The European Community's Trade and Trade-Related Industrial Policies
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

This paper examines the objectives and instruments of trade policy in the European Community (EC) from 1987 until mid-1992. It reviews the Community’s institutional setting and policy environment as background to recent trends in EC trade policies and trading arrangements. A discussion of key issues and developments in the internal market program and its interactions with the Uruguay Round of multilateral trade negotiations is followed by a review of the main issues underlying trade disputes with third countries and trade-related industrial policies.

Abstract

This paper examines the objectives and instruments of trade policy in the European Community (EC) from 1987 until mid-1992. It reviews the Community’s institutional setting and policy environment as background to recent trends in EC trade policies and trading arrangements. A discussion of key issues and developments in the internal market program and its interactions with the Uruguay Round of multilateral trade negotiations is followed by a review of the main issues underlying trade disputes with third countries and trade-related industrial policies.

I. Introduction

This paper examines the trade policy objectives and instruments of the European Community (EC) from 1987 until mid-1992. 2/ Section II discusses the institutional setting, including the Single European Act arid the program to complete the single market, and highlights the interactions between the single market program and the Uruguay Round. Section III reviews the policy setting and external environment as a backdrop to a review of trends in the EC’s trade policies and trading arrangements. Trade disputes between the EC and its trading partners are covered in Section IV. Section V reviews developments in trade-related industrial policies. Finally, Section VI summarizes the main themes and conclusions of the text. 3/

II. Institutional Setting. Single Market, and Uruguay Round

1. Institutional setting

The EC was established by the Treaty of Paris (1951) and the Treaties of Rome (1957). 4/ The original six EC members 5/ were later joined by Denmark, Ireland, and the United Kingdom in 1973, Greece in 1981, and Portugal and Spain in 1986. 6/ The twelve EC countries accounted for two fifths of world trade in 1991 (Chart 1 and Table 1). Excluding intra-EC trade, the EC accounted for almost one sixth of world trade and its imports from nonmembers were higher than those of the United States. As of June 1992, seven countries had applied to join the EC: Malta, Cyprus, Turkey, and four EFTA members (Austria in July 1989, Sweden in July 1991, Finland in March 1992, and Switzerland in May 1992).

Chart 1
Chart 1

Shares of EC and World Trade (1991)

Citation: IMF Working Papers 1992, 094; 10.5089/9781451950687.001.A001

Table 1.

European Community: Share in World Trade

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Source: International Monetary Fund, Direction of Trade, various issues. NIEs=Newly Industrializad Economies.

Includes the original six EC members plus Denmark, Greece, Ireland, and the United Kingdom. The same group of countries is maintained throughout the period to avoid distortions arising from EC enlargement.

Includes the present six EFTA members throughout the period.

The institutional structure, of the Community consists of the European Council (of heads of state and the President of the Commission), the EC Commission, the Council of Ministers, the European Parliament, and the European Court of Justice, which constitute the administrative, legislative, and judicial branches of the EC. The Commission implements Community policy, ensures that EC treaties and amendments are carried out, draws up the budget, and proposes legislation to the Council. The Council is the final decision-making body. The Presidency of the Council of Ministers rotates among the EC member countries on a semiannual basis. The European Parliament, elected by popular vote’, has supervisory powers over the Commission and is responsible for final approval of the EC budget, although it has limited power to amend it. The budget finances, the EC’s common, policies, notably the Common Agricultural Policy (CAP), as well as EC regional and social programs, using revenues from the common external tariff and contributions paid by Community members. The Parliament acquired the power to reject or amend Council decisions pertaining to the unification of the EC market under the Single European Act of 1987. The Court of Justice, through dispute settlement and advice, interprets EC treaties and enforces Community law. The EC is not a legal member of the GATT; but by convention represents the member states and speaks on their behalf. (The EC is, however, a signatory of several of GATT codes.) Within GATT the EC is represented by the Commission which has jurisdiction over trade;

