Restructuring European Union Trade with Central and Eastern European Countries

By Fidrmuc, Jarko | Atlantic Economic Journal, March 2000 | Go to article overview

Restructuring European Union Trade with Central and Eastern European Countries


Fidrmuc, Jarko, Atlantic Economic Journal


JARKO FIDRMUC [*]

Central and eastern European countries (CEECs) participate in the European economy with trade shares of the European Union (EU) and levels of intraindustry trade comparable to peripheral EU countries. However, the opening of CEECs has induced increased specialization in EU countries, which contrasts with the development in previous decades. This partially explains the cautious approach to the eastward enlargement in the EU. Furthermore, CEECs are more similar to each other than to EU countries. The pattern of the CEECs' trade with the EU resembles that of Turkey. Trade diversion is likely to present a significant burden for countries omitted from the first wave of the enlargement. (JEL F12, F14, F15)

Introduction

The opening of eastern Europe and the proposed full integration of the eastern European countries into the European Union (EU) imposes different effects on EU countries. The current discussion of eastern enlargement of the EU focuses on the question of budgetary, migration, and adjustment costs. Nevertheless, foreign trade represents an important channel for both the adjustment needs and growth potential in East-West integration in Europe.

This paper analyzes the impact of an EU eastern enlargement by comparing it with previous developments in EU trade with the central and eastern European countries (CEECs) (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) in the manufacturing sector, which has been significantly liberalized by the Europe Agreements. The CEECs were relatively successful in regional and structural changes of exports and imports. The restructuring of East-West trade provides a comparably better indication of the convergence of CEECs to EU countries than any other economic development. The growth of intraindustry trade, which is observed in intra-EU trade, also dominates the recent development of East-West trade. This could lower the possible negative impact on EU countries. This paper analyzes the political economy implications of restructuring EU trade with CEECs.

This paper is organized as follows. The second section discusses the political economy of trade liberalization and integration. The third section presents the development of EU trade with CEECs in a comparison to intra-EU trade and trade with selected third countries. Conclusions will be presented in the fourth section.

Political Economy of Trade Liberalization and Integration

Since the opening of eastern Europe in the late 1980s, the expectations of the impact of trade liberalization between the EU (and other countries of the Organization for Economic Cooperation and Development) and CEECs are driven by the arguments of the Heckscher-Ohlin model. CEECs are seen to be abundant in qualified and unqualified labor, some raw materials, and energy. This pattern of factor endowments is similar to southern European countries, while northern member states of the EU are abundant in capital and human capital. Therefore, this analysis of the impact of trade liberalization with CEECs focuses, first, on competition with southern European countries and, second, on factor price changes through liberalized trade [Collins and Rodrik, 1991]. These arguments follow the discussion related to the creation of the North American Free Trade Agreement in the U.S. [Learner, 1992].

Based on the trade structure in 1991 and 1992, Neven [1995] finds that northern European countries seem to have comparative advantages relative to CEECs in technology and human capital intensive products. Southern European countries have a comparative advantage in labor-intensive industries with low capital content. This means that CEECs may specialize in labor-intensive products with high capital content, thus filling a niche in the European division of labor. However, CEECs are also likely to compete with southern European countries in labor-intensive products as well. …

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