Integration effects in the EEC

European Economic Review 5 (1974) 379-405. g North-Holland

INTEGRATION

Publishing Company

EFFECTS IN THE EEC

An attempt at quantification in a general equilibrium framewoak Wilfried E. PREWO* University of Texas, Austin, Texas 78712, U.S.A. Received May 1973, revised version received January 1974 This paper presents an attempt at quantitatively examining integration effects in the EEC within a general equilibrium framework. The methodology is based on multinational inputoutput analysis, where the national interindustry structures of the EEC-countries are linked together via gravitational trade flows. The analysis of trade effects is of the ex post type: Hypothetical trade flows of the customs union’s anti-monde are calculated for the years 1965 and 1970 on the assumption that the structural relationships observed in 1959 remained unchanged, and comparison is made with actual trade Rows. The results indicate substantial trade creation. There is little trade diversion, and external :rade creation, where it occurred, is generally only a small fraction of internal trade creation. Substantial trade creation occurred in Italy, France,and Germany; trade diversion app.zarcd in the Benelux countries. Sectors with high trade creation were agriculture and manufacturing industries, while trade diversion was concentrated in fuels and mining. The resuPtsconform with ex ante expectations based on estimates of pre-union trade resistance.

1. Mro&etioo

From previous studies of integration effects in the European Economic Community (EEC) it is clear that an analysis of these effects should have the following desirable characteristics : ’ (a) It should be carried out on a disaggregated level. (b) Effects of trade creation are to be separated from those of trade diversion. (c) Adjustment st\Juld be made for the effects of economic growth on trade flows that would have persisted in the absence of integration. (d) The appropriate framework is that of a general equili’_num model, since in dealing with a situation where tariffs on many products have undergone large changes, partial equilibrium analysis may lead to misleading results. A general equilibrium approach allows the determination of direct as well as indirect effects due to intercountry and intercommodity substitution. *For many valuable suggestionsI wish to thank especially Professors Bela Balassa and Trent Bertrand. 1 also wish to acknowledge the assistance received from Messrs. Hugo Krijnse Locker and Pierre LeGrontec of the Statistical Office of the European Communities in obtaining some of the data. I am responsible for theerrors that remain. ‘See, for example, Balassa (1967), Lipsey (!960), Verdoorn and van Bochove (1972).

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W.E. Prewo, Integration effects in the EEC

While other studies, using various approaches to analyse the effects of integration, were successful in satisfying some of these requirements, they were not able to incorporate all of them. The following analysis is an attempt to quantitatively examine integration effects in the EEC in a general equilibrium framework, an attempt made to conform to the other requirements as well. The method used is that of multiregional input-output analysis developed by Leontief and Strout (1963). Growth effects that would have presumably persisted in the absence of integration are netted out by explicit consideration of the supply side and by the assumption that integration did not appreciably affect growth rates for final demand.* Estimates of integration effects are calculated for the EEC as a whole and for each of its five member countries (considering the Belgium-Luxembourg Economic Union - BLEU - as one country) for the periods 1959 to 1965 and 1959 to 1970. Non-members are lumped together and are not distinguished further by supply areas or membership in other trade blocs.3 Each country’s economy is disaggregated into 17 sectors,4 twelve of them producing traded, five non-traded goods. The analysis is of an ex post type. The difference between the actual trade flows of the customs union and the hypothetical trade flows of the customs union’s anti-monde is taken to be indicative of the integration effects. This difference is calculated as a percentage as well as in absolute terms, in order to abstract from effects of market size. 2. Model and methodology The multinational model consists of conventional national input-output models for each of the five partner countries, connected by a system of equations describing internationa! trade flows. The multinational system is open with respect to trade with non-member countries. Let there be m member countries, each producing n goods. The superscript r stands for the rest of the world, i.e., non-members. Then for each of the m countries there is a national interindustry system described by 2Asin other studies whkh have dealt with the problem of growth effects, it is assumed that growth in the absence of integration would have been at the same rate as under integration. To the degree that integration has had growth-inducing effects, this simplifkation leads to an underestimate of trade creation and au overestimate of trade erosion. WGs restriction was not imposed by the methodology of this approach, but is due to data limitations and limitations of computer capacity. In order to e&tively distinguish in the nonmember group among EFTA-suppliers, the U.S., and others, we Gould neeci input-output data for them compatible with those of the EEC-countries. ?t may be argued that 17 sectors does not represent a sulkient degree of d&aggregation on grounds cited above. It will also not allow analysing the effects of intru-industry specialisation. The limitation to 17 sectors is due solely to computer capacity limitations. The classification of sectors follows that of tbeyearlyinput-output tables planned by the EEC Statistical 05ice.

W.E. Prewo, Integralion eflects in the EEC

381

j = 1,

2,..., n, i = 1,2, . . .. n, g = I,2 ,..., m,

(1)

where total internal input in country g of good i produced within the m countries (i.e., imports from third countries excluded); technical input-output coefficients; output of good j in country g for use within the m countries; exports of good j by country g to third countries; It is assumed that exports to third countries are a constant share of final demand, i.e., $/vf = el;s final demand for good i in country g;6 imports from third countries of good i by country g; imports from third countries are considered to be competing and are expected to have a constant share of the market, i.e., $@/.I$,~= my; represents summation over the index it replaces, e.g., xy” = cr= r $‘. Eqs. (1) are the conventional national input-output equations. These national input-output structures are linked together by international trade equations describing sectoral trade flows between any pair of countries. A gravitational formulation of trade flows was chosen, as it fulfills two criteria. First, it indicates the potential volume of trade in the absence of trade barriers. Secondly, it incorporates the effects of barriers to trade, changes in which are considered in examining the impact of the Common Market’s establishment on trade flows.’ The potential volume of trade is determined by demand in the importing and supply in the exporting country. Available supply is incorporated in this formulation, because increased capacity in an industry is expected to stimulate exports. Such recognition of supply factors is especially important when analysing the effects of technological advances and capacity growth on trade relationships. To provide an example: given a certain demand for automobiles in Germany, Italian car exports to Germany are expected to increase at a faster rate than French car exports to Germany, if capacity for automobile production is growing faster in Italy than in France. It is assumed that, apart from trade impediments, the potential volume of trade between two count& is proportional to demand in the importing and supply in the exporting country. If country h uses 10% of the union’s output of commodity i, then it would import 10% of each Vhis proportionality assumption follows the treatment of exports in many input-output studies. This assumption is, however, restricted to the exports to the rest of the world and t’he assumption was required due to unavailability of comparable input-output data for therest of the world. 6Final demand for rood i in country g consists of domestic final use of good i, being either domestically produced or imported, and of exports of i. ‘For an explanation of the gravitational trade hypothesis, see also Piiyhijnen (1963). Pulliainen (1363), Tinbergen (1962), and Linnemann (1966). For an application to the analysis of integration effects, cf. Waelbroeck (1964) or Verdoorn and Schwartz (1972).

