No. 2314 - SATURDAY, FEBRUARY 10, 1990.

EC POST-1992 - TRADE CREATION OR DIVERSION DEPENDS ON EC.

GENEVA, FEBRUARY 8 (BY CHAKRAVARTHI RAGHAVAN)ó While creation of a single market in the European Community could have trade creation effects, there could be adverse trade-diversionary effects on Third World countries particularly if tendencies, already manifest, to pass on burden of adjustment to outsiders grow, according to the UN Conference an Trade and Development.

This assessment is provided in an UNCTAD report (TD/B/-1242) to the March meeting of the Trade and Development Board on the implications of bilateral arrangements and regional economic integration, specially those having a major impact an global trade and in particular on trade and development of the Third World.

The report, while analysing various regional arrangements, focuses on the post-1992 EC single market and the U.S.-Canada Free Trade Agreement (FTA), "since their weights in international trade is of such a magnitude that developments in trade policies significantly affect the trade of third parties".

The Canada-U.S. FTA aims at liberalising mutual trade and with some provisions for investment but does not imply a common external policy and hence its implications for outsiders are principally indirect.

The EC's 1992 programme, aiming at removal of formal restrictions and further relaxation of regulations obstructing their movement goes much farther for factors of production. Having already a common external policy in trade in goods, the EC integrationís direct effect on the international system would be more immediate, as an increasing number of previously national negotiations become collective.

Trade diversion, in the aggregate, under the U.S.-Canada FTA would be minimal because of the low average trade barriers of the two countries against each other's manufactures. But there could be significant effects in specific industries - textiles including clothing and apparel.

Apparel has been singled out for discrimination in respect of rules of origin under FTA which otherwise allows for free trade in goods no matter where they are produced provided 50% value originates in the U.S. or Canada. For apparel from Third World, only those made of Textiles originating from U.S. or Canada would qualify for the FTA benefits.

However, there is such a high degree of product differentiation in apparel from the U.S. and the Third World into Canada, that it is possible that trade diversion is less likely.

Imports into Canada of vegetables and fruits from the Third World - mainly Brazil, Chile, Mexico, Ecuador and Costa Rica - could also be affected. Currently, Third World accounts for roughly 20 percent of Canadian imports in this category, and the U.S. for 65 percent. The tariff reductions under FTA for these products would favour imports from the U.S.

The concept of an EC single market is an basis that the quantum leap in productivity and competitiveness would enable the EC to compete effectively with other major trading countries, particularly the U.S. and Japan. But it would also improve the EC's Competitiveness vis-à-vis the Third World countries and, other things being equal, it would mean a further re-direction of trade away from traditional suppliers and towards partner EEC members, analogous to those that occurred after initial elimination of internal tariffs.

The present structure of EEC imports is the outcome of a complex set of preferential and protective interventions in trade, and the 1992 single market would have important implications for these imparts including those from the Third World.

As a result of the unification, the internal barriers to competition from other member-states would disappear.

The EEC's protection in agriculture, steel, textiles, chemicals, footwear and consumer electronics has so far limited the role of free international competition. To the extent the protection is based on instruments of individual member-states, it would be incompatible with the EC single market.

But if 1992 is associated with rise in protectionism by the Community, existing restrictions of member-states could be replaced by much more stringent restrictions on access to the EC.

However, if an open one liberal approach prevails, world trade would get a substantial new impetus and export possibilities for Third World would be enhanced.

The 1992 programme will accelerate structural change within the EC through loss of Art. 115 rights (of member-states whereby they can now restrain free circulation of goods originating from a non-member), through increased labour mobility, broad industrial. rationalisation, relocation.

This, UNCTAD suggests, could well generate pressures for shifting burden of internal adjustment on to imports and restricting competition from outside.

The recent rise in anti-dumping (AD) investigations suggest that 1992 might already have intensified resort to this instrument, UNCTAD notes.

Like voluntary export restraints, ad actions can be applied without going through national legislatures or attracting much public attention. EC industries, with support from sympathetic member-governments, might continue to pressure the Commission to deal with perceives advantages that 1992 might give to outsider producers by using these various instruments to restrict imports. Under the EC anti-dumping regulations, these actions are a particularly effective way of tackling post-1992 adjustment problems, and imposing the costs of adjustment on the outside world.

AD actions can be effected quickly and provisional duties can be imposed immediately, with decisions about which complaints are to be pursued resting primarily in the hands of the Commission.

Depending on the outcome of investigations, a definitive duty can be imposed or negotiations opened with the exporting firm to elicit an appropriate response in the form of a price undertaking or a voluntary export restraint arrangement or both. As regards the trade in services, there would be faster growth in services trade among EC members with any directly trade-related services (shipping, insurance, financial, marketing and distribution) moving with trade.

For all forms of transport, the opening of the internal market was unlikely to permit foreign suppliers greater opportunities existing conditions for access such IATA on air transport, liner conference agreements (for shipping) and permits for road transport effectively restrict outside suppliers.

In aviation, the clear potential for economies of scale from mergers among EC companies would increase their competitiveness outside the EEC, thus causing a steep gain against other suppliers.

In the long run, as transport is trade related, the net effects on non-EEC suppliers will follow directly from those for goods. As most price-competitive suppliers, Third World countries in a position to provide the service would benefit more than other outside suppliers in sectors like tourism and data processing.

In investments, the trade-diversion effects would have immediate consequences for goods-related investments. There would be an increase in investments by those currently trading within the EEC and a decrease elsewhere by those currently exporting to the EEC.

The rise in inward-flow of investments into the EEC might represent some diversion from Third World countries, through there is little evidence at present to suggest that this has so far taken place.

The further evolution of the Community, particularly the way external trade policy is formulate and conflicts are resolved, will be the subject of intense interest for outsiders.

In this regard, UNCTAD notes, experience with the CAP where the EC has gone the farthest in establishing a common external policy, is highly relevant. The EEC's decision-making process may have contribute in CAP to prices - levels of protection and export subsidies - gravitating towards the position of the most protective regime.

The principles, techniques and devices developed to carry out the CAP, in conjunction with the decision-making process evolved, have had an impact on international trade relations.