EU enlargement will have a threefold effect on the rest of the world.
There will be a traditional trade expansion and trade diversion effect;
there may be an effect on the European Union’s views on further
liberalization of the global trade system, particularly in the Doha
round; and there will be an effect on growth in the
European Union. The third is by far the most significant consequence.
First, the traditional pattern of trade creation and diversion does
not apply in this instance because of the association agreements that
the new member states already had with the European Union before they
joined. In fact, many American companies were disadvantaged
because they faced generally higher tariffs in the Central and Eastern
European countries, while the association agreements gave EU producers,
including U.S. affiliates, preferential access.
So, when these countries actually joined the European Union, their
tariffs mostly came down, and there should not be any negative effect
on U.S. exports. The U.S. market share in Central and Eastern Europe
has always been small, partly because so much of the demand for American
brands is satisfied by U.S. production in Europe, but the share has
continued to decline.
While the new members’ tariffs overwhelmingly came down, however,
some did go up. Under Article 24-6 of the GATT, which is embodied in
the WTO, that should be grounds for trade compensation, in the U.S
view. The
European view has always been you have to look at the average change
in tariffs, not individual movements, and we
have often been through this when the European Union was enlarged in
the past. We may or may not go through
it again.
The second question is whether
enlargement will alter the European Union’s position on global
trade rules in the negotiations on the Doha Development Agenda. There
are two prevalent opinions. The predominant view is that enlargement
will be good for the Doha round because it will compel the
European Union to reform the Common Agricultural Policy, and this will
lead to progress in the negotiations.
The other view is that such a change would be too rapid and the United
States would want to resist it, believing there is no real need to
liberalize the agricultural regime. That, of course, would have a very
negative impact on the talks. I shall be optimistic and predict that
the first alternative is more likely.
The third effect of enlargement, however, is by far the most predominant,
and is going to be very beneficial. Now that the European Union has
been
enlarged, it will be obliged to do something it has not done in a long
time grow. There are two factors that stimulate economic growth.
The first is
demand, which is what really spurs
production, and enlargement will bring new demand into the Union.
“The older member states are not used to change, but the new
ones are”
As production increases in the ten new member states, the obvious market
is the 15 older members. That will cause some angst and some dislocation,
but it also will lead to rising incomes and
demand in the new member states. How will this new demand be met? It
will be met by the older member states, and that will trigger the kind
of growth cycle that Europe has not experienced in years.
The second, and by far the more
important, cause of economic growth is that the European Union will
have to begin deregulating and becoming more flexible. Over-regulation
and inflexible markets are the main reasons why
Europe grows so slowly. That slow growth is a major cause of economic
dislocation in the world. Japan is growing slowly, too, but the United
States is growing very much faster. This has to change, and now there
is an opportunity for it to do so.
Enlargement is the irresistible force that will bring about greater
flexibility. It is not just that the 15 older members need greater
economic flexibility so that they can increase productivity in order
to compete with the rapid changes that are happening in the ten new
member states. Another factor is that the older member countries are
not accustomed to change indeed, they have resisted it. The
new members, on the other hand, have gone through enormous change.
They have become much more flexible, and they will inevitably imbue
the rest of the European Union with a greater
appreciation of the need for more flexibility. We all know that Europe
has to move in that direction.
It is obvious that the heavy load of regulation was designed in many
cases to prevent change, and it has worked. My favorite was a regulation
in Austria, which may still exist, which stipulated that if a new service
establishment wanted to commence business, for
instance a dry cleaner in Vienna, the owner would have to apply to
the proper authorities and the authorities would go around and ask
all other similar businesses whether they felt a need for a new establishment.
The answer, of course, was almost invariably “No.” All
the regulations that are designed to prevent change will simply have
to go.
Pressure from outside the European Union has not been enough to achieve
these necessary reforms. Nor has the fact that many Europeans know
that changes will have to be made sooner or later. Now, however, with
the inclusion of ten more flexible states that are pretty
hungry for change and for growth,
Europe will finally have to bite the bullet.
We shall see a more rapid pace of deregulation, greater flexibility
and, as a consequence, faster growth in Europe. This will expand Europe’s
imports and exports and have a salutary effect on world trade. When
we look back ten years from now, we shall see that the major effect
of EU enlargement was that it finally got Europe to move in the
direction of deregulation, flexibility and growth.
Franklin Vargo is Vice President for International Economic Affairs,
National Association
of Manufacturers, and chief spokesperson on trade issues. During a
30-year career at the U.S.
Department of Commerce, he served as Deputy Assistant Secretary for
Europe, Deputy Assistant Secretary for Asia, and Deputy Assistant Secretary
for WTO Affairs and Trade Compliance.
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