Implicit trade Costs and European single market enlargement

Abstract

This paper investigates the deeper integration of the new EU accession states into the Single Market. Building on the assumption that observed trade patterns can be taken to reveal trading costs between members and non-members of a bloc, I develop a model-consistent Dixit-Stiglitz general equilibrium-based calibration technique. Using this, I investigate numerically the effects of the recent EU enlargement, suggesting that deeper integration, which removed the border costs implied by 1990s trade patterns, could raise trade by 50–100% and incomes in the accession states by 10–20%.

Notes

¹See Lawrence (1995).

²On mutual recognition, the most comprehensive reference is Maskus and Wilson's (2001) World Bank study.

³E.g. the effects of product standards, labelling and such like, and the associated application of testing and border checks.

⁴The articles in Maskus and Wilson (2000) are a good survey of the limited research carried out so far on the economics of technical barriers to trade. Baldwin's (2000) article in that book summarizes the view that these barriers comprise ‘regulatory protection’. Edwards (2003) gives a more cautionary view on this.

⁵Zahariadis (2002) looked at EU-Turkish integration, combining data on various costs from Harrison et al . (1996), Hoekman and Eby Konan (1998). Total estimated costs on Turkish imports into the EU were below 5% for most sectors, though there is also a standardization cost (Harrison et al ., 1996) of 1–2.8% on Turkish exporters only.

⁶Trefler (1995), McCallum (1995).

⁷Obstfeld and Rogoff (2000) argue that a combination of border regulatory costs, currency conversion costs, informational costs and under-measurement of transport costs explains much of the difference. Anderson and Van Wincoop (2003) argue that omitted variables and model-inconsistencies mean that McCallum's estimated border effect is vastly overstated.

⁸See, again, Maskus and Wilson (2001) or Edwards (2003) for more detail.

⁹The author's calculations indicate that, for a demand elasticity of four, the threshold lump-sum entry cost imposes a higher welfare loss than the iceberg trade cost consistent with a halving of trade volumes.

¹⁰In the absence of better information, I have assumed these border costs are symmetrical in both directions between a pair of countries. Note that the assumptions made about relative border effects can potentially affect our picture of the underlying competitiveness of the CECs in different industries – further information on this might help guide future work.

¹¹The love of variety characteristic of the Dixit–Stiglitz model requires the substitution elasticity σ>1. Note that the original Dixit–Stiglitz (1977) paper was written in terms of a substitution parameter, ρ=(σ−1)/σ, which correspondingly has to lie in the range between zero and unity.

¹²Goods: AG agriculture, forestry and fishing, OP other primary, FP food processing, IS iron and steel, TX textiles, MH heavy manufacturing, ML light manufacturing, SV services.

¹³Regions*: PLD Poland, HUN Hungary, OCEC Other CEECs (Cz Rep, Slovakia, Slovenia, Romania, Bulgaria), UK United Kingdom, GER Germany, OEUN Other EU Northern, OEUS Other EU Southern (Italy, Spain, Portugal, Greece), FSU Former Soviet Union, ODX Other OECD excluding EU and CECs, LDC rest of the world (mostly less developed countries). *Note: GTAP version 5 has only 3 CEEC regions.

¹⁴Due to data limitations, I am unable to carry out simulations on the precise accession list of 2004. The other CEEC region comprises the Czech Republic, Slovakia, Slovenia, Romania and Bulgaria. The latter two are not on the 2005 EU accession list, whereas the three Baltic States, as well as Cyprus and Malta, are.

¹⁵ VIWS – VXWD is the transport cost margin. VXWD – VXMD is net export tax/subsidy, plus the GTAP estimates of the tariff equivalent of some quantitative trade restrictions whose revenue accrues to the exporting country. VIMS – VIWS is net import tax/subsidy and the tariff equivalent of remaining NTBs. Correction is made for some data errors in GTAP V5. I have removed tariffs on trade between the EU and CEECs other than in agriculture and food processing.

¹⁶Comparative costs in services would, of course, be expected to be lower in poorer countries (see Balassa, 1964). However, it seems that, at least for Poland, the low relative costs apply to all sectors. Only for the Other CEEC region does there seem to be clear evidence supporting the Balassa–Samuelson relationship.

¹⁷If costs were asymmetric, then Equation 8 would imply that, if border costs were lower in one direction than in Table 1, they would have to be higher in the other direction.

¹⁸Full details and tables are available in Edwards (2004).

¹⁹See Edwards and Whalley (2006).

²⁰However, a higher trade elasticity, as suggested by, for example, Harrigan (1993), could reduce the implicit border costs consistent with a particular observed trade pattern.

²¹ Source: Polish National Statistical Office, http://wwxw.stat.gov.pl./dane_spol-gosp/finanse_pod_gosp/Rachunki_kwartalne_pkb_latach_1995-2004/tabela38.xls

²²Polish Ministry of Economic Affairs and Labour: Poland 2005. Report-Foreign Trade. Table 3 and Charts 3–4.

²³Some of the trade growth observed would, of course, reflect underlying steady-state economic growth.

²⁴Rauch's (1999) work on networks and trade, in particular, would indicate this kind of learning process is involved.

²⁵On this point, Piazolo's (2001, Chapter D) estimates suggest that an improvement in institutional quality by one third, as measured by the EBRD index, would increase the level of GDP by at least one tenth purely due to the greater efficiency of resource use estimate with our CGE model. The total increase in GDP in some of the institutionally more backward states, allowing for additional investment over time, could be 20 to 30%.

²⁶Dixit and Stiglitz (1977).