Will trade liberalization with Eastern Europe inflict significant damage on European Union economies? No, according to some of Europe's leading trade economists in a recently published CEPR study commissioned by the EU's PHARE programme. In fact, taking into account foreign direct investment and the uncontested benefits to EU consumers of opening markets to the CEECs, the report finds that the benefits and opportunities from trade liberalization far outweigh the likely adjustment costs. The report concludes that `concerns are completely misplaced: the impact of trade liberalization on the EU economies is likely to be either favourable or at worst, only minimally negative. It is virtually impossible to find significant negative effects of opening trade with the CEECs at the &nbspnational, regional or sectoral levels'.&nbspIndeed, it adds, `the process of trade and economic opening with the CEECs could proceed at a faster pace than envisaged in the Europe Agreements (EAs). This would ease the transition in the CEECs and would not inflict substantial costs, even in the short run, on EU producers'.

European Union Trade with Eastern Europe: Adjustment and Opportunities is edited by Riccardo Faini and Richard Portes, with a foreword by Sir Leon Brittan and Henning Christophersen. The volume reports the results of studies of the impact on the EU of its trade with the Central and East European countries (CEECs) participating in the PHARE programme. This was to be done explicitly from the viewpoint of the Union, while taking into account the perspective of the CEECs themselves. Faini is Professor of Economics at &nbspUniversità di Brescia and a Research Fellow in CEPR's International Trade and Human Resource programmes; Portes is Professor of Economics at London Business School and Director of CEPR.

The report suggests that, aside from the unquestioned benefits to consumers, trade liberalization with the CEECs could affect EU economies in several ways. First, it may entail some disruption to the extent that hitherto protected sectors may face growing competition from the CEECs. Second, it may cause EU exporters to face tougher competition from CEEC firms in third markets. Third, it may induce localized difficulties for specific sectors or regions of the Union. The report studies the impact on the EU of trade with the CEECs at the aggregate, national, regional and sectoral levels. It analyses in detail the experiences of France, Greece and Spain, and there are case studies of two major `sensitive sectors': steel and textiles and clothing.

Many European policy-makers are concerned that Southern Europe is particularly vulnerable to trade liberalization with the CEECs. Hence, the study takes a careful look at the impact on that region, finding that `there is little evidence that trade with the CEECs will injure producers in these countries'. Indeed, at least one country is likely to gain substantially from the growth in trade, as Sophia Dimelis (Athens University of Economics and Business) and Konstantine Gatsios (Athens University of Economics and Business and CEPR) find in their study of the impact on Greece. Far from inflicting damage, trade with the CEECs has created an enormous potential for Greek export growth. Exports from the country should increase by a factor of 2.91 (that is, by 191%), whereas imports from the CEECs to Greece are projected to &nbspincrease by only 91%.

Unlike Northern Europe, where most of trade with the East occurs with the Visegrád countries (the Czech Republic, Hungary, Poland, and Slovakia), Greek trade with the CEECs shows a significant tilt towards the Balkan countries (Albania, Bulgaria and Romania). More than 64% of Greek exports to the CEECs went to the Balkans in 1992 compared with 14.2% of total EU exports. Dimelis and Gatsios observe that `there is little or no support among business people for anti-dumping policies or restrictions on CEEC exports into the EU's markets. They at least have understood a fundamental lesson in economics &ldots; You cannot export unless you are prepared to import, and you cannot grow unless your trading partner also grows'.

In their chapter, Carmela Martín (Fundación FIES, Madrid) and Jordi Gual (IESE, Barcelona, and CEPR) examine the case of Spain and find that the effects of opening up trade with the East are negligible. `Even in the long run, trade with the CEECs is likely to account for no more than a small share of Spanish trade', they assert. And in a chapter on France, Olivier Cadot (|NSEAD) and Jaime de Melo (Université de Genève and CEPR) estimate that trade with the CEECs will create 9,377 jobs and destroy 3,412 jobs at the national level. Their simulations show that even if trade with the CEECs grows across the board, no region comes out as a net loser, and even at the sectoral level there is no significant job loss in any region.

Cadot and de Melo's chapter also addresses another key issue in the report, namely widespread fears that new investment in the CEECs may displace investment and jobs in the EU, particularly in the South. The report finds that these fears too are largely unwarranted: indeed, a large portion of the benefits from increased integration with the CEECs may come from higher foreign direct investment (FDI). In the case of France, FDI in the CEECs has been growing quite rapidly since 1989, especially toward Hungary and the former Czechoslovakia, and the question arises: will this reduce employment in France? To answer it, Cadot and de Melo look at the previous enlargement of the European Community to Spain and Portugal. Low wages in these &nbspcountries did &nbspnot, as feared, &nbspdisplace &nbsplabour-intensive activities in France and lead to massive job losses there. In fact, there was no evidence of direct job losses. France's trade surplus with Portugal and Spain improved substantially, despite (or perhaps partly due to) a surge of France's FDI in Spain. Similarly, Dimelis and Gatsios argue that there are growing opportunities for Greek investment in the CEECs, particularly in the Balkan region. Again, the growth in both trade and foreign investment may be the vehicle for increasing economic integration in the region.

