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Patrick A. Messerlin *
Trade Policy for Cohesive Growth: The Required Policy Framework **

    * [Groupe d'Economie Mondiale at Sciences Po, Paris.]
    ** [ This paper draws heavily on the author's recently published book "Measuring the costs of protection in Europe: European Commercial Policy in the 2000s", Institute for International Economics, Washington, DC.]

In the early 1990s, the EC policy in terms of preferential trade agreements (PTAs) shifted from a nonreciprocity to a reciprocity approach. Paradoxically, this shift was a reaction to the nonreciprocal and nondiscriminatory sweeping trade liberalizations undertaken by Czechoslovakia, Hungary and Poland immediately after the fall of the Berlin Wall. These liberalizations brought rapid economic benefits to the three Central European Countries (CECs); within a couple of years, their trade patterns changed dramatically, reflecting a return to trade flows based on comparative advantage (Kaminski, Wang, and Winters 1996; Hoekman and Djankov 1997a). They also brought a large--unanticipated then and still unrecognized today--political benefit to the three CECs. In particular, they forced an initially reluctant EC to abandon its old formula of „cooperation and trade" agreements with centrally planned economies and to dismantle its barriers on imports from CECs--in other words, they forced the EC to knock down its cherished pyramid of preferences.

The EC shift to reciprocal discrimination has been the source of roughly a hundred bilateral agreements in Europe alone (and this figure is rapidly increasing, with new agreements in the Balkans, and the replication of EC agreements by Turkey under the Customs Union Treaty with the EC) (see table 1). All of these agreements have the same general structure, but they differ in many details: product coverage, time frame, liberalization pace and so on. The resulting „spaghetti bowls" (Bhagwati 1995) illustrate the emergence of an European „bilateralism" centered on the EC.

The Europe Agreements (EAs, described in appendix 1) signed during the 1990s between the CECs and the EC raise four questions. [In these Notes, CECs refer to the ten countries formerly under central planning regime and under accession procedure: Estonia, Latvia, Lithuania, Poland, Czech and Slovak Republics, Hungary, Romania, Slovenia and Bulgaria. Balkan countries refer to the successor states of Yugoslavia (except Slovenia) and to Albania. Eastern Europe refers to the rest of the successor states of the USSR with European territories.]
First, are there reasons to believe that they are costly for the CECs? Second, if yes, what could the CECs do to reduce these costs? Third, could the CECs substantially influence EC multilateral trade policy before becoming full members of the Community? And last, what could be done in the short run in order to improve the situation?

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Are Europe Agreements Costly for the Central European Countries?

From the CEC perspective, the balance of the static costs and benefits to be drawn from EAs is likely to be disappointing, for two reasons--for a (slightly) more optimistic conclusion, see the analysis of the Poland-EC EA (World Bank 2000, 66-67). [For the EC, the economic benefits and costs of EAs per se are small, for several reasons: The CECs are small markets for the huge EC economy; the value of the additional preferences granted by the EC to the CECs with EAs has been limited and declining (EC tariffs have declined since the Uruguay Round, the 1996 First Information Technology Agreement, the Customs Union with Turkey, the agreements with Mexico and South Africa, etc.).]
First, the value of additional preferences granted by EAs to the CECs (the difference between the EC MFN rate and the EC zero rate granted to the CECs) has been limited because the CECs were already enjoying large access to EC markets for all nonsensitive products before the signature of EAs (under the GSP and the 1990-91 measures; see appendix 1). The only noticeable source of additional preferences attached to EAs has been the elimination or suspension of tariffs (in 1997) and quantitative restrictions (in 1998) on exports of textiles and clothing from the six original CECs. [From 1992 to 1998, EAs granted increasing „outward processing traffic" (OPT) quotas to CEC exports of textiles and clothing, which prepared for the 1997-98 liberalization. OPT quotas have been beneficial to EC firms because their use was conditional on imports of raw materials or intermediate goods from the EC. In other words, OPT quotas have given EC firms powerful leverage to vertically integrate Central European producers over the six years, and to reap the associated rents. The six initial CECs are Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia.]

The often-mentioned other source of additional preferences--the progressive introduction of a pan-European system of accumulation of rules of origin--is less clear. The pan-European system still has limits which make it costly to manage, and which make it more difficult to assess the net impact of preferential rules of origin on trade creation and diversion. This net effect depends on several factors, e.g., the relative importance of traded intermediate vs. final goods, the origin or use of these intermediate goods, etc., which play in opposite directions (Panagariya 1999b).

The second reason for likely static costs attached to EAs is the MFN trade policy of the CECs themselves. During the EA negotiations, all the CECs, except Estonia, increased their protection with respect to non-EC countries, sometimes very substantially (e.g., the Polish average industrial tariff increased roughly from 6 per cent in 1991 to 18 per cent in 1993). This protectionist drift was possible because all the CECs were not GATT or WTO members and were, therefore, not subjected to the discipline of „bound" tariffs at the time of the signing of their Interim Agreement with the EC (the only exception being Czechoslovakia, which indeed has not increased its GATT-bound tariffs because it was the only Central European fully fledged GATT member before EA signing). If it reflected domestic pressures in each CEC, this protectionist drift was also fuelled, in numerous instances, by pressures coming from EC member states, the Commission and firms (as is best illustrated by the car sector).