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W.E. Prewo, Xtwgrution effkcts in

the EEC

member-country’s output of i, i.e., country h is indifferent as to the national origin of its input of good i. Thus. if the Netherlands’ use of steel amounts to 10% of the steel output of the EEC, then loo/, of the steel output of each individual EEC-country would be shipped to the Netherlands. In addition to the demand ‘pull’ and supply ‘push’ effects, the actual volume of trade will depend on impediments !.o trade which will affect differently trade among various pairs of countries. If we denote the impact of trade impediments on the flow of commodity i from country g to country h by rp”, WCcan formulate the equations for bilateral trade Bows on a sectoral level,

g,h= I,2 ,..., m, i = 1, 2, ..I., n,

CW

where #” total flow of good i from supplying countryg to country h; q aggregate amount of good i produced and consumed in the m countries, i.e., excluding exports to and imports from third countries; rfL parameter reflecting the cost of transferring commodity i from country g to country h (inverse of trade impediment factors). Knowledge of all other variables in eq. (2a) allows direct computation of the trade parameters rf”. Gravity models in iotemational trade were estimated by Tinbergen (1962), Poyhiinen (1963), Pulliainen (1963), and Linnemaoo (1966). Their models related trade between two countries to national income or GDP in the two trading countries and (ioverse’y) to the distance of transportation. The models were static cross-sectional models, and the coefhcients of the export equation were estimated using conventional regression analysis. For this purpose, proxies were used for the distance variable, e.g., the distance between commercial centers. The results were supporting the hypothesis that the gravity model can explain total trade volume between two countries. 10 an interindustry study GDP or national income would not be used as proxies for supply and demand Instead, the dependence on trade of individual industries, not only of the economy as a whole, would be analyscd by relating exports of an industry to its outbut and to input r~quiremcnts of other countries. Also one does not have to resort il: the use of a proxy variable for the factor representing trade impediments. In the Dutch and Finnish studies only one distance parameterwas used for eact: pair of countries. This assumes concentration of production and consumption at or around ooe point in each country. Although these studies explicitly take account of the spatial dimension in

W.E. Prewo, Integration effects in the EEC

383

explaining trade flows between countries, they neglect the fact of spatial distribution of production and consumption within countries. These models are therefore relating point, not space economies. The variable rfk used in this study is a portemanteau variable, comparable to velocity in the equation of exchange. It represents the influence on trade flows of trade barriers (tariff and non-tariff j,relative price differences,transportattatloncosts, and non-quantifiable trade impediments such as language barriers, existence of sales networks, repair facilities, etc. Regression results showed significant influences of such variables on the determination of the trade parameters risk.* If we rewrite eq. (2a) as g f

h,

then we obtain a model very similar in formulation and algebraic solution to the Leontief-Strout (1963) gravity trade model.9 To complete the model, we write 2rnn balance equations,

i =

dh = ,$,dh*

(3)

1, 2, . . . . n,

.g, .h = 1, 2, . . . . m.

“Due to the lack of data on all trade impediments,wecan only tes,tfor the influence of some trade impedimentsand cannot therefore expect a perfect fit. A single regression equation, linear in logs. of a cross-section of 22 trade parameters, rr. was tested for the year 1959. The variables were: average tariR rate for commodity i in country h. tt: geogra3hical land distance between commercial centers of trading countries, d*; a relative price variable, calculated from unit values. pp; population in the exporting and importing countries, P and P. respectively, to represmt the degreeof self-sufiiiiency or the need to specialke; a dummy variable, bm, set at unity if the trading, countries shared border areas; and a constant term. The results were (t-v&es in brackets): tog+

= -5.68 (-21.45) -Q.7? log P

(-8.24.)

-0.42 (-4.01) -0.71 I ( - 7.63)

to&d*

+o.ss v, (+3.32)

-0.20 tog pT’ (-3.85) R’ = 0.581.

The results are significant a! the 57; level at least and they therefore support the hypothesis that the trade parameters retkct the impti of trade impediments. qI do not know whether Lcontief-Stmut had this interpretation of bilateral trade flo\;o in msnd. Leontief’s rationale, as he expressed it in (1963, pp, 73f.), was lo bui?I a system directed iowards immediate appttibility ratper than theoretical completeness. Fe considered the symmetric treatment ofexpnrtiny and importing regions as an advantage ‘Jicr their asymm&c treatment in other interregional studies.

384

W.E. Prewo, Integrationeffects itsthe EEC

Eqs. (3) and (4) describe the production of good i by country g for use by any of the m countries and the consumption by country h of good i originating in any of the m countries, respectively. Since aggregate production of good i produced for use in any of the m countries equals aggregate consumption of good i in the m countries, exclusive of imports from third countries, we have

(5) Substituting (2) into (3) yields

s, g = I, 2, . . . . Jn, i = 1, 2, . . . . n. Since eq. (2) only pertains to international flows, we add xf” in eh;. (6) on the right-hand side. We set rfg = 0 in order to set egrTg = 0. Substituting (2) into (4) yields

(7) The complete system now has mn intrunational equations (I) and 2mn international equations (6) and (7). The unknowns are the mn outputs xr, mn inputs x;“, and mn nationally absorbed outputs x I”. The mn final demands yeare assumed to be given. To obtain a numerical solution we reduce the number of equations and unknowns! We can diminate the mn unknowns :eg by first rewriting eq. (7) for coun,?ry s,

(8) After multiplying (4) and (8) by xy we obtain (9), where xr” has cancelled out,

i = I, g =

2, . .., n, 1,2, . . . . m,

r.?e = 0 .

W.E. Prewo,Integrationeficts in the EEC

385

Since the mn variables. .?j@have been eliminated, 2mn variables remain to be estimated by the 2mn e+ation’s (1) a:ld (9). From (5) we can substitute cy= r 4 for $“ on the R.H.S. of (9). and Es”_I x”*i for XT on the L.H.S. of (9), obtaining

or by letting eg = 1 - rp, Icy” = 1,

xf$, xp”kf” = x;@,~I xyq,

s,g= i =

I,2 ,..., 112, 1, 2, . . .. rz.

(10)

However, from eq. (5) we see that of the mn equations (IO) n equations are redundant; if we sum in (10) over all countries, we obtain an identity which implies that any of the m equations added can be obtained from the remaining m- 1. However, now we also have to consider the n balance equations (5) IS additional constraints replacing the n redundant equations of (IO). The complete system now consists of the mn intranational equations (l), mn - n international equations (IO), and n internatilonal balance equations (5). As the final denmnds fl are considered given for all n goods in the PI countries, we can show the effects of a change in Jinal demand on the total output and input of each good i in each country g, as well as the resulting trade flows. We compute the #“‘s and xpB’s,which are the ?mn unknowns, from the 2mn equations (I), (5), (IO) by means of a first-order approAmation, since we have to linearize the non-linear equations (10). This is done by expressing the variables in (IO) as deviations from base-year values. This is shown in the appendix. The result, in Imatrix form, is repcaied here for convenience (the symbols are defined in the appendix): dX = I~-v(P+~)-i~]-iV(f+~)-‘(Y+;I~)d

Y.

