Trade opportunities between the East Asian-Six and the European Union

Abstract

Six East Asian countries (EA6) --Indonesia, the Republic of Korea, Malaysia, Singapore, Taiwan and Thailand-- together with Hong Kong (which is not included in this study because of its "China connection") have led the economic growth of the developing countries since the 1960s. Their domestic economic policies supported macroeconomic stability and rapidly growing trade which led to their integration in the world economy. Political objectives were paramount in the formation of the European Economic Community (1958) which consisted initially of Belgium, France, the Federal Republic of Germany, Italy, Luxembourg and the Netherlands. It was also hoped that European integration would result in economic benefits from specialisation according to comparative advantage, from the exploitation of economies of scale and increased competition. West European countries enjoyed buoyant economic growth in the 1950s and 1960s but their economies slowed in the 1970s. Meanwhile, membership of the European Community expanded in the 1970s and 1980s to twelve countries. Integration efforts intensified with the Single European Market and plans for an Economic and Monetary Union. These steps were still primarily politically motivated but supported by arguments that they would promote faster economic growth. Trade links between the European Community/European Union (EU) and the EA6 countries are weak compared to trade links between the EA6 and the United States or the EA6 and Japan. This thesis argues that a major reason for the low intensity ofEU-EA6 trade in manufactures lies in the trade regime of the EU. While the EA6 have non-discriminatory trade policies, the ED's trade policies form a pyramid of preferences that disadvantages the EA6 countries. In addition, the EA6 have become frequent targets for contingent protection and other discriminatory nontariff barriers in the EU. A computable general equilibrium model is used to investigate the extent to which a continuation of the EU' s discriminatory trade policies could maintain, or even increase, the bias against trade with the EA6; the model also examines the effects these policies have on GDP in both regions. The Europe Agreements between the EU and Central and East European countries are modelled as a key example of the preferential nature of the EU' s trade policy. This approach is contrasted with hypothetical, non-discriminatory trade reforms in the EU. The effects of further EA6 unilateral, non-discriminatory trade liberalisation on their trade with the EU and on the GDP in both regions are also evaluated. Model results show how the Europe Agreements disadvantage the EA6 in the EU market. Uruguay Round tariff cuts are shown to lessen the impact of the Europe Agreements to some extent. Unilateral tariff cuts by the EA6 are much more effective in counteracting the negative impact of the Europe Agreements on their market shares in the EU. Even greater benefits could be generated if the EU switches to unilateral, non-discriminatory liberalisation. This study underlines the key role of the newly established World Trade Organisation in the promotion of multilateral trade liberalisation and increased economic growth in the OECD and EA6 countries.