By increasing their protection on imports from non-EC countries before or during the EA negotiations (and by continuing to do so since then, when possible, e.g., in agriculture, through discriminatory surcharges and other instruments), the CECs have substantially increased the value of the preferences that they grant to EC producers--and with it, the risk of trade diversion and the possibility of welfare costs. The still relatively

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high level of EC overall protection (on average 12 per cent in 2001; Messerlin 2001) suggests that a wide range of EC producers could be relatively inefficient by world standards--in other words, that trade diversion is not rare (all the more because CEC imports from the EC are large, often representing 40-60 per cent of total CEC imports).

Static costs can be compensated for by political and dynamic benefits. However, the political benefits of EAs seem dubious. First, it is hard to see how EAs could have enhanced CEC security vis-à-vis the rest of the world, in particular the Soviet Union or Russia. The fact that the EC did not show any willingness to compromise on sensitive sectors (despite minute economic effects on the EC huge economy) was not exactly a signal of West European readiness to fight for the CECs, if necessary.

Second, the credibility of CEC economic reforms could have been enhanced by EAs, only if EAs had not been accompanied by a reversal of the CEC’s initially open trade policy (see above) and only if CECs’ commitments had been more credible when taken vis-à-vis the EC alone than when taken vis-à-vis a group of trading partners (including the EC). Such a condition--that „fewer cops are better than more cops"--would be convincing only if the EC had a better monitoring and retaliating system than its trading partners--a doubtful condition, if one takes into account the post-Uruguay Round tough dispute settlement regime. (The argument that dispute settlement schemes of PTAs are better than the WTO regime because they may give better access to private parties is highly debatable; such a possibility is not available in most PTAs, and the WTO dispute settlement regime is not totally impermeable to private parties.) Last, the EA component of insurance against EC trade practices was not very convincing either, after the upholding of the EC antidumping regime and the introduction of several safeguard provisions in the EAs. Indeed, from 1990 to 1999, the CECs were accused of dumping by the EC in 42 cases (106 cases during the 1980s).

Dynamic benefits from EAs are more difficult to assess. The available evidence suggests that the CECs which are most advanced in their accession negotiations are those whose exports have the largest exposure to the EC technical regulations policy, and in particular to the New Approach (Brenton, Sheehy, and Vancauteren 2000). However, the discussion of the EC system of technical regulations (TR) does not suggest that the EAs can be powerful enough to eliminate TR-related costs (those costs have been very imperfectly reduced within the existing Community).

The same observation can be made for liberalization in services. Increasing foreign investment in the CECs could provide large benefits (Baldwin, Francis, and Portes 1997), but investment flows to the CECs have so far remained limited, except for Hungary since the mid-1990s, and perhaps for the Czech Republic since 1999. In 1997, the inward stock of foreign direct investment (FDI) amounted to, respectively, 35 and 23 per cent of GDP in Hungary and the Czech Republic, but 10 per cent or less in the other CECs (preliminary estimates on FDI flows for 1998 do not dramatically change the picture) (UNCTAD 1999). Moreover, some large FDI inflows may have reflected costly investment diversion occurring behind high trade barriers (e.g., in the Polish car industry).

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Europe Agreements and CEC Accession to the EC

In the volatile political environment of Central Europe in the early 1990s, Central European politicians focused on the immediate political benefits of trade agreements (e.g., the apparent legitimacy attached to signing EAs) while ignoring their delayed costs (to the extent that they were aware of such costs). When they began to realize EA deficiencies (with the probably excessive trade reallocation and the limit of EC political support), they started to negotiate discriminatory trade agreements between themselves (CEFTA and BFTA) in order to counterbalance EAs.

But the bilateral feature of many aspects of these intra-CEC agreements imposed (and still does) a strong limit on their capacity to reduce the costs of the hub and spokes regime generated by the EAs. This weakness of the intra-CEC approach can be explained by several factors. Certain factors are political and quite specific to the European situation, such as the CEC belief in a rapid accession of their countries to the EC. Other reasons are economic and quite generic to trade agreements between spokes; contrary to multilateral free trade, gains from discriminatory trade agreements flow from increased shares obtained in export markets, whereas costs are imposed by rents abandoned to inefficient producers located in partner countries. As a result, export lobbies in a spoke country focus on the large markets of the hub country, and concentrate their efforts on the risks of domestic protectionist measures in these markets. By contrast, they neglect spoke markets, and possible domestic protectionist reactions from the spoke countries.

Now that the EAs have been implemented and will last for a long time, how can the CECs reduce their costs? Of course, a first possibility is to accelerate the CEC accession process to the EC. Membership is likely to reduce static costs because it will reduce CEC MFN tariffs, and it could be expected to increase dynamic benefits related to smaller transaction costs and larger foreign investment flows. However, this option does not depend on the CECs alone; it requires EC acquiescence at the very time when the CECs threaten two powerful EC interest groups: farmers and poor EC regions.