(20)

The matrices W
W.E. Pruwo, Integrution c,@cts it, the EEC

386

these hypothetical trade flows of the customs union’s anti-monde are then compared with actual trade flows realized in the EEC. As the latter entail the effects of integration, we may relate them to the trade flows calculated under the nointegration hypothesis of unchanged trade parameters and will thus obtain estimates of trade creation and trade diversion. As this approach provides for a simul@neous solution of all output levels, the resulting output and trade changes reflect not only international feedbacks, but aiso intersectoral feedbacks, which are not taken into account in a partial equilibrium approach. Secondly, the hypothetical trade flows that are obtained af!er solving these equatiobs include the effects of growth in the EEC between Table 1 Possible trade effects.

World 1. Traok creation (1) Double trade (2) Internal trade external trade (3) Internal trade external trade II. Trade erosion (4) Double trade (erosion) (5) Internal trade external trade (erosion) (6) Internal trade (erosion) and creation

creation

creation and diversion diversinn and creation

Percntage change in trade with Partners Non-Partners

+

+

+

+

+

4

+

+

diversion creation and diversion + dive&n external trade

-

+

the!base year (1959) and the refemnce years (1965 and 1970, respectively), as they are related to both supply and demand changes in the trading countries. Correspondingly, differences between actual and hypothetical trade flows are net of growth effects, but they do reflect the changes in the trade struc:ure between base and reference year. Depending on the signs of the percentage deviations, six possible trade effects gay be distinguished, as shown in table 1. This table resembles the classification of Trum; .I (1969), but I am employing crdifferent terminology in larder to stress the correspondence among cases of ‘trade creation’ and ‘trade erosion’. Trade creation is used to describe a positive change in total imports, while trade erosion indicates a negative change in total imports. The six cases are divided into these two broad categories according to the change in total trade. W

Case 1, double trade creation, indicates an increase in imports from both partners and non-members, hence leading to trade creation. Its connterpart is Case 4, where decreases in trade with both partners and non-members, double trade diversion (erosion), leads to a decrease in total imports and thus to trade erosion. Cases 2 and 5 are the classical cases ~,f increases in intra-area imports coupled with decreases in extra-area imports. If internal trade creation exceeds external trade diversion, trade creation {Case 2) is achieved, whereas Case 5 indicates that total trade has decreased due to stronger external trade eliversion (erosion). Cases 3 and 6 are unorthodox cases: intra-area imports decline while extra-area imports rise. Again, we distinguish among these cases according to whether the impact on total trade is posi.tive (Case 3) or negative (Case 6). 3. Data and calculations The year 1959 was chosen as the base year, as discriminatory tariff reductions did not co:me into effect before 1960. Structural coefhcients were therefore calculated from the 1959 input-output tables for the five countries of the EEC [OSCE (l965)], which were converted into dollar figures using 1959 exchange rates, and from trsde data obtained from the three-digit CST lo figures of the EEC Foreign Trade Statistics [OSCE (n.d.)]. The structural matrices on the R.H.S. of eq. (20) were then calculated. Growth rates to calculate the increases of the final demand vectors in 1965 and 1970 were obtained from the 1965 input-output tables [OSCE (197O)j and various EEC Statistical Yearbooks and National Accounts Statistics. This allowed solutions of eq. (20) for 1965 and 1970. The next step was the calculation of sectoral trade flows for bilateral trade between each partner and between each partner and non-members, using the procedure as described in the previous sectic n. These trade flows are hypotheticai trade flows calculated under the no-integration hypothesis of unchanged trade parameters. The trade effects are determined by calculating the percentage deviation of actual trade flows from the hypothetical trade flows. This is done for total imports, imports from partner countries, and imports from non-members, for each sector in each member-country in both 1965 and 1970. In the following sections, the term ‘trade increase’ describes an excess of actual eves- hypothetical trade for a given year, implying that trade has increased by more than expected under the no-integration hypothesis. ‘Trade decrease’ describes the opposite case.

4. Results The resulting trade effects for the EEC as a whole and the five member countries are shown in tables 3 and 4, respectively. Due to space limitations, sectoral l”‘CIassification Statistique et Tarifaire’, similar to S.I.T.C.; the trade data were aggregated according to aggregation codes supplied by the EEC Statistical O&e.

388

W.E. Prewu, Integrationefec?s in the EEC

estimates for 1965 are omit;ed from table 4 and are only shown for the EEC as a whole. ’ l Table 2 shows the incidence of the six possible cases in the 11 tradedgoods sectors of the five countries on a sectoral basis. The twelfth sector, Retail and Wholesale Trade, has been omitted from these tables, as we can ignore the trade effects in this sector due to tb composition of its imports. ’ 2 4.1. Aprioriexpectations

As hypothetical trade flows for post-integration years are calculated under the assumption of constant trade parameters, we might expect to find the strongest cases of trade creation in the countries where pre-integration trade parameters indicated high trade resistance. Analogously, we expect low trade creation and large trade diversion in the countries characterised by low levels of trade resistance in 1959. Using a ranking of countries according to trade parameters rf*, where highest trade resistance is indicated by the lowest value of rl”, Italy is found to be the country with highest trade resistance in 1959, followed by France, Germany, Belgium, and the Netherlands. It can be shown on a sectoral basis how many tines a country ranked highest in terms of resistance to trade with the partner countries in 1959. Of the 55 cases (11 sectors and five countries), Italy has highest trade resistance in24cases, with strong concentration in agriculture, rawm.aterials, chemicals, and paper and paper products; France is showing highest trade resistance in :7 cases, mainly in manufacturing sectors; Germany has highest trade resistance in 13 cases, most of which are in the trade of non-ferrous minerals, machinery, and transport equipment; Belgium has only oue case of highest trade resistance, while the Netherlands have none at all. We would therefore expect to find the largest increases of intra-EEC imports in Italy, followed by France and Germany, and to observe trade diversion and possibly total trade decreases more frequently in the Benelux countries, which, according to this ranking, showed a high degree of openness already in 1959. Such a ranking can only give rough indications of expected trade changes. For it should be remembered that the regression equation of the trade param&ers’ 3 represents an extreme and imperfect hypothesis. Due to our lack of information, the tariff rate is the only variable in that equation of which we know how it has been influenced by integration. This should not be interpreted to mean that the tariff rate is the only variable that matters. While the magnitudes of the nonprice and non-tariff variables in the regression equation remain unchanged in the course of integration, their trade impeding influence, i.e., their coefficients, ’ %ectoralestimates for 1965 :rreavailable upon request. 1*This sector contains retail and wholesale margins and various services of sales acerlts. The trade of this sector is in stamps, paintings, engravings, antiques, other art objects, a& srchaeological findings. We can @ore the trade chmges in this sector on the safe assumption that trade in these goods has not been sensibly itiuenced by the establishment of the EEC. 1%eefootnote 8.

