but this reflects EC firms' increased competitiveness rather than protection; while the overall welfare effects on the US and Japan will be small, there may be serious consequences for some industries. Finally, some very stylized simulations of possible outcomes of the Uruguay Round indicate that a successful outcome will more than offset any possible trade diversion arising from European integration.

Welfare Effects of `1992': A General Equilibrium Assessment for EC and EFTA Countries
Jan I Haaland

Discussion Paper No. 828, July 1993 (IT)