It is thus not so surprising that the accession process has been very slow (see appendix 2 and table 2). As of April 2001, no negotiations on the difficult topics had taken place, although the process with the Czech Republic, Estonia, Hungary, Poland and Slovenia (the so-called first wave, or „Luxembourg Group", which also includes Cyprus) had been launched in December 1997 by the Luxembourg European Council (for details, see Mayhew 2000a). During the past two years, the CECs have completed their negotiating position papers on all the chapters for negotiation, and the Commission has begun to draft the EC common position.

These negotiations have been made more complicated (and probably slower) by the December 1999 Helsinki European Council decision to extend them to the remaining CECs (the so-called second wave, or "Helsinki Group", which consists of the rest of the CECs and Malta), partly as a recognition of their support during the Kosovo war. Last, if the 2000 Nice Inter-Governmental Conference (IGC) between the 15 EC member states has dealt with institutional issues, such as voting weights and the Commission size in the EC with 25 member states, it has not dealt with the economic problems of accession.

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The accession negotiations are likely to be most difficult on three topics, all key in the context of trade and commercial policies: agriculture, regional subsidies and technical regulations. In addition, they are expected to be difficult on foreign policy and Russia, two non-economic issues with clear echoes in trade policy, and on justice and home affairs (also related to trade policy, to the extent that it touches CEC capacities for legal enforcement and upholding the rule of law). [For this second wave, very sensitive political issues, such as the status of minorities, democratic institutions, etc., are a precondition for substantive discussions on accession. The EC has announced that it will not set target dates for accession before having a full assessment of each candidate’s situation, i.e., before 2002.]

Of course, agriculture is the most difficult chapter of negotiations. It is still a large sector (in value added and employment) in CEC economies, including the CECs that have no substantial comparative advantages in this sector (only Bulgaria, Poland and Romania are considered potentially large producers of farm products in the future). During the 1990s, political pressures on CEC governments increased, with substantial declines in farm production in most CECs (8 per cent in cereals, 28 per cent in milk), and with the emergence of trade deficits accompanied by increasing market shares for farm imports from Argentina, Australia and Brazil.

In this difficult context, the 1999 EC Berlin Council made two inconsistent decisions. When dealing with EC farmers, it chose to reject the option of renationalizing farm aid on the (right) basis that the CAP is not a social policy (Messerlin 2001). But this approach would have logically required scheduling a progressive extension of the whole CAP (including farm income support) to the CECs. Far from going in this direction, the Berlin Council included a financial agreement that made it clear that EC direct income subsidies would not be extended to CEC farmers by earmarking a maximum amount of 3.4 billion Euros (in 2006) for CEC accessions, whereas available estimates of the budgetary costs of extending the pre-Berlin CAP to the CECs fall within the range of 5-15 billion Euros for the Czech Republic, Hungary, Poland and Slovakia (and within the range of 9-23 billion Euros for all the CECs).

The Commission tried to rescue the Berlin Council decisions, but it made things worse. It justified the Council’s position with the fact that EC farmers will suffer income losses due to scheduled price decreases, whereas CEC farmers will not. This justification has two flaws. It ignores the fact that „intervention" prices of agricultural products in certain CECs (Poland and Slovenia) are becoming as high as EC prices (sometimes even higher); and it would logically require that any „new" EC farmer (being the heir of a retiring EC farmer or an entrant into farming activities) would not be eligible for aid--and that (unfortunately) is not the case (Messerlin 2001).

In 2000, the EC tried to improve the situation by offering the CECs a trade agreement eliminating export refunds and import tariffs on EC-CEC trade in farm goods (pigmeat, poultry, cheese, fruit and vegetables) which are not heavily dependent from the CAP. This marginal liberalization has generated a lot of bitterness among the CECs, for two reasons. [Again, the fact that tariff-free farm exports from the CECs to the EC would increase from 37 to 77 per cent as a consequence of this agreement is less a measure of the scope of liberalization than of the severe restrictiveness of the CAP for the rest of CEC exports.]
First, CEC tariff-free farm products will be subject to internal control for

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compliance with EC technical regulations in the country of origin; the extent to which such controls will be a substitute to EC border protection remain to be seen in the near future.

Second, this „freer" trade comes at a cost in constraints on production; production quotas will be imposed on CEC farm products included in these trade agreements, raising the question of the level at which these quotas will be fixed. CECs have requested quotas based on their production during the late 1980s, but the EC has argued that such levels of production reflect the distortions of nonmarket economies, and hence are not acceptable. This is not a minor issue. For instance, CEC pork production declined by 24 per cent during the 1990s. The bitterness is particularly high in Poland, which is the major CEC producer of most of the products involved (e.g., it produces 40-50 per cent of CEC pork output). In this context, Polish WTO strategy during the Uruguay Round (that is, adopting a high level of protection to minimize compensation when joining the EC) is becoming a trap; it has made its farm sector barely competitive, by EC standards, for the products covered by the agreement (e.g., the production price of pork is 5 per cent higher in Poland than in France).