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389

has been affected by integration. This holds in particular for the distance variable, as integration does affect the allocation of industries and allows their concentration at their internationally optimal lo:aGon, which will affect ‘economic distance* between countries. ’ 4 Increased communication and information among partner countries also facilitates exchange and may be expected to affect the Tab!e 2 Sectoral distribution of trade effec:s in the EEC countries. Trade creation --. -.--.(1) (2) (3) __~_ ..1965 1970 1965 2. Fuels 1970 3. Minerals, Ferrous and non-ferrous 1965 1970 metals (ECSC) 1965 4. Non-ferrous minerals and 1970 products (non-ECSC) 1965 5. Chemicals 1970 1965 6. Metal products, Machinery, Electricalequipment 1970 1965 7. Transport equipment 1970 8. Food products, Beverage, Tobacco 1965 1970 1965 9. Textiles, Leather and shoes, 1970 Clothing 1965 10. Paper, Paper products, Printings 1970 1965 11. Other industries 1970 1965 Total 1970 1. Agriculture. Fishing, Forestry

(4)

(5)

___

(sl

I l1

4 4 1 1 1 1 2

Trade erosioo ______

1

I 1

1 1

2 2 4 3 1 1

2 1 1 1 2 4

2 1 2 1

1 2

2 : 1

20 29

2 1 1 5 10

4 2 1

i

2

:

1 II 6

15 6

3 1

coefficients of the population and distance variables. ?he establishment of sa!es networks and repair facilities in partner countries will have similar effects. 4.2. Overallpattern of trade effects in 1965 and 1970 The totals in table 2 show that in 1970 more than half of the 55 cases exhibited double trade creation, and 16 additional cases internal trade creation and r4Cf. Linnemann (1963, p. 29), who argues that distance represents the hpact of ali ‘natural trade impediments’, amoog which he includes communk.atioo barriers.

390

W.E. Prewo, Integration e_&cts in the EEC

external trade diversion. In more than 8G“/oof the cases intra-EEC imports have risen, while more than 7504 of the cases show increases in total imports. This pattern of trade effects is similar to that reported by Truman (1971) for 1968, who found double trade creation in 5 I”/, of manufacturing sectors. If trade changes are aggregated over all EEC-countries, we find that out of 11 possible cases seven were cases of trade creation in 1965, while in eight of 11 cases intra-EEC imports had risen. In 1970, there were nine incidences of trade creation, while the remaining two cases of trade erosion were in the fuels and iron ore sectors. A comparison of the 1970 and the 1965 patterns reveals that cases showing increa -s in extra-EEC imports have increased from 24 to 33 during these five years. While external trade creation up to 1965 may have been the result of both the Dillon Round and downward adjustments to the common external tariff in the high tariff countries, the trade liberalisation due to the Kennedy Round may explain further increases in extra-area imports after 1965. This resulted in nearly a 50% increase in cases of double trade creation from 1965 to 1970 and was matched by a more than 50 % decrease in cases of trade erosion (from 29 to 13). It is quite possible that overestimates of trade creation were due to the general tendency towards intra-industry specialisation in industrial countries. 4.3. &aggregation for individual sectors Table 2 also shows the total incidence of the specific trade effects in each sector. Double trade creation is strong’fy represented in agriculture and in the manufacturing sectors, with the exception of textiles, where large internal trade creation is nearly outweighed by external trade diversion in 1970. The 1965 results show far more cases of trade erosion, mainly in sectors where decreases in extra-area imports have outweighed increases in partner imports. Many of thr se trade erosion cases, especially in the manufacturing sectors, have switched to cases of trade creation b.:tween 1965 and 1970, which indicates that between 1965 and 1970 extra-EEC suppliers have regained ground lost during the early years of the EEC. In discussing the results for individual sectors, it will be useful to group them in three broad categories: agriculture and food products, fuels and mining, and manufacturing industries. 4.3.1. Agriculture andfoodproducts Sector 2 (Agriculture, Fishing, and Forestry): Double trade creation in the agricultural sector suggests that extra-EEC suppliers have not ex@-need absolute losses due to the Common Market’s agricultural policy. However, their relative position has worsened considerably, as compared to iatra-EEC suppliers: h 1970, internal trade creation was more than five times as great as external trade creation, whereas in 1965 the difference had been small.

W.E. Prewc, Integration effects in the E&C

391

Sector 8 (Food Products, Beverages, and Tobacco): Intra-area imports have risen sharply both to 1965 and again to 1970, whereas extra-arca imports have stagnated (1965) or decreased moderately (1970). 4.3.2. Fuels and mining Sectors 2 und 3 (Fuels, Minerals, and Ferrous and Non-Ferrous Metals): Eight of the ten cases showing a decline in intra-area imports in 1970 can be Table 3 Trade effects in the EEC, 1959-1965 and 1959-1970. Percentage change in trade with World Partners Non-memhen 1. Agriculture, Fishing, Forestry

2. Fuels 3. Minerals, Ftirous and nonferrous metals iECSC) 4. Non-ferrous m’irkralsand products (non-ECSC) 5. Chemicak 6. Metal products, Machinery , Electrical equipment 7s. Transport equipment 8. Food products, Beverages, TObXCO

9. Textiles, Leather and shoes. Clothing 10. Paper, Paper products, Printings 11. Other industries All sectors

1965 1970 1965 1970 1965 1970 1965 1970 1%5 1970 1965 1970 1965 1970 1965 1970 1965 1970 1965 1970 1965 1970 1965 1970

__

41.5 26.7 -4.3 -7.3 -33.4 - 12.0 1::; - 14.8 141.9 865.: 50.2 64.8 10.1 32.6 -18.5 0.49 21.5 57.0 !Z! 4.1 26.2 --Y-_-

46.5 74.8 -18.7 - 32.6 -34.5 - 14.5 21.7 127.0 50.0 279.4 7;; 62.6 90.8 49.9 173.3 47.2 88.2 29.3 135.3 99.1 97.3 18.2 63.9

40.1 13.6 0.56 0.87 - 32.4 - 10.0 -6.2 -33.0 -51.3 57.3 10.9 105.7 34.6 31.2 0.13 -4.1 -. 58.5 -52.5 18.6 27.5 36.6 7.1 -3.9 3.8

Case 1 1 : 4 4 2 2 5 1 : 1 1 : 5 2 1 1 1 1 2 1 --

attributed to these two sectors. In 1970, trade erosion in sectors 2 and 3 was only 7.3 % and 12 %, respectively, as compared to 4.3 % and 33.4 % in 1965. The overall impact of trade erosion was therefore small (see table 3). Moreover, we cancot ascribe these trade effects to the establishment of the EEC, as the products of these sectors were already governed by the European Coal and Steel Community (ECSC) and the changes between 1959and 1965 or 1970 are therefore not changes from a pre-integration to a customs union situation. Secondly, heterogeneous

