Measuring the Costs of Protection in Europe: European Commercial Policy for the 2000s

Overview

Trade protection costs the European Union between 6 and 7 percent of its gross domestic product, or the equivalent of the annual economic output of Spain. Continuing the Institute's series on trade protection in major countries (which already includes the United States, Japan, Korea, and China), this study by Patrick Messerlin is the first attempt to measure the impact of all types of protection in the European Union.

Messerlin uses partial equilibrium methods to assess the ...

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Overview

Trade protection costs the European Union between 6 and 7 percent of its gross domestic product, or the equivalent of the annual economic output of Spain. Continuing the Institute's series on trade protection in major countries (which already includes the United States, Japan, Korea, and China), this study by Patrick Messerlin is the first attempt to measure the impact of all types of protection in the European Union.

Messerlin uses partial equilibrium methods to assess the costs to consumers and to evaluate the political economy of European protection. He also examines in detail the intricate relations between the major EU domestic policies-from the Common Agricultural Policy to the Single Market in services-and commercial policy. He aims to assess their dynamic evolution for the decade to come, which will be marked by the first accessions of Central European countries to the EU and by the debate on the European political union. The study provides a valuable agenda for the upcoming round of WTO negotiations and underlines their role as a support for domestic reforms that the EU should undertake for its own benefit.

About the Author: Patrick A. Messerlin, Visiting Fellow, is a Professor of Economics at the Institut d'Etudes Politiques de Paris and Director of the Groupe d'Economie Mondiale de Sciences Politiques (GEM) since its creation in 1997. GEM is a research unit seeking to improve the performance of French and European public policies in a global world. He has been a consultant to various international organizations and firms and served as a Senior Economist at the Research Department of the World Bank from 1986 to 1990. He is also a member of the Advisory Committee on Competition Issues (French Ministry of Economics), and of the G-8 Preparatory Conference. His current research deals with progressive liberalization and regulatory reforms in services. He has written several books on global trade policy, in addition to numerous articles for professional journals, including the Economic Journal, the European Economic Review, Weltwirtschaftliches Archiv, the World Economy, Economic Studies (OECD), European Economy (European Commission) and Revue Economique.

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What People Are Saying

Bernard Hoekman
[This] is clearly a major piece of work that reflects an immense effort to get to grips with the impact of the trade policies that are pursued by the EU ... undoubtedly the most complex trade policy setting institution in the world today. [Messerlin] has done an excellent job of describing how EU trade policy gets made (and unmade), how it is evolving, and what costs it imposes on EU citizens and the rest of the world. —(Bernard Hoekman, Development Research Group, The World Bank)
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Product Details

  • ISBN-13: 9780881322736
  • Publisher: Peterson Institute for International Economics
  • Publication date: 9/1/2001
  • Pages: 432
  • Product dimensions: 6.32 (w) x 9.08 (h) x 0.81 (d)

Read an Excerpt

Chapter One


Political Stresses, Legal Constraints, and Old-Fashioned Economic Views


The European Community (EC) is an entity in formation, not a fully fledged state, unlike the United States and the other countries examined in this series of studies on the costs of protection. This feature gives EC trade policy a very distinctive flavor: it has a high proportion of political content, because the EC has no other way (foreign policy or army) to express its political views; it can be sticky and chaotic, because it is based on cast-iron, sometimes inconsistent, often poorly drafted (with regard to external relations) Treaties; and it relies on an institutional process that tends to be intrinsically biased toward old-fashioned ways of economic government.

    This chapter is devoted to examining these features because they have had (and still have) a profound impact on the scope, magnitude, and structure of EC trade barriers, and hence on the costs of protection in the EC (examined in part I of this book); and because they shape the possibilities for the evolution of EC trade and commercial policies (examined in part II).

    First, a high proportion of political content means that a protectionist trade policy is seen by many Europeans as a price "readily" paid for political objectives, be it territorial expansion of the Community through "preferential" trade agreements or accessions or internal unification ("deep integration," in EC parlance).

    Second, the Treaty-based constraint makes EC trade policy particularly prone to selectivesectoral protection, a source of large distortions' in European economies. It also makes almost impossible, bold EC initiatives for multilateral liberalization, even though the EC has often had (and still has) recourse to the General Agreement on Tariffs and Trade (GATT) and to its successor, the World Trade Organization (WTO), even for solving intra-EC problems.

