The income levels of the Central and East European countries (CEECs) may grow two or three times faster than those of Western Europe for one or two decades and their demand for West European consumer goods and industrial products is likely to grow at least as fast. Recent events, historical evidence and geographical proximity suggest that the EFTA states in particular are the CEECs' natural trading partners. In Discussion Paper No. 853, Programme Director Richard Baldwin uses the `gravity' model, which explains bilateral trade relationships in terms of trading partners' per capita and total income levels and the geographical distance between them, to evaluate the potential for EFTA-CEEC trade in the coming decades.

First, even without extra income growth in the CEECs, he finds that EFTA exports to these markets should increase fourfold from 1989 levels, so they should become as important for Austria, Iceland and Switzerland as intra-EFTA trade is today. For `Central Europe' (the Czech Republic, Slovakia, Hungary and Slovenia), the EFTA-cum-CEEC market should account for between 25% and 50% of exports to Europe. Second, if CEECs' incomes catch up to 70% of the EC average, EFTA exports to them should continue to expand at double-digit rates; they will then account for almost one-fifth of total EFTA exports to Europe.
Baldwin notes that EFTA exports to the CEECs cannot continue to rise at 10% to 20% per annum unless their own exports also rise, however, since foreign capital inflows and increased indebtedness cannot sustain trade deficits indefinitely. West European markets must be therefore be opened up to Eastern goods for this potential to be realized. These results suggest that several are natural members of EFTA and should enjoy substantial political support from EFTA-based exporters. Even applications for membership that are eventually refused are therefore likely to secure them increased assistance programmes from the EFTA governments.


The Potential for Trade Between the Countries of EFTA and Central and Eastern Europe
Richard Baldwin

Discussion Paper No. 853, November 1993 (IT)