392

W.E. Prwo, Integration efects in the EEC

products are lumped together in these two sectors. One might suspect that in the fuels sector internal trade diversion (erosion), coupled with an increase of extraarea imports, was partly due to substitution of extra-EEC oil for EEC-coal which ,would reflect the energy policy ofthe EEC-countries [Balassa (1967, p. S)]. Falling petroleum prices might also have contributed to the result. Decreases in intra-E.EC imports of petroleum products are attributed by Kreinin (1972, p. 905) to the constr’uction of refineries in the EEC counties, resulting in a Xeplacement of member imports. Sector4 (Non-Ferrous Minerals ai\d Products): This sector contains minerals, other than ores and combustibles, and their products, i.e., stone, clay, cement, glass, etc., which were not covered under the rules of the European Coal and Steel Community. Three countries indicated trade creation and two trade erosion, which was due to external trade diversion outweighing intra-EEC trade increases. On average, the 1959 intra-EEC tariffs had been above those on imports from third countries, 1’ indicating potential gains due to elimination of internal tariffs. The overall result for 1979, trade creation due to internal creation and external diversion, is consistent with this expectation. 4.3.3. Manufacturing industries Sector 5 (Chemicals): In 1965 large decreases in extra-area imports had still outweighed increases in intra-area tr&.e, thus leading to net trade diversion. By 1970, however, external trade diversion had been reversed, leading to strong double trade creation in all countries. In addition to strong integration effects on trade flows in this sector, technological changes and increased demand for various products, especially synthetic fibers, have stimulated increased demand for imports from both intra-area as we11as extra-area suppliers. Though extraarea suppliers have thus been able to recoup earlier losses, intra-EEC suppliers hale increased their exports to partners to a far larger degree than extra-area suppliers, as, in percentage term;, internal trade creation was five times as large as external trade creation. Sectors 6, 7, 10, and II (Metal Products, Machinery, Electrical Equipment; Transport Equipment: Paper, Paper Products, Printings; Other Industries such as Rubber, Plastics, Furniture): These manufacturing sectors, together with chemicals, exhibited 90% of total double trade creation in the EEC in 1970. The movement towards double trade creation, that had already shown evidence in 1965, continued through 1970, leading to a reduction of trade erosion cases from 6 out of 20 in 1965 to one out of 20 in 1970. It is doubtful that all tr crention in these sectors, especially external trade creation, can beexplained by the establishment of the EEC. First, as noted above, the results might reflect the effects of the Dillon and Kennedy Rounds. Secondly, the tendency over time towards intra-industry specialisation within the entire ‘“Averagenominal input-output tables.

tariff rates were

cakulated from import and duty data as shownin the

W.E. Prewo, Integration effecrs in the EEC Table 4 Trade effects in individual EEC-countries.

__ _________ 1. Agriculture, Fishing,

Forestry

393

1959-1970.

Percentage change in imports by -._-.___----..-_ ----- --__._ ____ Belgium NetherItaly France Germany Luxembourg lands - .-----._. ._---_ 20.0 Total 127.3 19.9 43.1 - 20.2 74.5 Intra 188.6 41.3 123.0 109.8 11.4 Extra 115.1 10.5 9.9 - 34.7 - 17.3 -53.6 -2.2

19.8 68.6 8.8

-7.6 -26.2 10.6

-2g.7 -69.3 - 14.8

58.3 43.3 68.6

6.4 - 5.4 25.4

- 13.7 - 19.8 -9.8

-41.8 - 29.2 -48.8

- 36.9 - 32.8 -44.7

Total Intra Extra

41.6 79.8 26.9

40.5 216.9 - 20.2

57.3 240.3 6.3

-46.8 156.2 -80.1

-8.7 44.0 - 53.0

5. Chemicals

Total Intra Extra

248.1 525.4 99.7

f64.8 573.1 38.5

143.5 343.1 64.4

121.0 186.9 46.7

66.7 81.0 46.5

6. Met,al products, Machinery, Electrical equipment

Total Intra Extra

119.5 116.5 124.3

211.1 217.3 202.3

198.6 235.5 171.7

18.9 23.1 7.0

9.2 -2.4 31.1

Transport equipment

Total Intra Extra

103.1 162.9 40.5

105.7 153.4 50.4

165.2 212.9 120.5

10.2 39.5 -31.0

-0.6 4.8 - 10.2

Food products, Beverages, Tobacco

Total l: :ra Extra

6G.4 431.8 3.7

17.6 203.1 -11.7

43.9 159.0 5.4

48.4 80.3 20.4

0.8 116.4 -23.3

Textiles, Leather and shoes, Clothing

?‘otal -37.2 Intra 77.2 Fxtra - 64.4

7.0 458.6 - 67.4

22.5 lQ4.5 -28.8

- 22.1 3R.S -76.5

4.6 34.0 - 49.4

Paper, Paper ,products, Printings

‘r’otal rntra Cxtra

108.7 236.5 56.8

75.8 214.9 48.1

14.2 38.9 - 12.7

17.6 98.9 - 18.8

94.8 235.5 34.3

102.8 220.3 61.4

40.2 23.9 51.9

4.7 110.6 -71.5

2. Fuels

Total 0.1 Intra - 60.9 Extra 6.6

3. Minerals, Ferrous and non-ferrous metals (ECSC)

Totai Intra Extra

4. Non-ferrous minerals and products (non-ECSC)

49.3 172.7 31.4

Total -44.6 lntra -48.4 Extra -43.1 1959-3970 All secws 19%1965

Total Intra Extra

51.1 123.4 23.2

42.9 97.0 13.2

::: 15.3

0.3 28.1 -23.4

-8.0 11.9 - 24.9

Total Intra Extra

15.5 25.5 11.7

12.4 36.8 1.2

19.4 44.6 7.8

-15.9 -1.6 -28.2

- 19.7 -9.1 -29.1

394

WK. Prewo, Infegration effects in the EEC .