    Third, the institutional process of revising the EC cornerstone—the 1957 Treaty of Rome—has not produced only desirable outcomes. Revisions have offered renewed opportunities for the EC member-states, in which a demand for economic government based on old-fashioned concepts is still alive, to "react" to the expansion of market-oriented policies induced by the natural development of the Community—and these "reactionary" provisions tend to increase the costs of protection in the EC.


The High "Political Content" of EC Trade Policy


The principle guiding the formation of modern Europe so far has been to use an economic process for a fundamentally political goal. The economic integration of the Community thus is the privileged instrument for getting "an ever closer union of the peoples of Europe" (Treaty of Rome, preamble, first paragraph). The Treaty of Rome itself is the best illustration of this principle: it was an economic response to the political collapse of the European Defense Community (involving the same founding countries) a few years earlier.

    The Treaty of Rome defines the political goal of the Community in vague terms. An "ever closer union of the peoples of Europe" can cover a wide range of possible alternatives—from peaceful coexistence between European states to their political unification—all of which are compatible with the "sense of mission" (Winters 1993a, 224), far beyond the attainment of mere economic benefits, that characterizes European integration. In fact, referring to the peoples of "Europe" in 1957 was amazingly ambiguous; including the peoples then living under the Soviet regime of central planning and high protection could, at that time, be seen as an expression of defiant political repossession, or as a murky compromise between markets and the rule of the state.

    Such a high proportion of political content has an impact on the level of EC trade barriers. There is an implicit—unconscious in many European minds—trade-off between the acceptable economic costs associated with a highly political trade policy and the political goals to be reached, with their perceived political benefits. Europeans eager to create some kind of federal Europe have been, and probably still are (as shown by the ongoing debate on the European political "constitution," see chapter 7), ready to adopt a much less open trade policy than Europeans interested "merely" in peaceful coexistence between European states.

    The search for such a balance has been a permanent part of the Community's history. It started with the debate on the EC Common Agricultural Policy (CAP) in the mid-1960s (see chapter 4). In the late 1980s, it was highlighted by the slow pace at which the external dimension of the Single Market Program was taken into consideration (Eeckhout 1994). It is at the core of the "Euroskeptic" approach in Britain. For instance, Hindley and Howe (1996) argued that the economic costs of the EC for the British economy in the mid-1990s were higher than the economic and political gains they perceive from British membership—hence concluding that Britain should withdraw from the Community. Since then, other Euroskeptics have argued that Britain should join the North American Free Trade Agreement (NAFTA, the free trade area between Canada, Mexico, and the United States) as an alternative to the EC (Hulsman 2001).

    The debate has crossed the Channel with the emergence of the souverainistes in France, who argue that Brussels is "too" powerful, but also that the Community is not protectionist enough, and is being diluted into a "mushy" free trade area. But it would be wrong to limit the search for a balance between economic costs and political gains to the Euroskeptic or souverainiste groups. It is a constant preoccupation of the EC governments—as is illustrated by persistent references made in Germany to the Atlantic dimension of the Community (e.g., G. Schröder, International Herald Tribune, 19 July 1998), or by the world dimension of trade routinely emphasized in Britain (e.g., the title of the British White Paper, Free Trade and Foreign Policy: A Global Vision, 1996).

    There is an essential—though often ignored—corollary to this balance between economic costs and political benefits. To say that the EC is, at bottom, about politics, not economics, and to use this argument for justifying costly decisions from the economic perspective, is a one-sided approach. The argument also implies that any decreasing perception of the political gains from European integration requires a decrease in the economic costs of European unification, to keep the balance even. In trade policy, that means a push for a more open Community.

    This case can be illustrated by many intra-EC key issues, such as the reform of the EC Common Agricultural Policy. If during the Cold War the explicit European goal of "self-sufficiency" in agriculture was perceived by a large majority of Europeans as an acceptable cost to be paid for a united Community confronted with the military threat of the Soviet Union, the current perception (wrong or not) that such threats have disappeared is contributing to the undermining of the existing CAP, and to its reform. In sum, because politics are in permanent flux, tomorrow's politics will not necessarily sustain economic costs adapted to yesterday's politics.

