At a Brussels joint lunchtime meeting with the European Centre for Advanced Research in Economics (ECARE) on 27 April, Alasdair Smith presented results of recent research on the European Community's trade with Eastern Europe. Smith is Professor of Economics at the University of Sussex and a Research Fellow in CEPR's International Trade programme. His remarks were based on his article with Jim Rollo, `The Political Economy of Eastern European Trade with the European Community: Why So Sensitive?', in Economic Policy No. 16 (see box). The views expressed by Professor Smith were his own, however, not those of ECARE nor of CEPR, which takes no institutional policy positions.

Smith noted that the `Europe Agreements' governing EC trade policy towards the Czech and Slovak Republics, Hungary and Poland, and now also to Bulgaria and Romania, commit the Community to industrial free trade within ten years. Many tariffs and quotas disappeared when the agreements came into force on 1 March 1992, but for a critical, core group of `sensitive' products substantial protection will remain in place, at least for some years, or any liberalization is likely to be more apparent than real.

Smith considered several reasons for this limited openness. Especially vulnerable are declining industries or those whose regional concentration raises fears of unemployment, which may deserve protection, while rapid growth of East European exports within narrow product ranges may entail serious adjustment problems. But some sectors whose importance in advanced economies has declined may have excessive lobbying power. The prevalence of `contingent protection', (policy tools such as anti-dumping and safeguard actions) suggests that the Community is sensitive to any potential source of rapid import growth; if so, transforming economies will run into protectionism in any sector in which they are successful.

Smith noted that the ratios of sensitive sectors' imports to EC gross production indicate they are particularly exposed to import competition from outside the Community, while non-agricultural sensitive sectors display above-average import penetration from Eastern Europe, but few are above 1%. These sectors constitute a significant share of the West European economy, but import flows from Eastern Europe could multiply many times with no major ill effects. Agricultural liberalization to allow limited import volumes into the protected EC market yields substantial gains to East European producers, but corresponding gains from reducing barriers to manufactures trade are partly offset by the loss of economic rents. The distributions of both net gains and adjustment costs depend on how the markets are modelled.

Smith reported predictions of EC production declines of 1-10% resulting from import liberalization for both agricultural and manufactured products, in a gradual process spread over about ten years. Governments are more sensitive to short-run employment shocks than to long-run economic welfare for reasons of political economy; but the shock of prospective competition from Eastern Europe lies well within the range of normal experience of structural change. The Community successfully absorbed the adjustment problems entailed by West European integration. The adjustment now required to liberalize trade with the East is quite manageable, even totally ignoring the potential growth of Eastern markets for Western products; there is thus no rational economic explanation for its current sensitivity.

Finally, even though the loss of economic rents may reduce Eastern Europe's gains from liberalizing manufactures in particular industries, its export earnings are set to grow in industries whose production and trade are currently not significant and which have no economic rents to lose. Contingent protection will only deter their development, so not liberalizing will entail long-term losses. Also, since any product is potentially sensitive, any group of EC producers damaged by competition from the East can trigger the threat or often the substance of contingent protection. The European Commission's 1991 report on anti-dumping found that iron and steel, textiles, clothing, and leather and footwear were major, albeit declining, targets during 1986-90, but electronics and other mechanical engineering products also featured prominently. Smith concluded that `sensitive' products are not defined by criteria related to particular structural adjustment problems; the Community's emphasis on contingent protection reflects rather a mixture of competitive threat and regulatory capture.