Speaking at a CEPR lunchtime meeting on 24 July, held to mark the launch of European Integration: Trade and Industry, L Alan Winters discussed the role of foreign competition in the completion of the European Community's single-market programme. He referred particularly to three chapters in this volume, of which he was co-editor with Anthony Venables, and which reports the proceedings of a March 1990 CEPR conference on `The Impact of 1992 on European Trade and Industry', held in Urbino in association with the Centro Interuniversitario di Studi Teorici per la Politica Economica (STEP) and Confindustria. Winters is Professor of Economics and Head of Department at Birmingham University and Co-Director of the International Trade programme of the Centre for Economic Policy Research. The present 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 and by the UK Department of Trade and Industry and Foreign and Commonwealth Office. The views expressed by Professor Winters were his own, however, not those of the above funders nor of CEPR, which takes no institutional policy positions.

Winters began by noting that the continued impasse in the negotiations under the Uruguay Round made it all the more important to stress the constructive role of external competition to the Community's 1992 programme. Focusing first on the chapter on `Competition and Imports in the European Market' by Alexis Jacquemin and André Sapir, Winters noted that the discipline of competition was essential to the maintenance of price-cost competitiveness, so that the absence of actual and potential competition would enable `protected' industries to jack up prices. Jacquemin and Sapir found that imports from within the Community had only small effects on profits, once allowance was made for factors such as capital intensity. The imports that matter to the four main EC member countries France, Germany, Italy and the UK were those from outside the Community. Jacquemin and Sapir develop an econometric model to relate the price-cost margins for some 100 industries and these four countries to both `traditional' factors such as capital intensity, the level of R&D and scale economies and policy effects, such as extra- and intra-EC tariffs and import controls. They also show that price-cost margins increase with the common external tariff and with non-tariff barriers to intra- EC trade.

Turning to the chapter on `Japanese Direct Investment in European Manufacturing' by Stefano Micossi and Gianfranco Viesti, Winters noted that such investment remains small in relation both to total Japanese direct foreign investment and to total foreign investment in EC manufacturing. Nevertheless, it has grown rapidly the 1980s, motivated primarily by considerations of market access as the single-market programme nears completion.
Winters argued that the primary effect of this growth is a net increase in the supply of `Japanese' goods to the Community as a whole. This may involve increased competition at the local and indeed national level, but those arguing for reciprocity for Community investment in Japan are missing the point. Nobody is obliged to sell their assets to Japanese investors; that the latter are in the market merely increases the worth of EC assets and firms. Similarly any restrictions on the inward flow of EC investment into Japan are correspondingly a welfare problem for Japan rather than the Community. There may, of course, be beneficial spillovers to Japan arising from its ownership of factories based in Europe, but these do not of themselves generate losses for Europe: foreign investment is a positive-sum not a zero-sum game.

Winters noted that European policies towards Japanese direct investment have to date been determined primarily at the national level. Ideally, the Community should have a single policy on investment in order to avert the dangers of a `bidding match'; but if the only available options are a highly restrictive policy implemented by the Commission and the present moderately liberal policy of national regulations, such `decentralized chaos' may on balance be preferable.

Winters turned finally to the results of the chapter by Victor Norman on `1992 and EFTA'. Norman's most powerful results consider the case of greater integration between the EC and EFTA. Winters noted first that competition in manufactured goods markets will be beneficial, but its effects will not be massive on either side: EFTA is small relative to the Community, while EFTA countries already pursue open trade policies so that their markets for such goods are reasonably competitive. Moreover, most manufacturers fall under a free trade agreement already. EFTA's further integration will have major effects, however, in agriculture, where EFTA governments' current policies are even more protectionist than the Community's Common Agricultural Policy.

Also, service industries in the EFTA countries are highly regulated. Their inclusion in the single-market programme would therefore have a significant impact on these industries, deriving in part from penetration by EC firms but principally from the replacement of domestic regulations by those of the Community's 1992 programme. In particular, Winters cited Norman's simulation of the deregulation of internal Scandinavian airline transport. For the Oslo-Stockholm route, Norman found that replacing the present SAS monopoly with a duopoly with Bertrand competition in the pricing of tickets and a Cournot equilibrium in the numbers of flights offered by each carrier would increase the consumer surplus by more than 45% of initial consumer expenditures and an overall welfare gain of some 36%. Even higher consumer surplus and welfare gains would result from three- or four-firm oligopolies.

Winters stressed in conclusion the common theme of these chapters and others in the volume: that the effects of external competition on the Community's trade are even more important than those of the single-market programme as such. This clearly has major implications for the Community's policies on trade, the Uruguay Round and foreign direct investment.