An economic assessment of the accession of the Central and Eastern European countries to the EU single market

In 2004 the European Union is due to incorporate 10 new members, mostly from theCentral and Eastern European Countries (CECs). Trade between the EU and CECs currently falls well short of that between EU countries, and if we assume this pattern reflects both tariffs and a resource cost due to regulatory differences, then 1997 trade patterns would imply such costs are 7-15% on trade between the EU and CECs. Elimination/harmonisation of remaining tariffs is likely to bring small welfare gains to new entrants. By contrast entry to the Single Market looks far more significant: after both tariff union and entry to the Single Market total trade volumes between the EU and CECs could rise by 50-100% (much more in some commodities), while welfare gains in the CECs could be of the order of 11.5-20%, larger than the previous two studies have suggested. Welfare gains within the EU are around 0.4% of GDP, with all regions gaining but Germany gaining most. Gains are greater where capital is fully mobile

Search and the Path-Dependency of Trade.

This paper investigates the implications of imperfect information and matching/searching for international trade theory. I develop an illustrative model where firms find such partners by a search through successive matches. The consequences include linking today's import demand patterns to past changes in costs, protection and interest rates. Today's policy decisions will likewise affect future trade. Trade diversion from a preferential trading agreement may well persist as informational diversion well after the preferential agreement has been scrapped. This has important implications for the timing of trade liberalisation.Trade, Protection, Search, Outsourcing.

The fall of Doha and the rise of regionalism? CEPS Policy Brief No. 111, September 2006

The indefinite prorogation of the WTO’s Doha trade talks in July suggests that the global appetite for multilateralism may now be seriously weakened. In this new Policy Brief, CEPS Senior Research Fellow David Kernohan and T. Huw Edwards of Loughborough University look at how a failed or significantly delayed Doha round (say till 2009 at the earliest) could affect the scope and structure of any eventual WTO deal. In particular, if a rise in regionalism in the interim is inevitable, they ask whether the EU should reassess its regional trade policy objectives? A move from a multilateral focus to a twinned regional-multilateral trade policy stance will have consequences, both for practical reasons of EC ‘institutional capacity’ and for strategic reasons, in terms of choice of partner/s. Either way, tough decisions will have to be made. Wherever possible, the authors argue that these tactical choices should be preceded by careful technical analysis of the choice of regional partners and trading groups, as well as on traditional ‘diplomatic’ methods of trade partner selection

Short and Long Run Decomposition of OECD Wage Inequality Changes

This paper focuses on the decomposition of increased wage inequality in OECD countries into the component factors of trade surges in low wage products and technological change. It argues that if the observed wage inequality response to price and technology shocks represents a short run response in which factors and output have not adjusted fully across industries, then decomposition analysis is substantially altered relative to a long-run factors mobile world. This applies either when one type of labour has mobility costs or where there is an additional, sectorally immobile factor. Only small departures from the fully mobile model can greatly change decompositions. Previous general equilibrium based studies have assumed a long-run full mobility response, when this may not be the case, and may consequently have drawn incorrect conclusions.Trade, wages, technology, inequality.

Short and Long Run Decompositions of OECD Wage Inequality Changes

This paper focuses on the causes of increased wage inequality in OECD countries in recent years and its decomposition into the component factors of trade surges in low wage products and technological change that has preoccupied the trade and wages literature. It argues that the length of production run and degree of fixity of factors is crucial in such analyses. In particular, if the observed wage inequality response to price and technology shocks reflects a short-run response in which factors and output have not adjustedfully across industries, then decomposition analysis of the causes of the observed increases in inequality is substantially altered relative to a long-run factors mobile world. This conclusion applies both when one type of labour has mobility costs and in the Ricardo-Viner case where there is an additional, sectorally immobile factor. Furthermore, only small departures from the fully mobile model can greatly change decompositions. This finding is important because most data used in earlier work are interpreted as reflective of a long-run full mobility response, when this may not be the case. Incorrect conclusions as to how trade surges and technology contribute to wage inequality can be easily drawn, if the data are in fact generated by a short-run adjustment process.