    Its high political content has made EC trade policy an obvious substitute for foreign policy, to an extent unsurpassed in other industrial countries. (In this respect, EC trade policy is a not too distant cousin of the trade policies of newly independent countries.) Of course, the United States may also use its trade policy for political purposes (after all, the constitutional external powers of the US federal government are broader than its purely domestic powers). But having an operational diplomacy and army, the United States has a much wider range of possible instruments than the EC.

    In contrast, the high political content of the EC trade policy, and the absence of any other means for EC international actions, have induced the EC to carve out zones of political influence through the intensive use of discriminatory trade agreements (see chapter 6). All these agreements have had almost no economic impact on the EC. Rather, their role has been to strengthen the hegemony of certain EC member-states or to establish the EC hegemony. During the past 40 years, EC trade policy has been the privileged support for EC territorial expansion—from the 6 founding members in 1951 to 9 (1973), 10 (1981), 12 (1986), and 15 (1995) member-states (leaving aside the direct enlargement to eastern Germany in 1990, which had been prepared for since the Community's birth, and confirmed by special trade arrangements between the former German Democratic Republic and the EC since the 1960s).

    Today's elaborate EC hierarchy of trade treaties reflects the subtle graduation of countries from the status of trading partner to the situation of full member-state: reciprocal or nonreciprocal agreements; free trade agreements of several vintages and types, or customs unions; and ultimately accession agreements. Each of these agreements is associated with a well-codified set of trade barriers between the Community and its trading partners: quantitative restrictions or not, preferential tariffs in all sectors or not, antidumping actions or not, "approximation" of laws and regulations in accordance with EC rules ("acquis communautaire") or not, and so on. Indeed, these trade agreements manifest an increasingly clear political dimension, often reflected in the title of the Treaties. For instance, the January 2000 draft of the agreement signed with Mexico is entitled "Economic Partnership, Political Coordination, and Cooperation Agreement."


A Treaty-Based Trade Policy


The EC relies on Treaties between sovereign member-states. Treaty after Treaty, the coverage of activities subject to the European integration process has continuously expanded: the 1951 Treaty of Paris on coal and steel; the 1957 Treaty of Rome on all products and services, generating the 1964 Common Agricultural Policy and the 1992 Single Market Program (SMP) in services; the Treaty on the Single European Act (1986); the Maastricht Treaty (1992), covering monetary and economic union; the Amsterdam Treaty (1997), entered into force in May 1999, and tinkering with social rights; and, following the Intergovernmental Conference (IGC) of Nice in December 2000, the Nice Treaty (2001) focusing on the voting rights of member-states and other institutional arrangements related to the accession of the Central European countries (CECs) to the Community. Box 1.1 summarizes the key provisions of EC trade policy since the Treaty of Rome, and its major subsequent revisions, which constitute, in EC parlance, the "Treaty establishing the European Community" (TEC).

    The TEC constitutes the Community's "fundamental law" (Zuleeg 1997). But it also imposes specific constraints on EC trade policy, because it does more than lay down pure constitutional rights and obligations of member-states. Its successive versions (Rome, Maastricht, Amsterdam, Nice) lock in key specific "deals," which have been necessary for reaching a consensus, and cannot be substantially modified afterward without due renegotiations. This "stickiness" is not specific to trade policy. For instance, it is also illustrated by the "convergence criteria" of the Treaty of Maastricht, which state that member-states can participate in the monetary union only if they meet certain criteria (such as a budget deficit not higher than 3 percent of GDP) at a given period of time. Almost everyone agrees that these convergence criteria have no economic meaning and that they can be harmful to economic growth and efficiency in Europe. However, renegotiating them is seen as so costly (in time, signals sent to the markets, etc.) that they remain in place and will have to be met, despite their costs.

    Examples of stickiness abound in trade policy. In 1957, a protocol on the banana import regime was attached to the Treaty of Rome: it excluded this product from the European common market, and kept it under exclusive member-state competence. It required 36 years, two GATT panels, and pressure from the Uruguay Round negotiations to substitute (in 1993) a unique EC import regulation for the existing member-state import schemes. But this regulation was so unacceptable to EC trading partners that, five years later, a new panel of the WTO condemned it. Although the April 2001 agreements between the EC, the United States, and Ecuador are a first step toward settling the case, they do not really modify the costs of protection imposed on EC consumers. In fact, the case will definitely be settled only by 2006, that is almost in time for the 50th anniversary of the Treaty of Rome, when the final EC tariff on banana imports will be implemented (see appendix A, case 19).