A further widespread worry about trade with Eastern Europe is that it could inflict heavy damage on the EU's so-called `sensitive sectors', which include steel, textiles and clothing (T&C), and chemicals. The share of sensitive products in total exports to the EU did increase sharply between 1980 in most East European countries, and in 1991 was equal to 58% in Bulgaria, 40% in the former Czechoslovakia, 53% in Hungary, 45% in Poland and 41% in Romania. Two chapters in the study therefore take a close look at trade in the sensitive sectors.

The principal finding is that the negative impact of trade liberalization on the sensitive sectors may be more limited than initially thought. Indeed, the EU's textiles and clothing sector would probably benefit from a more liberal trade regime with the CEECs. In her chapter, Cristina Corado (Universidade Nova de Lisboa)  focuses on this sector, and her conclusions are striking. There has been rapid growth in T&C trade between the EU and the CEECs, but Corado finds no evidence of damage to EU producers. In fact, increasing trade with the CEECs may have benefited EU producers for at least two reasons: first, it fostered exports to the CEECs of textile goods (where industrial countries' producers still hold a comparative advantage) and of high-quality clothing products; and second, it facilitated the process of transferring highly labour-intensive operations from the EU to the CEECs, thereby improving the capacity of EU producers to face the competitive pressure from developing countries.

Most clothing exports from the CEECs take the form of outward processing trade (OPT), where EU firms transfer the fabric to CEEC firms and contract with them highly labour-intensive operations. Corado warns `if the window of opportunity created by OPT were closed to EU producers (as may happen under proposed new regulations advocated by trade unions in the T&C sector), EU producers will find it increasingly difficult to face the competition from third world firms'.

In his chapter, Alan Winters (World Bank and CEPR) finds little evidence that CEEC producers are a serious danger to the Union's steel sector. Winters estimates what would have happened if first the short-run, then the long-run market access provisions of the Europe Agreements (EAs) were applied in the steel industry as it stood in 1992. Unsurprisingly, consumers in the Union and producers in the CEECs gain substantially from the EAs. The cost to producers in the EU and EFTA is remarkably small: in the long run, output falls by 1.6% in the EU and by 3.0% in EFTA, while output in the CEECs rises by 18%. Moreover, the CEECs' comparative advantage is in lower quality steel, and as their production of consumer goods grows, they will substantially increase their demand for the higher quality steel produced in the EU.

Trade Policy in Eastern Europe
Countering Protectionism

The honeymoon is over for trade liberalization in the countries of Central and Eastern Europe (CEECs), according to a recently published CEPR study commissioned by the EU's PHARE programme. Neither GATT membership nor the Europe Agreements (EAs) alone are strong enough to withstand the recent growth in protectionist pressure. In order to meet this pressure, CEEC trade policy must be given a new and stronger institutional basis.

Foundations of an Open Economy: Trade Laws and Trade Institutions for Eastern Europe is edited by L Alan Winters (World Bank and CEPR), with a foreword by Sir Leon Brittan and Henning Christophersen. The book presents detailed recommendations for redesigning CEEC trade policy and the institutions which manage it, stressing that policy must above all be designed to emphasize accountability, independence and transparency. The issues and policy recommendations go beyond, &nbspbut are complementary to the internal market White Paper drawn up by the Commission for the CEECs.

Despite a good start towards liberalization, the CEECs have encountered strong pressure for protectionism. The old lobbies have re-emerged, such as those in agriculture and industry, supplemented and reinforced by new ones, such as small private business and the political clientele of the new elites who have taken over many of the crucial sectors of the economy. Particularly noteworthy is the resurgence of the bureaucracy, especially the sectoral ministries. Shorn of one set of functions they have sought out another, looking actively for casualties which they can nurse.

Full membership of the World Trade Organisation will impose some policy disciplines, but WTO restraints are not sufficiently tight to ensure a sensible and liberal import regime. For example, tariff bindings commit members not to charge above declared maximum tariffs, but the levels of these bindings agreed in the Uruguay Round are very high in some cases. Romania, for example, has generally bound industrial tariffs at 35% and has agricultural tariffs ranging up to 333%. WTO restraints on applying anti-dumping duties are far too weak to prevent serious abuse of that instrument.

The Europe Agreements impose &nbsptighter &nbsppolicy-making disciplines than the WTO, and will eventually require a regime of more or less free trade in manufactures between the EU and the CEECs. Moreover, EA discipline will be stronger, because of cooperation in areas such as infrastructural links, aid flows, legal harmonization and political cooperation. Serious defection in trade policy can now be made much more costly &nbspby &nbspwithdrawing cooperation in other areas. On the other hand, the EAs allow derogations from free trade for the associated countries. For example, special safeguards may be invoked up to three years after a trade flow is freed from restriction, state aids may be used for infant industry and restructuring purposes, and anti-dumping duties may be invoked.