The second major issue raised by CEC accessions consists of the considerable increase in the population living in EC regions that could be qualified as „poor," and hence eligible for regional aid. This problem is exacerbated by the fact that part of the farm problem could be handled through this approach. Direct income support to (small) farmers could be provided under this heading (assuming that the de-coupling principle will be respected, and tightly monitored to avoid the past and current mistakes of the CAP--a big „if" in the EC context). Traditionally, the regional issue is dealt with by the so-called Structural and Cohesion Fund transfers. However, the Berlin Council decision to cap EC transfers from these funds at 4 per cent of the recipient country GDP has had two effects. It reduces (probably severely) the CEC expectations in this domain. And it implies that a large portion (80 per cent) of the structural aid currently given to EC regions should be reallocated to CEC regions.

Such a drastic shift is hardly compatible with the prevailing view among current EC member states, according to which structural aid is an „acquired right." Ireland successfully defended its rights at the Berlin Council despite the fact that its per capita GDP was 107 per cent of the EC average in 1999, and is expected to be 117 per cent in 2001. At the Nice Inter-Governmental Conference (2000), Spain kept its right to veto decisions on regional aid until 2013 (at least). Last, the Financial Framework of the Berlin Council clearly suggests that the EC expects new member states to pay their full contribution to the budget--raising the question of the balance, during the first years of accession, between full contribution and still incomplete transfers (Mayhew 2000b).

Last but not least, the CEC accessions raise acute problems in the increasingly important domain of technical regulations and work safety regulations (Messerlin 2001). The estimated costs for the CECs to comply with the EC acquis communautaire in these matters are huge. For Poland, they have been estimated at 3 per cent (of current GDP) for the directives on standards and safety rules in transport; 4.5 per cent for the directives on the environment; and 0.5 per cent for the directives on work safety in general; that is, a total of 8 per cent (which excludes the costs of aligning the other directives related to the Single Market Program) (Mayhew and Orlowski 1998). A

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World Bank study has also estimated that introducing the 320 EC environment directives alone would annually cost Poland US$6 to US$13 billion (4 to 8 per cent of its current GDP) for the next 20 years, and roughly half these GDP percentages for the Czech Republic (Mayhew 2000b). If correct, at least part of these sums (the part reflecting „excessive" environmental protection) is likely to represent a huge amount of forgone consumption in the cost-benefit analysis of EAs.

Assuming no sudden, deep changes in the EC approach, this brief survey suggests that the Berlin Council has tilted the rules in favor of the EC’s most powerful vested interests (farmers and poor regions) and against the Candidate Countries--and that these changes reduce the benefits of full accession expected by the CECs. Moreover, by imposing costly investments to meet EC technical and environmental regulations, the alignment to the EC acquis communautaire will impose forgone consumption on the CECs, another source of reduced benefits for the CECs from accession--and hence of increased acrimony in the CECs.

CECs’ Influence on EC Multilateral Commercial Policy during the Coming WTO Round

Because the accession process will be based on a very gradual approach (as it was for Greece, Portugal and Spain, which benefited from long transitional periods, such as 10 years in agriculture), the coming WTO round will likely see all the CECs outside the EC--with some of them bitter vis-à-vis the EC. This situation raises the following question: What can the CECs’ influence be on EC multilateral trade and commercial policy during the coming round? The question of what the CECs can do to accelerate their accession to the EC is left for section 4).

If few (or any) CECs become EC members during the negotiations of the coming WTO round (assuming that these negotiations will be concluded by 2005-09), and most (all?) of them will become full EC member states after 2010, what then could CEC influence be on EC multilateral trade policy during the coming WTO round? This question deserves particular attention when the CECs’ level of protection is lower than the EC level (when higher, the CECs will be better off adopting the EC existing protection). Such a situation is not rare because, if the CECs have an economy-wide average tariff close to the EC average, they often have individual (by-products) tariffs which are different from EC ones. The answer differs significantly for industrial products, farm goods and services.

In manufacturing, the CECs can adopt two attitudes. They may be „neutral" if they do not feel concerned (for instance, if there are no CEC consumers) and hence leave the EC to grant „compensations" (in accordance with GATT rules) to its trading partners for getting the right to align acceding CEC tariffs to EC tariffs (i.e., the right to impose the acquis communautaire on the CECs). Alternatively, the CECs may exert pressure on the EC to align its higher MFN tariffs to the corresponding lower (preaccession) CEC MFN tariffs. The choice between these two attitudes will depend on the intra-CEC balance of interests between producers and consumers for every product. CEC consumers will always be interested in lower (postaccession) EC tariffs, whereas CEC producers will not necessarily oppose EC tariff decreases to the extent that they are accustomed to

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lower protection at home, so that they can expect to increase their share of the EC market. The risk that CECs may have a negative influence on EC trade policy is higher for products under nontariff barriers (in particular CEC producers may oppose EC tariff reductions following the elimination of MFA quantitative restrictions on textiles and clothing) and for products for which coalitions of protectionist lobbies can mobilize several CECs (this situation may happen in one-fifth of the CEC industrial sectors; UN-ECE 1996).