industrial world will also result in an overestimate of trade creation. On the other hand, external trade creation was integration-caused to the extent that it was due to a downward adjustment to the common external tariff. Furthermore, the investment boom that accompanied the establishment of the EEC and led to higher machinery imports from non-members contributed to external trade creation [Balassa (1967, p. Sf.)]. Sector 9 (Textiles, Leather and Shoes, Clothing): Strong declines in extra-area imports had still outweighed increases in partner imports in 1965, while by 1970 further increases in partner imports were just slightly above external trade diversion. In general, cases of trade creation were concentrated in agriculture and the manufacturing sectors, while total trade decreases occurred in primary products. Aggregating the trade changes over all sectors, we find double trade creation in 1970 for the EEC as a whole; total imports have been above hypothetical imports by 26p/,, intra-EEC imports by 64 %, and extra-area imports by a negligible amount of 4%. For 1965 the figures were 4%, 18 %, and -3.9 %, respectively, representing internal trade creation and external trade diversion and indicating that by 1965 not even half of the integration effects realised by 1970 had appeared. The absolute changes in 1970 indicate $19.8 billion of total trade created of which 17.3 billion were created in partner trade and only 2.5 billion in trade with non-members. The overall result is therefore close to the case of internal trade creation and external trade diversion. 4.4. Resultsfor individual countrks Germany. showed the largest absolute amounts of trade created, followed by France, Italy, Belgium-Luxembotryg, and the Netherlands. This ranking, however, is changed when percentage changes are considered, which indicate that Italy has the most t.rade creation, followed by France, Germany, BelgiumLuxembourg, and the Netherlands. The high-tariff countries are leading on this account, whereas the country with the lowest average pre-union tariffs, the Netherlands, is at the bottom of the scale. The ranking according to percentage changes is in strict conformity with the prior expectations (section 4.1) based on a ranking of the 1959 values of the structural trade parameters riffh. This ranking had shown Italy to be the country with the largest potential for trade liberalisation, whereas, on the other hand, the Benelux countries, which already were very open economies in 1959, showed a small potential for trade liberalisation effects. 4.4.1. I!aly Double trade creation was the predominant pattern for My in 1970, exhibited by 9 of 11 sectors, as compared to 5 in 1965. Intra-EEC imports have risen much more than extra-EEC impor” (by a ratio of five to one in percentage terms).

W.E. Prewo, Integration effects in the EEC

395

Intra,-area imports in 1970 have only decrease< in the fuels se&r and in Other Industries, which already had less than average L>ritTsin 1959. Trade creation for all sevt.ors in 1970 was 51% for total imports, 123% for partner imports, and 23% for non-member imports; the correspondinn rates for 1965 were 15.5x, 25.5’;/,, and 11.7%. 4.4.2. France In 1970, 75% of France’s sectors exhibiter .louble trade creation or interna! trade creation and external diversion. In sectors 2, 3, and 11 imports from partners declined, which resulted in trade erosion in sector 2. ‘rhis occurrence parallels the experience of the EEC as a whole. For all sectors taken together, trade creation in 1970 amounted to 43% for total imports, 97% for partner imports, and 13 % for imports from non-members, as cornpared to 12%, 36x, 1%, respectively, in 1965. The absence of external trade diversion in the overall results of Italy and France reflects the effects of downward adjustments to the common external tariff in these previously high-tariff countries. 4.4.3. Germany In 1970, ill) out of 11 sectors showed trade creation, 9 of which were cases of double trade creation. Sector 3 exhibited double trade diversion (erosion). However, ahe 1959 average tariffs for imports of the goods of sector 3 had been extremely low already. Other authorsi were surprised at finding large trade creation for Germany, as this ran contrary to their expectations, since Germany had been a low-tariff country in 1959. However, the ranking of countries according to trade parameters showed Germany to be less open in 1959 than the Benelux countries and on the other hand to be more open than France and Italy. The ranking according to the integration effects again shows Germany in this middle position, acd the results indicate that despite low pre-union t@Ts there was still a large potential for trade liberalisation to be realised in trade with Germany. These results also suggest that ex ante estimates of integration effects should not be based exclusively on the pre-union level of average nominal tariffs. Overall, trade creation in 1970 amounted to 40% i.n total imports, 92% in imports from partners, and 15 ‘A in extra-EEC import -,, while the figures for 1965 were 19x, 44.6x, and 7.3 %, respectively. The 1970 percentages are just about double their 1965 counterparrs, indicating that by 1965 only half of the integration effects had been realised in Germany. 4.4.4. Belgium-Luxembourg Belgium-Luxembourg experienced increases in total imports in 7 of 11 cases in 1970, of which five were due to double trade creation. Trade erosion occurred 16Cf. Truman (1971, p. 38).

3%

W.E. Pmw, Integration e_&cts in the EEC

in four sectors, and for sectors 4 and 9 it was due to an excess of external trade diversion over increases in partner imports. Three of the four cases of trade erosion occurred in non-manufacturing sectors. Overall, trade was created internally while being diverted from non-members in 1970; total imports have increased by only 0.3%. imports from partners were 28% higher than hypothetical imports, and extra-area imports have fallen by 23 %. The corresponding results for 1965 were -16x,, - 1.6%. -28 %, i.e., double trade diversion (erosion). The overall results in the Benelux countries, in contrast with the other EECcountries, were strongly affected by trade erosion in the Retail and Wholesale Trade sector. It was noted above that the trade changes in this sector were primarily not due to the formation of the EEC. Separate cakulations, in which trade in this sector was ignored, showed results with less trade erosion in the Benelux countries For the BLEU the adjusted figures for 1970 are 0.9x, 32.7 X, and -24.8 ‘)&and for 1965 - 14.5 %, 2.1x, and - 28.2 %, respectively. Both years then indicate internal trade creation and external trade diversion, with a switch from trade erosion to trade creation between 1965 and 1970. 4.4.X The NetherIan& The Netherlands showed even less internal trade creation than BelgiumLuxembourg, which might be due to the fact that, overall, it had the lowest average tari& in 1959. The unorthodox cas,e of internal trade diversion in the Benelux countries would be quite plausible if it was dce to a decline in intraBenelux trade due to the disappearance of trade preferences among the Benelux countries [Kreinin (1972, p.17)]. Trade diversion on thi:; account was probably stronger in the Netherlands than in Belgium-Luvembourg, as the latter country had a larger potential for trade creation with partners due to higher pre-union tariffs. In the Netherlands five of the sectors exhibited decreases in total actual imports in 1970 as compared to hypothetical imports. However, partner imports decreased in only th,ree sectors, of which two were in the fuels and mining group, where the causes may have been the same as noted above for the EEC as a Nhole. Among manufacturing sectors total trade decreased only in transport equipment, and there by a negligible magnitude of -0.6%. Yet trade creation, when it occurred, was generally much less than in the other EEC countries. Trade erosion was generally due to external trade diversion being larger rhan internal trade creation. The former effect was possibly caused by an uf ward adjustment to the common external tariff, while internal trade creation was small, as elimination of already low intra-EEC tariffs could not generate high internal trade creation and as abolishment of intra-Benelux trade preferences may have had a trade diverting effect. The high degree of openness indicated by the value of the trade parameters for 1959 suggests that the Netherlands wfre already special&d before entering the EEC, so that the potential for trade