In his contribution to the volume, André Sapir (ECARE, Université Libre de Bruxelles, and CEPR) examines the impact of the EAs on trade policy formulation in the CEECs, as well as their influence on the actual outcome of trade policy in Hungary. Sapir argues that the principal influence of the EAs on Hungary's trade policy lies in the process of consultation with trade partners. As a WTO member, Hungary is subject to regular consultation and review, but this is essentially ex post. Consultation under the EA tends to take place during the process of formulating trade policy. Consequently, Sapir argues, coupled with the EU's status as Hungary's premier trade partner, Hungarian authorities probably consider their EA obligations prior to their WTO obligations. Sapir goes on to analyse trade policy outcomes in Hungary, issues which are covered in the account of his lunchtime meeting presentation beginning on the next page.

The challenge facing the CEECs is to design institutions that redress the natural asymmetry between the proponents and opponents of liberalism. The advantages of free trade are generally diffuse and abstract (new jobs somewhere doing something), while the costs are concentrated and concrete. Thus there is a continuous flow of special cases in which the costs of adjustment can be made to look unreasonable and for which a little temporary protection looks humane and efficient. Sound institutional design is required to ensure that the diffuse, but almost always larger, losses from protection get equal weight with the gains. Legislators will always come under some protectionist pressure, because their constituencies will depend disproportionately on a subset of production activities, and there will be strong incentives for coalitions of legislators to emerge supporting protection for `each others' industries'.

The study contends that the detail of trade policy should therefore be delegated to the executive, which will normally be more liberal than individual legislators, because its constituency (the whole country) is less concentrated than a single region. This effect can be offset, however, if the executive can evade responsibility for some trade policy outcomes. Responsibility for trade policy must be unitary, clear and cover all dimensions of the consequences.

Executives require bureaucracies to administer trade policy. In their contributions to the book, both L Alan Winters and László Csaba (Institute for Economic Market Research and Informatics, Budapest) call for the creation of a separate and senior Ministry of Trade, which would act as the governmental agency for free trade. Protectionism, Csaba argues, does not need an agency to administer its many intricacies, and can flourish among the many departments. In contrast, free trade and the job of managing the congruence between domestic and EU legislation require a strong departmental advocate.

Protectionist &nbspinstruments &nbspsuffer &nbspless &nbspopposition because their costs are less well known and understood. The CEECs should combat such bureaucratic secrecy by establishing Review Bodies, which can argue cases against protection within the bureaucracy, analyse cases publicly outside it, and offer general comment on official policy from an objectively national point of view. This should be a high priority for the CEECs, and one for which World Bank or EU assistance might be appropriate.

In his chapter, Patrick Messerlin (Service d'Étude de l'Activité Économique, Paris) underlines the dangers from contingent protection (anti-dumping, safeguards, and anti-subsidy) which recent experience in OECD countries has shown may be tailored to deliver the exact dose and form of protection wanted by domestic lobbies. There are already cases of contingent protection in at least three of the CEECs: a few anti-dumping and safeguard cases in Poland and Romania, and around 100 safeguard measures in Hungary.

Messerlin argues that if a CEEC government feels it must adopt contingent protection laws, national laws should do more than WTO provisions require. He stresses the need to create institutions which assess both the costs and benefits of protection for the entire economy. Messerlin also urges that the contingent protection provisions of the Treaty of Rome (Articles 91–93 and 115) should be substituted for the EA provisions, since the Treaty is economically sounder than the EAs in this respect. By signing these parts of the Treaty, the CEECs will become immediate yet partial members of the Union, an important political step towards complete accession.

Trade policy also interacts with environmental, competition and industrial policies, and these policies are the subject of three further chapters. Each policy can be used either to reinforce or to undermine trade policy: at a minimum, they should at least be consistent with it. Bernard Hoekman (World Bank and CEPR) and Petros Mavroidis (GATT Secretariat) study competition policy in the CEECs and identify means by which competition law enforcement might be strengthened and linked more clearly to trade policy. David Audretsch (WZB and CEPR) considers the design of institutions to devise and implement industrial policy in the CEECs and in particular how to avoid regulatory capture, whereby policy-makers with a mandate to manage an industrial policy become spokespersons and champions for particular interest groups. Michael Rauscher (Universität Kiel and CEPR) argues that national trade law should respect the sovereignty of other countries with respect to their environmental policies. Lax environmental standards abroad are not ecological dumping and not a reason to implement countervailing duties. The use of barriers to trade should be restricted to the case of severe transfrontier pollution problems, within the framework of an international environmental agreement.