Quality standards under classical oligopoly and trade : regulatory protection or just over-regulation

Recent trade policy debates have focused increasingly on the supposed barriers caused by di¤ering country regulations, and at proposed remedies such as mutual recognition agreements. There are several motives for setting minimum quality standards in an open economy. This paper examines the motive of correcting an undersupply of quality when an industry is monopolistic, and sets up a theoretical model of regulatory setting of minimum vertical quality standards in a classical two-country cross-hauling duopoly model with identical �rms and consumers. It is shown that, in the absence of cooperation between the two national regulators, there will be a tendency to strategic over-regulation, bene�ting consumers at the expense of �rms compared to the globally optimal solution. This overregulation leads to excessive, rather than inadequate trade. Further, when a mixture of horizontal and vertical quality standards is introduced, the pro�t-shifting incentive noted in previous studies to set horizontal technical barriers to trade which discriminate against foreign suppliers is either greatly reduced or totally eliminated. It is also noted that the commonly-supported policy response to technical barriers to trade, mutual recognition, is not socially optimal as previous studies had indicated, but instead leads to underregulation, with higher-than-optimal company pro�ts and lower consumption and trade

Carbon Abatement and its international effects in Europe including effects on other pollutants: a general equilibrium approach

This paper outlines the development of a CGE model as a tool for analysing many of the issues relating to the introduction of environmental taxation, such as interaction with other taxes, revenue recycling, international carbon 'leakage' and tax export effects. The model is linked to IIASA's RAINS model to expand the analysis to cover other cross-boundary pollution. Analysis of a 30 ECU per tonne carbon tax applied in Germany, the UK and the rest of the European Union indicate that it could achieve savings of the order of 20 per cent in carbon emissions compared to business as usual, at little economic cost to the EU countries. The emission savings may be slightly higher in Germany and lower in the UK than the rest of the EU, while the latter would also gain more from terms of trade effects. The tax would bring substantial savings in sulphur emissions. Alternatively, if emissions were allowed to stay constant, the saving on abatement technology would mean a modest improvement in the net cost of the tax. Effects on Nitrogen emissions are smaller.

The Allocation of Carbon Permits within One Country : A General Equilibrium Analysis of the United Kingdom

As part of the Kyoto agreement on limiting carbon emissions, from 2008 onwards an international market in auction able carbon permits will be established. This raises the issue of whether trading should be simply between governments or between companies, or in the latter case how such permits should be allocated. Our paper uses the British section of a CGE model of the European energy sectors to evaluate the economics of various methods of allocating permits within a country, as discussed in Lord Marshall’s recent report to the British government. The option of allocation entirely by auction is similar to the setting of a carbon tax, and the recycling of revenues to reduce or offset other economic distortions could produce a potential net benefit to incomes and employment. 'Grandfathering' some of the permits free to large firms, according to their base year carbon emissions, would mean loss of the benefits of recycling auction revenues. This might be exacerbated if it created windfall profits repatriated by foreign shareholders. The third major alternative is to review the allocation regularly, awarding permits to all firms according to a ‘benchmark’ allocation, based on 'best practice' as estimated by outside experts. This would be similar in practice to recycling the revenue as an output subsidy to the industry, though it could be complicated to implement. Such a system could allow much of the potential ‘double dividend’ to be realized, though it might still be preferable to auction permits, with the revenues used to offset taxes across a wider spread of industry

Horizontal regulatory protection: its appeal and implications in a linear Cournot duopoly

I set up a linear model of a cross-hauling, Cournot duopoly. Even where countries are small, there exists a motive for protection to achieve a profit-shift and to raise revenue. Where the protection is of tariff form, then the protection will only totally exclude the foreign firm for a limited set of parameter values. By contrast, where the protection takes the form of a horizontal technical barrier to trade (HTBT), the government will always exclude the foreign firm. Where there is no constraint on imposing tariffs, these will always be preferred to the HTBT. However, if tariff reductions are imposed by international agreement without simultaneous restrictions on HTBTs, then reductions below a threshold level will trigger imposition of an HTBT sufficient to totally exclude the foreign firm

International share ownership, profit shift and protectionism

This paper examines the implications of increasing globalisation of stock market ownership on the economics of protection. Current data on European, Japanese and Australian stock exchanges indicate that over 30 per cent of the stock market is foreign-owned in most cases, a large increase on a couple of decades ago. Foreign share ownership in the USA lags behind these levels, but is increasing fast. This degree of foreign share- ownership is likely to change qualitatively the nature of the response of governments to FDI and support for 'domestic' firms. In particular, two worked examples, based upon duopoly theory, suggest that the level of foreign share-ownership is sufficient to render protection unattractive