The EC's `Europe Agreements' with the Czech and Slovak Republics, Hungary, Poland, Bulgaria and Romania promise to improve their access to its markets by removing many tariffs and quantitative restrictions. In Discussion Paper No. 836, Programme Director L Alan Winters and Zhen Kun Wang apply a partial equilibrium model of production and trade to investigate their effects on the footwear sector. In this sector, extra-EC imports account for only some 15% of total consumption by value and 33% by volume; while the bulk of Eastern output is sold locally, the EC dominates its export markets.

Winters and Wang find that abolishing quantitative restrictions in 1997 will raise the East's share of the EC market from 3.4% to 4.9%, its total output by 3.2%, and its total employment and wages in this sector by 4.1% and 1% respectively. The resulting rise in rents accruing to entrepreneurs and workers will not fully offset the loss of quota rents, however, so the liberalization is welfare improving for Eastern Europe only if these rents accrued previously to the EC. EC-North as a whole achieves a net gain of 1.3% of total expenditure on footwear, while Italy and EC-South suffer losses as their profits fall. If all tariffs are also abolished, the East's market share rises to 5.7%, its output, employment and rents also rise further, and its overall welfare now increases wherever the quota rents previously accrued. Within the EC, however, reductions in profits and tariff revenues more than offset the additional gains to consumers. If the East's productivity also rises by 20%, its EC market share rises to about 7.8%, and output booms as cost reductions raise their sales in home markets and the rest of the world, but rising labour productivity limits the rise in employment. The rise in imports administers a strong competitive shock to the EC, which raises its consumer surplus and reduces profits everywhere.

Finally, Winters and Wang show that with full liberalization of tariffs and quotas on all EC footwear imports the East's gains in market share, rent and production are almost as large as under preferential access, so Eastern producers in this sector need not be too concerned to maintain the preferences accorded by the Europe Agreements.

Liberalizing EC Imports of Footwear from Eastern Europe
L Alan Winters and Zhen Kun Wang

Discussion Paper No. 836, September 1993 (IT)