In agriculture, the CECs grant a smaller overall support to agriculture than the EC. In 1998, the estimated CSE-based tariffs (based on the old method) range from 10 per cent (Hungary) to 28 per cent (Poland), in comparison to 49 per cent for the EC (based on PSEs the gap is even larger, with the EC support being three times -compared to Poland - and nine times -compared to Hungary- higher). This broad view suggests that the CEC accessions will raise the critical issue of the ability of the enlarged EC to meet its WTO commitments (defined as the sum of the EC-15 and CEC commitments). The levels of difficulties ahead differ according to the type of trade barrier--as outlined in the following four points.

First, in terms of tariff commitments, most CEC accessions will be likely to require compensation because CEC tariffs (except for those of Poland and Romania) are lower than EC tariffs: by 20 per cent for Hungary, by 50 per cent for the Czech Republic and Slovakia, by almost 100 per cent for Estonia.

Second, concerning import quotas, adding EC and CEC commitments would increase EC quotas by 15 per cent for milk, by 50 per cent for cereals and beef, and by 150 per cent for chicken. However, EC vested farm interests hope to use the „netting out" technique, which consists of adding the EC and CEC quotas and subtracting the bilateral portion of these quotas (this technique tends to reduce the quota increases following accession; it was used for the last EC enlargement, but is still pending approval in the WTO).

Third, in terms of export subsidies, the situation will be very difficult for an enlarged EC. Almost all of the CECs have scheduled low levels of export subsidies, and export capacities estimated for 2006 could amount to twice these levels (of course, aligning CEC internal prices to EC prices would worsen the situation by increasing the CECs’ need for export subsidies). Moreover, the EC-15 has no room to maneuver because it is already at the limit of its own export subsidy commitments (Messerlin 2001). [In 1997, Hungary was granted a waiver from its export subsidy commitments (on the basis of miscalculations owing to trade conducted in nonconvertible currencies), and set revised commitments (subject to specific annual reports).]

Fourth, concerning domestic support, the EC-15 has enough reserves in unused support under the current definition of the AMS to be able to fulfill the commitments of the enlarged EC. But the final situation will depend on how successful the EC will be in keeping unchanged the existing definition of domestic support.

Solving export subsidy problems and minimizing tariff compensation would require that the EC substantially reduce its protection on farm products (as was noted above for

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manufacturing). Further reforms of the Common Agriculture Policy during the coming decade should make lower EC prices more consistent with CEC commitments. The Berlin Summit has left very limited scope for decisive moves in this direction.

Meanwhile, the competitive pressure from CEC farmers on EC farmers may be reduced for two reasons. Barriers on trade of key farm products between the CECs and the EC are still high. And CEC farmers are often inefficient, making them unable to exert the competitive pressure that wide-ranging regional agreements could potentially provide (Josling 1998). They need massive restructuring, but they fear that they will not have the time to do it, both because EC subsidized farm exports will quickly compete with their own products in the open CEC markets and because CEC’s cheap land may be quickly bought by rich EC farmers and resold at high prices later (after the CAP introduction in the CECs). Meanwhile, their hope for massive direct financial transfers from Western to Central Europe is fading (all the more because many CEC farms are small, hence unlikely to get much from the existing CAP which is biased in favour of large farms). As a result, farmers in certain CECs (Poland) are both increasingly fiercely opposed to enlargement and trying to slow down any further reform of the CAP--amplifying the protectionist drift in CEC farm policies, which can be already observed (Hartell and Swinnen 1998).

In services, the situation is quite different, largely because the de facto joint competence of the Community and Member States in commercial policy opens a Pandora’s Box of potential coalitions--and hence of strategies from vested interests. For those services for which certain member states have a strong protectionist stance, the CECs may align their position to the least open EC Member States so as to eliminate all risk of future claims for compensation. But in turn, that will make more difficult the emergence of a compromise about an EC „common position" among the current EC Member States--the protectionist member states claiming to have external „supporters" of their policy.

In such cases, the WTO compensation mechanism has the perverse impact of inducing the CECs to „maximize" their current level of protection, and hence to reinforce the most protectionist interests in the EC in order to minimize compensation in the future. This scenario has been illustrated by Croatia, Estonia and Latvia, which ultimately adopted the most protectionist version of the EC Television Without Borders Directive, at the cost of delayed accession to the WTO (the United States insisted that these CECs adopt the open-minded version of the directive) and of reinforced protectionism in certain EC member states.

Such a negative scenario could be amplified by the fact that foreign direct investment in CEC services has meant the almost complete elimination of CEC firms in many services (including in those where CEC firms initially may have had some advantages, such as retail trade), and the dominance of EC firms possibly eager to expand to the CECs the protection they enjoy in the EC. The counterbalance flows from the fact that large EC service firms tend to have a worldwide perspective--that is, they may be ready to exchange protection in small CEC markets for better access in large markets elsewhere.