W.E. Provo, Integration effects in the EEC

397

creation due to production effects was small, while trade creating consumption effects remained small as well due to already low pre-union tariff.5. Overall, the result for the Netherlands in 1970 is trade erosion due to internal trade creation being outweighed by external trade diversion, specifisally an 8 T/, decrease in total imports, a 12% increase in partner imports, and a 25% decrease in non-member imports. The results for 1965 were -19.70/,, -9”/,, - 29”/,, respectively, i.e., double trade diversion. As in the case of BelgiumLuxembourg, trade increases with partners after 1965 have erased the internal trade diversion that still persisted in 1965 in both countries. If the trade of the Retail and Wholesale Trade sector is excluded, net trade diversion in the Netherlands will be reduced, as the adjusted figures are -5.4(x, iI2.4x, -2l.l%,respectively, for 1970,andfor 1965, -15.1x, -3.2%.and -25.6%. According to these figures, trade erosion in 1970 was not sizeable at all and only one third of the 1965 magnitude. 4.5. Absolute values Trade effects for individual countries and the EEC as a whole are summarized in table 5. Absolute values are indicated for increases and decreases in total imports, imports from partners, and imports from the rest of the world. Due to aggregation, decreases and increases in imports for the EEC as a whole may differ from the changes obtained by summing over the individual country columns. The net results are, however, identical in both cases, While the percemage figures reported in, the previous sections were derived from the net differences between actual and hypothetical trade flows, table 5 shows the decomposition of the aggregate net differences into trade creating and trade diverting or eroding effects. For the EEC as a whole it is shown that trade erosion in fuels and iron ores amounted to little over loo/, of trade creation in the remaining sectors. Although the Netherlands show the largest net decrease in total imports (757 million or 8 %), gross decreases in Belgium-Luxembourg were even larger (1712 million), but in the latter country they could not outweigh the substantial trade creating effects (1815 million). Such disparities between gross increases and decreases would be even more pronounced if the data were further disaggregated, thus revealing the effects of intra-industry specialization. It is also demonstrated that trade erosion in the Benelux countries has largely been caused by decreases in trade with the rest of the war’:, which was explained by upward sdjustments to the common external tariff, a move which reinforced the trade diverting effects of the elimination of internal tariff barriers. On the other hand, decreases in extra-area imports by France and Italy have been contained at far lower levels, as the establishment of a common external tariff reiiuired a lowering of these countries’ previously high tariffs. Likewise, the elimination of high intra-ared trade barriers in these countries has led to sb. Jng cross increases in intra-EEC trade. In addition, increased demand for differentiated and technologically advanced

-1si3

-1;:

458 - 1972 -I514

_- ..___ _-._-_

- 377 1617

1994

- 1741 17281 63.9

13022

- 6276 2529

6102 - 3573 2529

_~__... ^__. .__.____

- 2392 17281 63.9

19673

26.2 - _..._..

22237 - 2421 19810

EEC

_

L

A

:_

_

-

-

I

-~

^

_

ho

_.

_

“. -

--1x._

_-.>

I

L.Y.“--_-

/>

.-_.O...

~=

Percent. 23.2 13.2 15.3 - 24.9 -23.4 3.8 3.8 -~--_-._-.._..- ..__._ -_..__. _ .___I___ _I. .._ ___ _..._ _-__-._-.~ Note: Figures refer to the difference between actual and hypothetical imports, the latter calculated under the assumption that the structural relationships okrved in 1959applied also in 1970.

Decmase (trade diversion and erosion) Difference

3506 - 726 2780

25169 -5359 19810

1’.3 26.2 __--_-- - .-._..-_ .-_--.

1815 -1712 103

Sum of country data

P

f R

2068 -838 1230

- 792 816 11.9

-.__ --.. _- - ~.~_..

-404 6443 92.3

1608

-8.0 _ _~~

864 - 1621 -757

Netherlands Blcu

_ _ __.

,0

2417 -811 1606

-575 5165 97.0

-244 3240 123.4

6847

40.2

9935 -712 9223

Germany

__

hcrease (external trade creation)

5740

42.9

6928 -533 6395

3494

51.1

5627 -781 4846

France

-. .~~__.__ --.-_____

Imports from non-member countries

Incre~ (trade creation and diversion) Decrease (internal trade diversion and erosion) Difference percent

Imports fr0mpartner countries

Percent

Decrease (trade erosion) Difference

Kmportsfrom world Increase (trade creation)

Italy

Table 5 Country distribution of trade eikcts, 1959-1970 (S mil!ion). ---_ .--__I--

W.E. Prewo, Megration

effects in the EEC

399

products of various manufacturing sectors offers a further explanation for external trade creation in France and Italy. This reasoning applies in particular to Germany, whose import performance, as noted above, cannot be explained by arguments based on pre-union tariff rates only. Among all EEC countries, Germany experienced the smallest gross decreases in extra-area imports (726 million), and gross increases of external imports (3506) were mainly attributable to substantial external trade creation of 2323 million in machinery, electrical am! transport equipment, and chemicals. 5. Conclusion

The conformity of the individual countries’ ranking according to trade effects with the ranking according to ex ante expectations based on the 1959 values of trade parameters suggests, on the one hand, that the model has been able to incorporate trade impediments and their influence on sectoral trade flows. On the other hand, the results suggest that trade impediments other than tariffs must not be neglected in analyses of the development of trade relationships. It is the weakness of this approach, that, as in many other studies, the integration effects are measured by the difference (or ratio) between actual and hy>othetica! trade flows, thereby assuming that such differences are wholiy due to integration. Specifically, it is assumed that trade impediments would have remained at their pre-union level in the absence of the formation of a customs union. This assumption leads to an overestimate of both internal and external trade creation. I7 Also, if more reliable information on the magnitudes and the impact of non-tariff barriers to trade were available, such information could be incorporated in the formulation of this mode! and the trade parameters could then be made variable and dependent on changes in trade impediments. This approach could then be adopted to derive ex ante estimates of integration effects. But such an analysis was not attempted here due to the lack of such information. In addition, this paper did not deal with changes in the input-output structure, as an incorporation of such changes would first require their separation into changes caused by integration and into autonomou: changes. A further important variable neglected in this study is t’le impact of foreign investment on the production and trade structure in ine Common Market. Inclusion of such factors may offer an explanation of decreases in extra-area imports, in particular in the Benelux countries, where trade may have been diverted from the rest of the world not only because of tariff changes but because of import substitution due to direct investment. In order to eliminate the effect of growth on trade flows or the effect of country size, se. oral studies have analysed shares or relative changes. The same was done “An attempt to ‘normalize” the estimates could be made if input-output tables for more than one pre-integration year were available. For various approaches to normalization. cf. Kreinin (1972), Verdoorn and Schwartz (1972). or Williamson and Bottrill(1971).

W.E. Prtw~. Inregrarinrre,,ds

400

in ~hc EEC

here. Obviously, such procedures only eliminate growth and size elfects if the inffuence of such effects has been proportional to their ow~nma from my own results, I suspect that market size has proportionately, leading to a more than proportionate i and to a less than proportionate increase in small count when faced with a common external tariff, might % ecide IC‘emblirh cqwerather than in the small sent&ions, sales networks, repair facilities in the la lain the frequent occurcountries. Such economies of scale would help to rences of double trade creation in the large countries. The large volume of trade created after 1965, i.e., after a reduction of intraEEC tariffs by roughly two thirds, need not be taken as evidence for long lags in the response of imports to tariff reductions. It may, at least in part, be due to tion-caused economies of scale, or to ‘forced efficiency’.” It is possible ffects had not come into play during the early years of the EEC, but have resulted in strong trade effects in more recent years after the major eliminations of protective barriers. _ ApPerrdix In order to provide a solution of the system of eqs. (l), (5), (lo), we linearise the international equations (10) by expressirg the variables as deviations from base-year values [cf. Leontief (1963), Polenske (1970)], f1° I = z?‘+A+’ I I 9

_$g D = Z:+Ax$‘,

Y! = fl+Afl’.

