1992
Members only?

1992 could have important implications for non-member countries, André Sapir told a lunchtime meeting on 22 May. The extent to which suppliers from non-member countries will share the benefits of 1992 will depend on the importance of existing intra-EC trade barriers in each sector, the competitive position of EC producers, and the Community's external trade policy. Sapir is a Research Fellow in CEPR's International Trade programme and participates in the research project on the external trade consequences of 1992, funded by the European Commission's new SPES programme. His talk was based on research presented in CEPR Discussion Paper No. 313; financial support for the meeting was provided by the Department of Trade and Industry and the Foreign and Commonwealth Office.
Over the period since 1973, Sapir noted, the EC has increasingly transgressed the principle of non-discrimination enshrined in the General Agreement on Tariffs and Trade (GATT). The Community has constructed a complex hierarchical system of preferential arrangements to benefit EFTA, the African, Caribbean and Pacific states of the Lomé convention, and the Mediterranean countries. These arrangements have helped undermine GATT discipline and diverted EC imports from less to more preferred sources. Prolonged slow growth and high unemployment in EC countries during this period also led to increasing difficulties adjusting to worldwide shifts in comparative advantage, notably the rise in imports from Japan and the newly industrializing countries, resulting in increasing recourse to discriminatory non-tariff barriers (NTBs). Following the growth of both preferential arrangements and discriminatory NTBs, Sapir observed that today more than 40% of EC manufacturing imports from non-EC members fall outside the GATT rule of non-discrimination. Adjustment problems also led to increasing resort on the part of member states to NTBs against fellow EC members.
This trend has been reversed by efforts to remove barriers to intra-EC trade. In Discussion Paper No. 313, Sapir analyses the effects on trade of the completion of Europe's internal market. The removal of NTBs should lead to further specialization of countries, according to comparative advantage, and to gains from trade. The price of supplies from other EC members will be reduced relative to those from domestic producers, thereby creating trade at the expense of domestic production. At the same time, integration will drive a wedge between the price of supplies from member and non-member countries, hence diverting trade from the latter to the former. Integration will also lead to increasing intra-EC specialization and, through economies of scale in production, to lower average costs for EC suppliers.
According to Sapir, the external impact of the 1992 programme will depend on three factors: the extent of intra-EC NTBs, the competitiveness of European producers vis-à-vis foreign firms, and the EC's external trade policy. This impact will vary a great deal across sectors. In his Discussion Paper, Sapir groups over 100 manufacturing sectors according to two indicators of market segmentation (the presence of NTBs and of price differences across EC markets) and then examines in more detail the relative competitiveness of EC producers and the implications for the Community's common commercial policy.
In some sectors, Sapir argued, 1992 will have relatively little external impact because EC suppliers have either a very strong competitive position (brewing, pharmaceuticals) or a very weak one (toys, television). The impact on foreign producers is likely to be most pronounced in sectors where EC producers have recently undergone a declining competitive position. In sectors where Europe's loss of competitiveness is due to changing comparative advantage, typically low- or medium-R&D-intensive industries with a low or medium level of scale economies (electrical appliances, clothing, motor vehicles), foreign producers should benefit. On the other hand, in high-tech sectors with relatively important economies of scale (telecommunications, aerospace), the removal of barriers fragmenting the EC market could help revitalize European producers.
The EC's commercial policies will also be influential in shaping the external impact of 1992. In low- or medium-tech industries, there is a danger that trade policy may be used instead of much needed and more effective structural adjustment measures, Sapir warned. In response to interest group pressures, policy-makers might also be tempted to apply infant-industry protection to high-tech, oligopolistic industries (telecommunications, aerospace, computers), instead of policies to stimulate research and increase competition.
Sapir concluded by considering the implications of the 1992 programme for world trade and the Uruguay Round of GATT negotiations, scheduled to be completed in 1990. The removal of barriers within the Community should promote structural change and increased growth, providing an increased market for imports from outside the EC. More rapid growth should also reduce EC unemployment and hence demands for protectionism. Nonetheless, third countries are still concerned over whether they will be able to improve their access to EC markets and what reciprocal concessions the Community will demand in return for that access. To some extent, the Community is bound by the principle of non-discrimination and must extend the benefits of 1992 to all GATT members without seeking reciprocal concessions. But the coverage of GATT rules is much narrower than the scope of the 1992 programme, and excludes areas like safeguard clauses, technical barriers, government procurement and services.
What kind of reciprocity will the EC demand in order to grant its trading partners the benefits of the fully liberalized internal market bilateral reciprocity or multilateral reciprocity conducted through GATT? In principle the Community has opted for multilateral negotiations in the course of the Uruguay Round, but it might be tempted to conclude bilateral arrangements with countries such as the United States, Japan or the newly industrialized countries. The EC should resist such temptations, Sapir argued. Europe will need an open trading system based on multilateral principles in order to ensure export markets for its increased output after 1992. An open attitude towards imports would also provide the necessary discipline to prevent non-competitive behaviour by European producers.