Besides establishing a customs union, the EEC Treaty provided for a common market permitting the free movement of capital and labor within the Community. Customs duties and quantitative restrictions on intra-area trade were progressively phased out over the 10-year period to mid-1968. Progress in liberalizing factor movements within the Community, however, has been slower. New impetus to this objective was provided by the Single European Act, which came into effect in July 1987 and represented the first major revision of the EEC Treaty. The Act paved the way for a fully unified EC market by end-1992, with no impediments to the movement of goods, services and factors of production. In December 1991, with the Treaty on European Union agreed at Maastricht—the second, major revision of the Treaty of Rome—the EC Council agreed on steps toward monetary, economic and political union, and in February 1992 the final version of the Treaty was signed. The European Union Treaty must be ratified by the member states’ national parliaments by the end of 1992. The Maastricht Treaty sets out a schedule for the adoption of a single European currency, the Ecu, by 1999; lays the foundations of a common security and defense policy; and provides for broader Community authority on the environment, health, research, networks, culture, and industrial and social policy. It offers European citizenship to EC nationals and grants the European Parliament greater powers. The Treaty does not make provision for the accession of new member states. Issues related to the Maastricht Treaty and its ratification have been the subject of intense public debate within (and outside) the EC in recent months.

2. The Single European Market Program

a. Background issues

The Treaty of Rome identified the removal of obstacles to the free movement of goods, services, labor and capital as one of the principal objectives of the EC. 7/ Market segmentation within the EC has long been identified as an obstacle to the expansion of potential output. It raises the cost of production by distorting resource allocation, preventing the achievement of economies of scale and the adoption of cost-reducing technologies, creating monopoly rents, and imposing administrative costs. Early efforts focused mainly on obstacles to trade in goods, leading to the elimination of all internal customs duties and the full implementation of the common external tariff by 1968. Despite these important achievements, segmentation in goods markets persisted for a variety of reasons, including differences in national standards, time-consuming border formalities, discriminatory government procurement practices, national trade restrictions vis-à-vis non-EC countries, and other regulatory impediments to cross-border market entry and competition. Impediments to trade in services were even more widespread, given the virtual absence of rules and disciplines, whether multilateral or EC-based, governing such trade. National monopolies in the transportation and telecommunications sectors, along with widely different regulatory regimes in the financial service industries, gave rise to further serious trade impediments.

The first major step towards the creation of a truly unified internal EC market was the adoption by the EC Council in 1985 of the Commission’s White Paper on the Completion of the Internal Market. This contained proposals to remove all physical and regulatory barriers to the free movement of goods, services, and factors of production within the Community by the end of 1992. 8/ The introduction of the paper’s 300 proposals (later revised to 282 and still later expanded to include energy and an energy tax) was assisted by the Single European Act, which came into force on July 1, 1987. Implementation of the Act required agreement of the EC Council on each individual proposal and, in most cases, their incorporation—or “transposition” in national legislations. To facilitate the adoption of the proposals, the Single European Act amended the EEC Treaty by extending the areas in which decisions could be adopted by simple or qualified majority. 9/

As of June 1992, over 90 percent of measures needed to complete the single market were in place. Agreements on insurance, public procurement, air transport and maritime cabotage were in their, final phases. However, only one of the proposals for abolishing border controls had been submitted to the Council. Over 300 items are still theoretically subject to border checks, and only four countries—Luxembourg (May 1992), Spain and Portugal (April 1992) and France (1991) have ratified the Schengen Agreement, which covers the free movement of people within the EC as well as that of goods. The Commission has not ruled out the possibility of a provision obliging all members to stop systematic checks at internal borders by the deadline. Agreement, however, seems close on some of the other obstacles to freeing borders, namely VAT harmonization, consistent laws on the restitution of illegally exported artistic goods and national treasures, and cross-border payments systems. National legislation of a substantial number of proposals still had to be enacted, however.

