Ex Post Estimates of the Effects of the European Single Market Programme on the Exports of Developing Countries

Article excerpt

The Single Market Programme in Europe (EC-92) was an ambitious attempt to create a common market. While EC-92 directives appeared to be outward-looking in their orientation, developing countries feared that the programme might lead to considerable trade diversion. Usually based on estimates by the Cecchini Report, ex ante analysis of the implications of EC-92 for the exports of developing countries generally suggested a positive effect, with strong EC-92-generated import growth swamping any diversion of developing-country exports due to the enhanced price-competitiveness effect. In this article, we revisit the question using two ex post approaches, that is an import-growth approach and a gravity model. According to our results, EC-92 directives appear to have had a negative effect on the exports of ASEAN and China, but not on those of the Asian NIEs. As expected, the effects were concentrated in light manufacturing and in some cases electrical machinery. The effect on ASEAN and on developing Asia in total was supported by the gravity-model approach.

I Introduction

Conventional wisdom1 holds that one of the factors responsible for the 1997/98 Asian financial crisis was the rise in the current account and trade deficits of the afflicted countries.2 In turn, it is plausible that regional integration schemes in Europe and North America diverted enough exports from ASEAN and South Korea to contribute to their trade deficits. The same may be said about Mercosur in South America. Diversion of Direct

Foreign Investment (DFI) originating in the industrial countries is also possible if not probable. Thus, regional integration schemes may have contributed, albeit marginally, to the economic crisis in: Thailand, Indonesia, Malaysia, the Philippines (namely, the big ASEAN four) and South Korea.

This article, a part of a larger study, explores part of the puzzle: what diversionary effect did the Unified Market Programme in Europe, known as EC-92, have on the exports of developing countries in Southeast Asia and elsewhere? EC-92 consists of 284 directives issued by the EC secretariat designed to remove all restrictions on the flows of trade, capital and people within the 12 members of the Community, and provide for market unification through other means. The directives began coming into force in the later part of the 1980s. While they were all supposed to be implemented by 1993, some were delayed until the mid-1990s. Theoretically, EC-92 could have had both positive and negative effects on nonmembers, including Asian developing countries; hence the need for empirical assessment.

II Possible Effects of EC-92

While the Cecchini Report of the European Community claimed that the internal growth effect of the EC-92 programme would be so strong as to swamp static diversionary effects on non-member countries, this cannot be taken at face value and needs to be estimated empirically. A number of studies have postulated what might be the effects of EC-92 on third-country exports. Bleaney, Greenaway, and Hine (1995) delineate a number of possible changes stemming from the EC-92 programme that might serve to reduce non-partner country penetration of EC markets: improved competitiveness of EC firms in EC and non-EC markets; trade diversion induced by internal liberalization; market exclusion due to discriminatory harmonization of technical barriers; market exclusion due to discriminatory government procurement; market exclusion due to "reciprocity" requirements; protection induced by eliminating national quotas; and protection induced by adjustment pressures (p. 86).3 Because these effects go well beyond the traditional pricerelated effects of a free-trade area or customs union, empirical trade models are not well equipped to estimate their ultimate effect on trade. Hence, generating such estimates by traditional approaches has been difficult (as discussed below).

As the development of the EC-92 programme unfolded, non-member developed countries and developing nations became concerned about the possible emergence of a "Fortress Europe". …