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What can be done in the coming years?

The major initiatives that the EC could undertake in favor of Central European countries would consist of purely EC domestic actions: a profound reform of the CAP, an increasingly strict cap on antidumping and safeguard measures (e.g., by banning such measures for goods subjected to a tariff smaller than a jointly agreed threshold), and a substantial change in the EC approach to technical regulations and services (based on more conditional mutual recognition and on a stronger, market-driven orientation).

All these measures are necessary to accelerate CECs’ accession to the EC. As already mentioned, they would also need to be complemented by a profound change in the EC approach to the enlargement process: focusing on the preaccession adoption by the CECs of only a few core directives of the acquis communautaire, ensuring their effective implementation in the CECs, while leaving the rest of the acquis for postaccession adoption, trusting market forces and the integration dynamics to discipline CECs’ behavior (as they have disciplined the behavior of current EC member states in the past and continue to do so).

CECs’ accessions will automatically provide a substantial cure for EC discrimination because they will eliminate the hundred agreements currently in force between the EC, CECs and EFTA countries. But they raise a key question: To what extent will the new EC Member States shift the currently relatively free trade oriented EC-15 to a more protectionist stance? The question is not superfluous: Many CECs have revealed inward-looking attitudes during the last decade. It has often been claimed (see Lawrence 1997; Sapir 1992; Cadot, de Melo, and Olarreaga 1999) that so far, the EC has induced its most protectionist members to open their borders more than they would have probably done without the EC. Whether this remark will have any chance to remain true when the EC has 25 member states is an open question. Under present conditions, joining the EC will imply for most CECs an increase in their farm protection and a decrease in their protection of manufacturing and services (for estimates, see Francois and Rombout 2001). This new structure of protection could induce the CECs to increase their farm production and decrease their industrial and service productions, all evolutions that the CECs may want to resist by using EC instruments of protection (e.g., antidumping in goods and regulations in services) in order to rebalance EC protection in their „favour". [The CECs’ possible abuse of EC protection raises the question of the robustness of the existing EC decision-making process in trade matters. In particular, how would the complex 133 Committee (see box 1.2) work with more than 20 member states having very different objectives in trade matters?]

Actually, it is more important, in the short run, to underline that the CECs have alternatives to EC actions at their disposal for accelerating their accession to the EC and decreasing the current costs of EAs. The CECs could align their MFN tariffs higher than the corresponding EC MFN tariffs to the level of these EC MFN tariffs without waiting for the end of the accession negotiations (Messerlin 1996). [As a result, rules of origin for all the goods with the same tariff in the EC and CECs could be eliminated. Of course, those CEC MFN tariffs that are lower than EC MFN tariffs should not be increased--for WTO legal reasons, but more profoundly, for economic reasons (trying to lower the EC tariffs).]
By granting tariff concessions that are probably considered almost worthless by their WTO partners (the

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CECs will decrease these tariffs to the EC level anyway as a result of their accession to the EC), the CECs will decrease static and transaction costs associated with EAs and improve their own environment for investors. The CECs may also get political gains from their initiative to the extent that it will generate pressure on the EC to shorten the transition period under the accession protocols (because their initiative will make the CECs instantly ready to enforce the EC Common Tariff).

The CECs could magnify the benefits of such an initiative, by making this initiative a joint decision to be implemented in a common time framework. Given the CEC hostility to common institutions, it is important to note that such an initiative does not require any institutional requirement. Only a joint declaration is needed, with each CEC specifying its own time frame to reach the common goal within the time frame decided in common. The additional gains it would bring would be a reduction of the static costs generated in the CEFTA-EFTA context, and, possibly, an increased (joint) bargaining power vis-à-vis the EC.

Concluding Remarks

The EC has realized that many of the PTAs that it has signed in the past have been a costly bargain for its partners and an exercise in futility for its own economic interests--hence, a political burden in the long run which more than outweighs the immediate political gains. The EC is also realizing that all the discriminatory agreements of some size that it could conceivably sign in the future offer a cost-benefit balance less positive than the one available in future WTO rounds, simply because they impose on EC firms the same competition pressures and adjustment efforts as equivalent WTO liberalizations (most of these new PTAs would include efficient world producers) without increasing foreign market access for EC products and services to the same extent as WTO deals.

The coming two decades are likely to witness the disappearance of many (maybe one hundred!) existing EC discriminatory agreements through the enlargement process, improving the functioning of the WTO system--if (a big „if") the EC-25 will be as pro-free trade as the current EC-15. All these evolutions are consistent with (1) the discretion with which the EC texts released for Seattle have mentioned the regional approach (the texts are de facto limited to a defense of the existing discriminatory agreements with developing countries, in particular the ACP states), and (2) the interest shown in these texts in the unilateral elimination of all tariffs imposed by the industrial and emerging-market economies on imports from the least developed countries.