The White Paper marked an important shift in the EC’s approach to integration. Whereas past efforts had focused on replacing existing national laws with uniform Community-wide measures, the Commission’s approach to harmonization shifted with the Single European Act to the mutual recognition of national laws and regulations, subject to agreement on certain essential minimum requirements. For example, product standards, testing and certification requirements of each member state would be accepted in all member states provided they met a short list of minimum safety requirements prescribed by the EC. The proposed minimum corporation tax and VAT follow the same approach. This greatly simplifies the requirements for harmonization and places greater reliance on market forces as opposed to bureaucratic rules to ensure an eventual convergence of regulatory systems within the EC. In particular, market forces would create pressures on national governments with relatively restrictive rules to liberalize them so as to enable firms from that country to compete more effectively on an EC-wide basis.

Implementation of the single market program will affect the EC’s trade relations with the rest of the world. For instance, the removal of internal borders implies that national trade restrictions against third countries will either need to be scrapped, or replaced by EC-wide measures that may be either less or more restrictive than existing national restrictions. Similarly, regulations governing the establishment and operation of non-EC firms in the EC may be either more or less restrictive than existing national regulations. The EC Commission has argued in favor of an open trade regime after 1992, and has stated that protection in the EC will not increase, on balance, as a result of the single market program. Indications thus far are that the post-single market external regime will broadly maintain—but in some cases may increase—the current degree of restrictiveness. There is already an agreement to replace national VERs with an EC-wide VER on Japanese car imports, and an EC-wide banana import regime is under discussion. Article 115, which allows individual members to request the Commission to ban certain imports circulating in other member states, was renewed in December 1991 in the Maastricht Treaty. While recourse to Article 115 has declined in recent years, its continued existence is a potential source of protection, and runs counter to the spirit of the single market.

The EC has generally taken the view that the benefit of access to the unified market provides an opportunity to obtain reciprocal market-opening measures in trading partners. 10/ Reciprocity considerations have in fact become an integral part of the program, although the nature, scope, and means of implementation of reciprocity provisions are not yet fully defined. In areas such as services and direct investment, reciprocity provisions based on the principle of comparable market access (i.e., the same treatment for EC firms in foreign countries as firms from foreign countries enjoy in the EC) might succeed in opening up foreign markets, but could also be used as a tool of protection. Reciprocity provisions based on national treatment (i.e., the requirement that foreign firms receive treatment no less favorable than domestic firms) are less likely to act as a barrier to trade. Other forms of reciprocity affecting trade in goods have been proposed by some EC members. These include greater access to foreign country markets for EC producers in exchange for the removal of national restrictions in the EC. In some sectors, such as automobiles, attempts have been made by industry representatives in some EC countries to define greater access as the achievement of certain target foreign market shares for EC suppliers rather than as the reform of regulations or practices that have been identified as a barrier to market access abroad. In the EC’s proposal for a tax on carbon emissions and energy to protect the environment, a defensive use of reciprocity is used: the proposal is made subject to the condition that trading partners adopt similar measures.

In the area of technical standards, reciprocity could take the form of mutual recognition treaties between the EC and third countries, under which single point access 11/ would be granted only to those countries that accept EC standards, testing, and certification procedures. The EC standards bodies invite public comment on their proposed standards with a view, inter alia, to providing transparency for EC standard-setting procedures. 12/ Industry representatives from non-EC countries have nevertheless expressed concern that standards and certification procedures may be used in a discriminatory manner to favor EC producers. GATT rules in this area are covered in the Tokyo Round Agreement on Technical Barriers to Trade (to which the EC is a signatory), but this stipulates only generally that technical regulations may not be used as a barrier to trade. Agreement in the Uruguay Round would make these rules more transparent.

b. Implementation of White Paper

Implementation of the single market program has gained considerable momentum. The Commission succeeded in submitting all 282 proposals to the Council by April 7, 1990, and by mid-1992 over 90 percent of measures needed to implement the single market, had been adopted. Transposition of directives into national legislatures has been slower. Some 75 percent of Directives had been transposed into national legislation by mid-1992 (with legislation in Belgium, Spain, Ireland; and Luxembourg being implemented more slowly), leaving open the possibility that many are unlikely to enter into force by January 1, 1993.