The linear approximation of (10) is

Multiplying out and dropping terms containing a product of two deviations,

B3t from (IO),

i

Rewriting (I l), “Cf. Lipsey (1960, pp. 512ff.f.).

W.E. Prewo, Integralioneffects in rhe EEC

401

The L.H.S. of (11’) can be rewritten as

To simplify, write L.H.S. of (11’) = x:x I Axye,

af%y,

Pi --

(

K$ -

,il ($“ky),

where

s # g, s =: g.

(12)

Analogously, write R.H.S. of (11’) = ES 1 A$‘@‘, where

(13) Hence,

%gl( A.+y) = s~l(A$%;g),

i=

I,2 ,...,

R,

g = 1,2, . . .. m-1, s = 1,2, .._, m.

We may write the system in matrix form using the following notation,

‘J

=

,

(mn x mn) Am

(14)

402

W.E. Prewo, Integration effects inyhe EEC <_K ‘.

wheri

where

P*_ fq’

w=. (mnxmn)

where

I

p

.

L r

.

.

p2

pp22

.

.

.@ l.m-1

&2.m-1

.

Z

I

. ..I

.

w”;

= I

0

.

.:I 0

AX" AX20

AX=

(mnxl)

.

,

A.-T_

-

:“. .

.

.

1

tie

g-l

pnl J.pn2

1 ;

I

.&&m-l

_

W.E. Prewo, Intqrarion t@cts in the:EEC ‘I

where

AP= (nxl)

where

I and 1 are identity matrices of order PIand mn, respectively.

where

J?and C are defined as fi and ti, respectively.

403

404

W.E. Prew,

Integration eficts in the EEC

Then from (I), AX”” = A’(AX=+

AX”3 + AYs-rfr”AX”s,

(z+ti”)AX” = A”(AX”+ AXw)+ A Y”, Ax”‘= (z+ri*)-‘A”(AX”“+AX”)+(z+-rir’)--’AY’,

f

s=1

~QsAX”’ =

s$l~eAXsO,

s = 1,2, . . .. m, g =

(1’) (14’)

1,2, . . .. m- 1,

(5’) Eqs. (l’), (14’) and (5’) form the complete system. We now substitute the R.H.S. of (1’) for Ax” in (i4’) and sum eq. (1’) over all m countries,

f [+S=l

zI

@‘(z+tFt”)- iAS]AXS’

[z-(Z+SP)-‘A”]AXSo = i (z+rir’j-iAYs+s~I(Z+rW)-lAsAX’. S=I

(18)

Since Ax”’ = CA Y” by our assumption on exports to third countries, we rewrite St, [~w-~Qs(Z+riP)-lAs]AX”

=$,

~Qs(f+~--(Z+AS~AYS, 07’) (18’)

W.E. Frzwo, integration

and finally by getting rid of the summation

effects

in the EEC

signs,

v(t+.G)-‘AlAX = v(P+@)-‘(P+z)A

[W-

405

Y.

09)

Solving for AX we get AX

3

[W-

V(~+h)-‘d]_‘V(P+~)-‘(Z+d~)d

Y.

References in the European Common Market, Economic Journal, March, l-21. European Free-Trade Association, 1972, The effects of EFTA and the EEC 1959-1967 (Geneva). Kreinin, M., 1972, Effects of the EEC on imports of manufactures, Economic Journal, Sept., 897-920. Leontief, W., 1963, Die multiregionale Input-Output-Analyse, in: Arbeitsgemeinschaft fiir Forschung des Landes Nordrhein-Westfalen, 114. Sitzung, March 7.1962 (Westdeutscher Verlag, K61n and Opladen). Leontief, W. and A. !&rout. 1963, Multiregional input-output analysis, in: T. Bama, ed., Structural interdependence and economic development (St. Martin’s Press, New York). Linnemann, H., 1966, An econometric study of international trade flows (North-Holland, Amsterdam). Lipsey, R.G.. 1960, The theory of customs unions: A general survey, The Economic Journal 70,Sept.,496-513. OSCE (Office Statistique des Communaut& Eurownnes), 196.5, Input-Output-Tabellen fiir die LHnder der EtiropBi;c.hen Wirtschaftsgemeinschaft, 2nd ed. (Brussels). OSCE (Office Stati’stl’que &s Comrnunautti Europ&nnesj, Commerce Exteri;eur, Table;?ux Analytiques (CST). various issues. OSCE (Office Statistique des Communautds Europ&nnes), 1970, Statistiques g&n&ales, S&e sp&ciale: Les tableaux entr&s-sorties 1%5,5 vols. (Luxembourg). Polenske. K.R., 1970, Empirical implementation of a multiregional input-output gravity trade model, in: A.P. Carter and A. Brody, eds., Applications of input-output analysis, Proceedings of the IVth International Conference on Input-Output Techniques. Geneva, S-12 January 1968, vol. 1 (North-Holland, Amsterdam). Pijyhiinen, P., 1963, A tentative model for the volume of trade between countries, Weltwirtschaftliches Archiv 90, no. 1,93-99. Pulliainen, K., 1963, A world trade study: An econometric model of the pattern of commodity flows in international trade in 1948-1960, Ekonomiska Samfundet TidLkrift 2,78 -91. Tinbergen. J., 1962, Shaping the world economy (The Twentieth Century Fund, New York), Truman, E., 1969, The European Economic Community: Trade c::ltion find trade diversion, Yale Economic Essays, Spring, 201-251. Truman. E., 1971, The impact of the EEC on trade and production of mamifactured products: The first decade, Yale University Department of Economics Discussion Paper no. 1I, June. Truman, E., 19?2, The production and trade of manufactured products in the EECand EFTA: A comparison, European Economic Review 3, no. 3.271-290. Verdoorn, P.J. and C.A. van Bochove, 1972, Measuring integration effects: Asurvey, European Economic Review 3. no. 3.337-349. Verdoorn, P.J. and A.N.R. Schwartz, 1972, Two alternative estimates of the effects of EEC and EFTA on the oattern ortrade. Eurooean Economic Review 3, no. 3.291-335. Waelbroeck, J., i964. Le com&rce d;? la CommcnautC Euro&m& aver les Pays Tiers, in: Integration europ&nne et tialite &onomique (Brugge). Williamson, J. and A. Bottrill, 1971, The impact of customs union trade on trade in rnanufacturr - , Oxford Economic Papers, Nov.

Bahssa. B.. 1967, Trade creation and trade diversion