That all of the PTAs of sizable economic magnitude that the EC could envisage signing include efficient trading partners (Japan, the United States, or sets of Asian or Latin American countries) are likely to impose the same adjustment costs on the EC as WTO deals without granting the same benefits in market access as such deals is likely to make (ultimately) the EC a robust (because it is based on self interest) supporter of the WTO.

Being a strong WTO supporter cannot be limited to the fact of shifting negotiations from a bilateral context to the multilateral WTO forum. It also requires becoming a permanent supporter of the WTO dispute settlement mechanism. The EC has shown its

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reluctance to use the WTO panel rulings as a support for eliminating domestic protectionist measures favouring blatantly narrow vested interests capable of getting support from foreign vested interests (as is best illustrated by the banana case).

This weak ability to keep under control its own vested interests should induce the EC to promote the following key improvement of the WTO dispute settlement procedure in order to benefit from stronger support from the WTO. Today, a WTO member faces countermeasures if it decides not to follow panel recommendations. This option transforms the WTO from a liberalizing force into an engine of protection because the defendant’s protectionist measures condemned by the WTO panels are followed by the complainant’s protectionist countermeasures authorized by the WTO. Instead of such countermeasures, WTO members should get additional concessions from the WTO partners refusing to enforce panel rulings, under the renegotiation provisions of GATT Article XXVIII and GATS Article XXI; this option would keep the pro-liberalization momentum of the WTO texts.

Appendix 1. The spaghetti bowls of European bilateralism

The EC reacted very cautiously to the Central European sweeping trade liberalizations which followed the fall of the Berlin Wall (Messerlin 1992). In early 1990, it simply shifted Hungary and Poland from MFN to GSP treatment for five years. Later that year, it eliminated all its quantitative restrictions on Hungarian and Polish exports but only for one year, and not for a substantial list of „sensitive" products. In 1991, the same benefits were granted to Czechoslovakia. They were progressively extended to the other CECs, when they shifted to a market economy.

In 1992, the EC began to embody these changes in a series of reciprocal, bilateral Europe Agreements with the ten CECs (for more details, see Winters 1992, Rollo 1992, and Sapir 1995), the major provisions of which can be divided into three main sections:

Free movement of goods: A free trade area is established between the EC and each CEC. Tariffs, quantitative restrictions and measures having an equivalent effect (including state monopolies, to a certain extent) must be eliminated over a maximum five-year transition period for the EC and a ten-year transition period for the CECs. But antidumping procedures are maintained, six different safeguard provisions are included, and complex rules of origin are established. Special protocols deal with „sensitive" products (e.g., textiles and clothing, coal and steel, cars, processed agricultural goods and fisheries). Concessions in agriculture are particularly limited--the CECs essentially getting privileged access to EC tariff-quotas granted under the EC Uruguay Round commitments. Almost all these provisions (except those in agriculture linked to the Uruguay Round) were quickly implemented (after signing, not ratification) by bilateral „Interim Agreements" (the EA portion devoted to free movement of goods).

The three other freedoms associated with the Single Market are movement of workers, movement of capital, and right of establishment in services. But the EAs refer to these fundamental principles of the Treaty of Rome in a rather restrictive way: Restrictions on labour flows are maintained (including on skilled labour and recognition of diplomas),

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and provisions on services are limited to increased „cooperation" between the EC and each CEC for certain infrastructure services (banking, telecoms, transport).

The legal framework (one-third of all EA provisions) essentially covers current payments, competition law and state aid, intellectual property rights, public procurement and „approximation" of laws (i.e., the CECs’ regulatory alignment with EC directives on a large range of issues, from customs procedures to technical regulations, banking law and transport regulations).

All the EAs are bilateral, and differ in many details--never insignificantly. Because of their own trade agreement with the EC, EFTA countries have adopted the same approach that the EC has with the CECs.

Appendix 2. The enlargement process: Missing a historic opportunity?

Each EA preamble specifies that the „objective of the [name of the CEC in question] is to become a member state of the EC". The CECs were unhappy with this formulation: They wanted a sentence presenting the accession as the objective of the CEC in question and of the EC.

The EC insisted on keeping such a unilateral formulation because it wanted to make clear its refusal to negotiate any component of the acquis communautaire, and to use the enlargement process as an opportunity for reforming the EC’s badly designed policies. As a result, the existing and future member states are locked in the existing intra-EC deals (as was first illustrated by the non-negotiability of CAP when Britain joined the EC), thus leaving ultimately the WTO as the only external source of reforms.

Viewed from a CEC’s perspective, it is crucial to realize how much of a moving target the EC is for a Candidate Country. The Single Market, which was supposed to be firmly established by 1993 (most EAs were already signed by then), has since been relying on more directives every year. The legal framework required by the European Monetary Union (EMU), the Common Foreign and Security Policy (CFSP) and the Justice and Home Affairs (JHA) is continuously expanding. The Copenhagen Council (1993) imposed a few, but nevertheless politically sensitive, additional requirements on certain CECs, such as the protection of minorities. The Madrid Council (1995) added the „adjustment of administrative structures", a condition that few of the current EC Member States would fulfill. The Berlin Council (1999) made clear that the existing Common Agricultural Policy would not be expanded to the CECs (see main text). Lastly, the new Accession Partnerships between the EC and CECs have linked the granting of EC preaccession funds to hard conditionalities on CECs. For instance, Poland was asked to restructure its steel industry (a reasonable goal per se but the Partnership Agreement is silent on the key matter of the interactions between EC and Polish steel restructuring) and to free short-term capital movements (a debatable goal in the short and medium run).