    Another example is the Common Agricultural Policy (see appendix A, cases 15 to 18). In 1964, its adoption was a condition imposed by the French government for starting the second phase of dismantling intra-EC trade barriers in manufacturing. In 1973, the CAP was already so enmeshed in the web of intra-EC deals that it was impossible to use the opportunity of the British accession to begin to dismantle it—despite the many early warnings about the CAP's perverse impact on European farmers in the long run (see chapter 4), and despite the fact that British farm policy was better conceived than the CAP, from an economic and social point of view. In the 1980s, similar difficulties emerged in getting rid of the special rules in steel and coal (see appendix A, case 11). In the 1990s, similar problems were raised by state-owned firms in services and the elusive notion of "service of general interest" (see chapter 5, and appendix A, cases 20 to 22).

    The stickiness of EC trade policy increases the costs of EC trade protection in two ways. It keeps high barriers on products and services for which long delays are necessary before including them in a move to trade liberalization (often very slow, as is best illustrated by services; see chapter 5). And it makes EC protection less "uniform," because, meanwhile, other goods and services have been subject to liberalization policy, or to technical progress equivalent to such liberalization. The sectoral selectivity of EC trade policy is mirrored by a relatively wide range of EC nominal rates of protection for goods (from 0 percent to more than 1,000 percent; see chapter 2), which are likely to generate even larger differences in effective rates of protection, and hence, large distortions and costs of protection in EC economies.

    Last, the progressive expansion of the activities covered by the Treaties has had two opposite consequences. On the one hand, it has extended the coverage of EC trade policy from goods to services—creating wider tradeoffs in trade negotiations. This evolution tends to make EC trade liberalization easier because trade negotiators with a wide scope of possible trade-offs are generally better equipped to reach successful outcomes than negotiators with a narrow scope. In the highly legalistic EC context, this benefit has an important internal corollary. Moreover, wider coverage of EC Treaties means an enlarged choice among alternative TEC provisions on which to base a trade-related initiative, and the choice of the appropriate legal basis for an initiative is often critical for its success (as is illustrated by labor issues; see chapter 5) and for the exact magnitude of its economic costs and benefits.

    On the other hand, the deepening of European integration has made EC trade policy related to, and hence dependent on, deals involving other policies, with possibly negative consequences. For instance, the extent to which too restrictive monetary and budgetary policies have been associated with the creation of the euro in an environment of rigid factor (labor and capital) markets may have contributed to slow growth and unemployment, and generated a macroeconomic climate hostile to trade liberalization. Such costs could be particularly important in the years to come, when the bulk of intra-EC and extra-EC liberalization of services will occur.


The "Statist" Bias in the TEC


The successive versions of the TEC have a statist bias, which has increased in relative terms since the late 1980s or early 1990s. "Statist" means that the Treaties stick to an old-fashioned economic role for governments, based on direct public interventions on prices and quantities in the markets of goods and labor, in contrast to a more indirect and lighter approach based on free markets relying on governments acting as competitive rulemakers and strict law-enforcers. "Relative" means that the level of statism in the EC is not assessed in absolute value but on the basis of a comparison with the level of statism in the rest of the world. In this respect, Koedijk and Kremers (1996) have provided evidence that, during the past 20 years, the relative level of EC statism—in comparison with non-EC countries that are members of the Organization for Economic Cooperation and Development (OECD)—has increased, although its absolute level may have decreased. Their conclusion echoes well the evolution of the successive TEC versions.

