At a CEPR joint lunchtime meeting with the Institut d'Etudes Européennes, held in Brussels on Wednesday 3 July to mark the publication of European Integration: Trade and Industry, Victor Norman discussed the implications of the closer integration of member countries of the European Free Trade Association (EFTA) with the European Community. Victor Norman is Professor of Economics at the Norwegian School of Economics and Business Administration, Bergen, and a Research Fellow in the International Trade programme of the Centre for Economic Policy Research. The meeting formed part of the Centre's research programme on `The Consequences of 1992 for International Trade', which is supported by the Commission of the European Communities under its SPES programme. The views expressed by Professor Norman were his own, however, not those of the Commission of the European Communities nor of CEPR, which takes no institutional policy positions.

Norman first noted that the news as presented in Stockholm, Oslo and Helsinki suggests that the two major European events of 1991 have been the negotiations between EFTA and the European Community on the European Economic Area (EEA) and Sweden's application for Community membership. EFTA members' integration with the Community will expand the internal market by less than 10%, however, which suggests that this is of greater importance to the EFTA countries than to the Community itself. The EFTA countries clearly need a formal trading relationship with the Community, with which they transact more than 50% of their entire foreign trade, but the cases for a comprehensive EEA agreement or full Community membership are much less clear. EFTA exports are heavily concentrated in raw materials and semi-manufactured products; and energy, primary metals and forest products account for more than 40% of all EFTA exports to the Community. Since European markets in these products are well integrated already, the current EFTA-EC free trade agreement should give the EFTA members market access almost as good as that afforded by a comprehensive agreement.

Norman reported however that numerical simulations for industrial products indicate substantial gains to an average EFTA member from participation in the internal market, which may be 2-3 times' those to an average EC member. Since EFTA countries mainly export goods for which the single-market programme is relatively unimportant, this effect must derive principally from its positive effects on competition in their domestic markets. While these markets are generally small, they are more open to international competition than EC home markets. Firms in EFTA are much smaller than in the EC on average, but their market concentration is typically higher. The positive effects of EFTA members' integration into the Community on the competitiveness of their domestic markets will also allow for larger firms and improved exploitation of scale economies. For service industries, where there is currently little or no foreign competition, the disparity in the effects of integration on EFTA and the Community is likely to be even greater. In particular, banking services are generally much more concentrated in EFTA than in EC member countries, while Scandinavian airlines enjoy an effective and expensive monopoly over air transport within the Nordic EFTA countries.

Norman noted the view of many Scandinavian economists that most of these gains which principally affect domestic markets could be achieved through unilateral action. If EFTA countries simplified border formalities for imports from the Community, copied EC product standard regulations and permitted EC individuals and firms to establish residence in EFTA countries, they could enjoy all the benefits of the 1992 programme and free trade with the rest of the world. Norman argued, however, that if EFTA countries' governments could achieve such deregulation and increased international competitiveness unilaterally, they would surely have done so already. That commitment clearly requires some sort of constitutional restraint; and an EEA accord or full Community membership would provide precisely that.

Norman contrasted these substantial effects with the negligible direct effects on the Community as a whole of expanding its membership to include EFTA. This may have important effects on particular regions or industries. Hamburg and Copenhagen will clearly benefit from an extension of the internal market to include Sweden and Norway; Finnish, Norwegian and Swedish membership will clearly have significant effects on the West European markets for paper, natural gas and cars respectively. Norman reported simulations that indicated, however, that the aggregate effects of EFTA's integration on the Community's gains from the 1992 programme amounted to less than 0.1% and may not even be positive.

Norman maintained, however, that indirect effects of EFTA members' accession to the Community may have far-reaching implications for its future character. Most EFTA members would favour a strong social charter and strict environmental policies, while in most other respects preferring a loose federation over a centralized European union. He cited recent work by Carl Hamilton (available as CEPR Discussion Paper 524), which indicated that an expansion of membership to include EFTA countries under the Community's present voting system may turn the majority on these issues. Similar effects may apply to the Community's external trade policy. With the exception of agriculture, the EFTA countries currently practise freer trade than the Community towards the rest of the world; and their membership would certainly strengthen the free trade lobby within the Community. Norman concluded therefore that the EFTA countries' accession to the Community may prove much more important to its current members than simple considerations of country size or estimates of direct economic effects suggest.

European Integration: Trade and Industry, L Alan Winters and Anthony Venables (eds.), Cambridge University Press for CEPR, £27.50/$54.50.