The EC’s day-to-day approach to enlargement is compounding the above-mentioned difficulties. It consists of a bureaucratic and pernickety process: it is aimed at monitoring CEC’s fulfillment of the entire EC acquis communautaire before entering

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the EC and it tries to minimize the number and the time span of exceptions as much as possible.

Such insistence on a strict preaccession conformity approach contrasts strikingly with EC’s past when member states slowly adopted the EC regulations when they were difficult for them, as best revealed by the many infringements on the translation of EC directives into national laws and by „opting-out" options (including by slow privatization). The EC insistence will have long-term costs: it forces CECs to hastily pass hundreds of laws to comply with EC requirements, and hence it risks creating „virtual" legal frameworks (that is, texts either loosely or not enforced) in Central Europe, all the more because implementing certain aspects of the acquis, such as environment directives (see main text), imposes huge costs on CEC economies.

The enlargement process follows a precise procedure. First, the Commission „screened" the situation of each CEC in order to identify the difficult issues likely to arise in the negotiations. Then, bilateral discussions involving each CEC, EC Member States and the Commission are "opened" to discussion on a chapter by chapter basis (the whole acquis communautaire has been split into 31 „chapters", see rows in table 2) by the successive EC Presidencies. This was done first for the Luxembourg Group of CECs, and then for the Helsinki Group (for a more detailed presentation, see Mayhew 2000a).

On each opened chapter, Candidate Countries first present their „position" (requests for arrangements). The Commission then presents its own assessment of the situation. Finally EC Member States present their „common position". Once all the contentious points in a chapter to be kept on the table of negotiations are determined, the chapter is „closed". Once all chapters are closed, real negotiations begin. As of April 2001, only about half the chapters have been closed, with the Helsinki Group increasingly catching up with the Luxembourg Group. Table 2 pinpoints the main sources of conflicts (shaded cells). As a result, the negotiation stage has not yet been reached by any CEC--in fact, the common position of the EC member states is still far from being known for most of the chapters.

Table 2 presents two possible definitions of the acquis communautaire: the Treaty provisions that are the core of the acquis and are definitely non-negotiable (they make up the EC Constitution), and the „secondary legislation" consisting of roughly 1,500 directives (a non-negligable number of which could have been subject to review and reform if the EC had been ready to use the enlargement opportunity to improve its own policies).

The breakdown between closed and still open chapters reveals a striking asymmetry: conflicts of interests are concentrated in chapters with a high dose of secondary legislation, whereas the constitutional Treaty provisions do not raise major problems (except the visa issue in Justice and Home Affairs, which is particularly sensitive because, ultimately, it will define „new" borders, cutting traditional links in Central Europe, for instance between Poland and Ukraine, or Hungary and Romania).

This asymmetry of problems suggests that the enlargement process is more about narrow interests than about long-term perspectives. This impression is magnified by EC’s unilateral decisions to grant itself long transitional exceptions from certain core

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Treaty provisions, as best illustrated by the freedom of movement of workers. Under German and Austrian pressures, the Commission has proposed a five-year transition period (with a possible extension for a further two years) during which the current EC Member States will be able to keep their restrictions on workers from CECs (such exceptions on crucial Treaty provisions and long transition periods are unlikely to be granted to CECs). Moreover, it remains to be seen if this contrast between EC’s lax position on its own obligations and its strict position on CEC obligations will not be amplified when Member States (finally) come to the forefront of the negotiations (as of April 2001, it was not yet the case).

Such an enlargement process reveals a lack of vision from the EC--and maybe also the fact that the EC may feel overwhelmed by an enlargement involving 170 million people (if one includes Turkey) with wide differences of income per capita and culture.

It also shows that the EC has not learnt an essential lesson from its own experience: the EC does not trust markets to discipline CEC behavior despite the fact that during the last forty years, they have disciplined France, Germany, Italy and a few other Member States that have been reluctant to open goods or services to competition. As a result, the EC is unable to adopt a strategic approach to enlargement--that is, to focus on the few core components of the acquis communautaire to be included in the ex ante exercise (for instance, a robust banking sector), leaving the other aspects to market forces and to ex post (after accession) compliance by the CECs.

The EC lack of vision and focus could add huge political costs to the economic opportunity costs imposed by an enlargement process expressly conceived as incapable to deliver EC internal reforms. The EC may then have lost a historic opportunity.

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Table 1. The "spaghetti bowl" of European discriminatory trade bilateralism, 1999

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Table 2. The EC enlargement to Central Europe (April 2001)

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