Research Fellows in CEPR's International Trade programme took part in a policy seminar held in Geneva on 6 November as part of the events marking the thirtieth anniversary of the European Free Trade Association. The policy seminar was organized by L Alan Winters, Co-Director of CEPR's International Trade programme, and it took place as part of the Centre's research programme on `The Consequences of 1992 for International Trade', for which financial support is provided by the Commission of the European Communities under its SPES programme. Further financial support was provided by the EFTA Secretariat, which also provided facilities for the policy seminar, as well as for the lunchtime meeting held the same day to mark the publication of the first of a series of CEPR Annual Reports on Monitoring European Integration.

Carl Hamilton (Institute for International Economic Studies, Stockholm, and CEPR) presented a paper on `European Community External Protection and 1992: Voluntary Export Restraints Applied to Pacific Asia'. He first noted that the only explicit mention of external trade in the 1992 programme is the abolition of Article 115 of the Treaty of Rome, with which member countries are currently able to restrict the intra-EC movement of goods imported from third countries. He argued that the importance of this Article and hence of its abolition is much exaggerated.
Hamilton focused on the `voluntary export restraints' (VERs) that EC member countries have applied to the Hong Kong clothing industry during 1980-9. France has applied Article 115 much more strictly than Germany, but this has not led to any significant differences in relative domestic prices. In theory, the free movement within the Community of EC-produced perfect substitutes for imports from the rest of the world should fully offset the Article's trade-restricting effects, which by definition can apply only to goods from third countries. Hence any observed price differentials among member countries should be attributed instead to the non-tariff barriers they apply to imports from members and non-members alike.

Hamilton estimated that the restrictiveness of these VERs over the 1980s expressed as an `import tariff equivalent' varied around an average of 14%, which together with the common external tariff of 17% yielded an average trade barrier equivalent to a 33% tariff. There was a trend fall in restrictiveness in the latter part of the decade, especially in Germany, while price dispersion among member countries decreased following the entry of Spain and Portugal in 1985, perhaps reflecting the increased penetration by the competitive Portuguese clothing industry into the rest of the Community. Average annual rent transfers from the Community to Hong Kong due to protectionism amounted to at least $165 million per annum.

Hamilton noted that the 1992 programme will lead to both a one-off increase in GNP of between 2.5% and 6.5% and also possibly to an increase in its rate of growth of at least 0.6%. Since economic growth increases the demand for imports, these will increase both the restrictiveness of existing VERs (which are defined in terms of import volumes) and also the level of rent transfers. He regressed the annual changes in the combined trade barrier on private consumption in the importing country (lagged by one year) and on competitors' relative labour costs. Both explanatory variables were significant at the 5% level: a single percentage point increase in the growth rate of private consumption should raise the combined trade barrier by about 1.4 percentage points, but the estimated impact of improved competitiveness was modest. Hence, as a result of the 1992 programme, rent transfers to Hong Kong during 1993-2003 will increase by $130-670 million over and above the $1,000 million in the base case, and VERs on clothing could continue to bind until the year 2003, compared to 1998 in the base case.

Finally, Hamilton considered the impact of increased trade with Eastern Europe. The only reliable figures available for production costs of clothing for Hungary over the period 1982-7 suggest that the supply price was some two-thirds of that in Hong Kong or Portugal, which suggests that the East European countries may become very competitive suppliers, enjoying the advantages of low-cost production and proximity to the market.

Victor Norman (Norwegian School of Economics and Business Administration, Bergen, and CEPR) then reported the results of his work with Jan Haaland on the trade effects of European integration using the VEMOD model of world trade. In this six- region, five-commodity-group model, all markets are perfectly competitive and all regions are fully integrated internally. At first sight this seems more suitable for modelling the Community's external trade after the completion of a successful integration programme, since it does not capture the effects of integration on individual industries. Feeding estimates of industry-level productivity effects into the model can nevertheless simulate their overall effects on resource allocation and trade.

Norman presented the results of simulating the allocation of world industrial production in the year 2000, assuming first that the 1992 programme will be successfully completed and second that there will be no further integration of the Community's internal trade. The simulation for this `reference scenario' assumed that profitability, protection and subsidies will remain at their initial levels for all industrial sectors and world regions, and that factor supplies will grow in accordance with historical savings rates, ILO projections of labour supply and trend projections of educational attainment. The results indicated that without an active intervention programme, EC and EFTA production of skill-intensive goods will fall and their production of capital-intensive goods will correspondingly rise.

The `1992' simulation assumed exogenous increases in European productivity, based on industry-level studies, of between 2% and 7% per annum, and a proportionate reduction in industrial subsidies within Europe of 50%. The results showed that the 1992 programme should enable the European Community to halt its drift from the skill-intensive to the capital-intensive sector, but that it will have no noticeable effect on the pattern of industrial production in the EFTA countries.

Norman attributed this discrepancy to the EFTA countries' stronger initial comparative advantage in capital-intensive production, the higher expected growth of their capital/labour ratios (on the basis of savings rates and demographic trends) and the expected reinforcement of the existing pattern of specialization within Europe as a result of the integration of EFTA into the single-market programme.

He also noted two beneficial side-effects of the programme. First, the increase in productivity and the reduction in subsidies should shift resources from highly protected industries into more profitable ones and lead to real income gains of 1.3% for the Community and 0.25% for EFTA. Second, the reductions in European capital-intensive exports and skill-intensive imports are estimated to improve the terms of trade by 0.23% and 0.26% for the Community and EFTA respectively.

Norman concluded with an outline of the broad direction of his continuing research in this field. He proposed to develop a general equilibrium model of EC external trade, with which he hoped to trace the factor market and intersectoral allocation effects of 1992, in order to relax the restrictive assumptions inherent in a perfectly competitive model of the type presented here.