    The statist nature of the Treaty of Paris may seem of secondary importance today, because the Treaty should be eliminated by 2002. But the Treaty involves such powerful vested interests that it remains to be seen whether some kind of "special treatment" beyond 2002 will not be granted to EC steelmakers, all the more because the Treaty's statism, in tune with the planning approach fashionable in the early 1950s, was also related to a still existing force: a strong tradition of collusion between steel firms backed by their governments. The Treaty provisions were, in many cases, influenced by the "Entente Internationale de l'Acier" (International Steel Cartel), which was set up in 1926 by steelmakers from Belgium, France, Germany, Saarland, and Luxembourg. The "Entente" was the best illustration of the general approach, promoted during the 1920s by the very active Pan-European Movement, which was advocating the idea of political union in Europe, according to which cartels were the best compromise between trade liberalization and "market stability" (Bonnefous 1952). The "Entente" has exerted a deep influence on the interwar European trade policies, in particular on the Franco-German Treaty of Commerce (Rieben 1954). The Paris Treaty pricing rules, broadly similar to the Entente price provisions and to the US Pittsburgh basing-point system abandoned in 1924 following an antitrust order, have been (and still are) potential substitutes for trade barriers between the member-states (see appendix A, case 11).

    The Treaty of Paris is a good illustration of the trade-off mentioned in the introduction, that is, economic costs readily paid for political goals. It had to be a masterpiece of baroque trompe l'oeil. Six years after World War II, intra-EC free trade revealing German comparative advantages in steel would have hardly been acceptable to the other member-states. Substituting private for public barriers thus has made a lot of political sense. But the price paid for launching the formation of modern Europe in these two highly symbolic sectors has been the inhibition of competition in these sectors for the next five decades, an almost complete collapse of world trade in steel (to be fair, the United States contributed heavily to this evolution by imposing the first voluntary export restraints and antidumping measures), and a long-lasting "attraction" for industrial policy in other EC manufacturing sectors.

(Continues...)


Excerpted from MEASURING THE COSTS OF PROTECTION IN EUROPE by Patrick A. Messerlin. Copyright © 2001 by Institute for International Economics. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.


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Table of Contents

Preface xiii
Acknowledgments xv
1 Political Stresses, Legal Constraints, and Old-Fashioned
Economic Views 1
The High "Political Content" of EC Trade Policy 2
A Treaty-Based Trade Policy 4
The "Statist" Bias in the TEC 8
"Why Did the Dog Fail to Bark?" 17
I Measuring the Level and Costs of EC Protection during the 1990s
2 The Level and Evolution of EC Overall Protection in the
1990s 21
EC Tariff Protection Between 1990 and 2000 25
EC "Overall" Protection Between 1990 and 2000 29
Concluding Remarks 36
3 The Costs of Protection in the European Community 39
Twenty-two Highly Protected EC Sectors: A Presentation 42
Costs of Protection: The Perfect-Competition Case 48
Costs of Protection: The Imperfect-Competition Case 56
Variations on Three Important Related Issues 61
II EC Trade and Commercial Policy in the 2000s:
Constraints and Dynamic Forces
4 The Dynamics of EC Trade Policy 73
Agriculture: An Incredibly Slow Liberalization Process 75
Manufacturing: Old Peaks of Protection, New Instruments 98
Technical Regulations: Toward a "New"
Protectionism? 103
Ongoing Deep Changes in the EC Economies? 121
Concluding Remarks 127
5 Emerging EC Commercial Policy 133
The EC SMP in Services: In Need of a WTO Boost 139
Trade and Labor Issues 162
Competition Policy: Market Power and Subsidies 169
Public Procurement: Such a Big Deal? 183
TRIPS and Investment Issues 187
Concluding Remarks 191
6 The EC Addiction to Discrimination: Toward a Slow Ebb? 197
EC Nonreciprocal Discrimination: ACP Conventions and the
GSP Scheme 201
EC Reciprocal Discrimination: Central European,
Mediterranean, and Balkan "Spaghetti Bowls" 210
EC Discriminatory Trade Policy in the 2000s: The End of
the Road? 228
Regionalism versus Multilateralism: The Dispute
Settlement Dimension 238
Concluding Remarks 242
7 European Political Union and EC Commercial Policy 249
Europa in the Kingdom of Lilliput 251
Toward a "Federal" European Union? 254
Or Toward a Fully-Fledged—Political and
Economic—European Community? 256
Impact of the Type of Political Union on EC Commercial
Policy 259
Appendix A Case Studies 263
Appendix B EC Contingent Protection: Antidumping and Other
Trade Instruments 347
Appendix C Models 365
References 371
Index 389
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