The single market program’s efforts to eliminate intra-EC barriers to trade in goods focus on three main elements: simplification of cumbersome internal, customs procedures, reduction of costly technical barriers to trade, and the further opening of government procurement. As regards customs procedures, the introduction of a single administrative document (SAD) on January 1, 1988, and the subsequent adoption of a directive eliminating the need for transit documents (for imported goods passing, through one member state to another) as from January 1, 1993, are seen as important steps to facilitate intra-EC trade. The Council and Parliament have been discussing a customs code, which would provide a single reference for customs officials administering controls. Directives for veterinary and plant checks and for weapons controls are due to enter into force in 1992. To reduce the need for controls on national treasures, the Commission has made a proposal (in 1992) to harmonize members’ laws on the return of illegally expropriated goods by countries in possession of valued national art and artifacts.

As noted, above, the “new approach” to standards aims at reducing technical barriers to trade through the mutual recognition of national regulations among EC states, subject to certain minimum harmonizing criteria. 13/ These criteria are set out in “framework directives” which address such matters as safety, public health, and environmental protection. The first framework directive, concerning toy safety, was adopted in 1987 and entered into force on January 1, 1990. A product certified in one member state as meeting these requirements can be freely marketed in any EC country. Eight member states have passed implementing legislation. A second EC product safety directive, covering simple pressure vessels, due for implementation on July 1, 1990, has been postponed for two years, pending completion of a full set of reference EC standards. A third directive, on electromagnetic compatibility, came into force January 1, 1992, but standards for this area have not yet been developed. The directive contains a four year transition period during which national regulations will still apply.

Unlike customs procedures and technical standards, which are not necessarily intended to restrict trade, the purpose of “buy national” regulations in government procurement is to protect domestic suppliers. Certain sectors, such as utilities, often follow “buy national” policies. In June 1992, the Council of Internal Market Ministers reached an agreement in principle on a Commission proposal to open public procurement contracts to non-EC placement firms to four previously excluded utilities sectors: water, energy, transportation, and telecommunications. The Utilities Directive is expected to enter into force in most member states on January 1, 1993, with derogations for later implementation by Spain (January 1, 1996), and Greece and Portugal (January 1, 1998). In order to meet French, Spanish, and Italian fears that other EC member states may not adopt the same rules of fair competition in public procurement, the Directive allows for renegotiation and, ultimately, retaliation if a country closes its public procurement to EC firms. All legislation needed to open public procurement has now been proposed and most has been adopted. Once adopted, the legislation will open public contracts above certain threshold levels to competitive bidding in the areas of public supplies, public works and most public services. Compliance measures have been introduced for most areas, enabling suppliers and contractors to seek redress for unfair discrimination.

The Utilities Directive contains a “buy European” clause that would allow member states to reject bids from non-EC companies offering products with less than 50 percent EC content without additional justification. Moreover, even if the local content objective for services were met, member states would be allowed to apply a 3 percent preference to bids submitted by EC companies. The Directive would not interfere with the rights of foreign suppliers under existing or future international or bilateral agreements. The United States has expressed concern about the Directive’s lack of predictability in its treatment of foreign products, and it has requested member states not to transform these guidelines into binding requirements. The United States is seeking to modify “buy national” policies in the renegotiation of the GATT Government Procurement Code. Similarly, the EC sees the Uruguay Round as an opportunity to negotiate with the United States over its “Buy American” program. In the context of these negotiations, the EC is seeking to ensure that the GATT Procurement Code will apply equally at the level of national, regional and local entities, in the sectors of utilities and in procurement of services (including public works). It has expressed its willingness to commit itself to equivalent opening of its own procurement market in this context. In February 1992, the Council endorsed a directive to set up a monitoring service on public service contracts.

The modality for phasing out existing national restrictions on third country imports (or replacing them with EC-wide measures) has generated much debate. The debate is rooted in the large disparities across EC countries in the levels of protection and the competitiveness of the affected industries. Different national restrictions are inconsistent with the single market program and will be difficult to monitor once this is in place. An important example of national restrictions is the automobile sector. Imports of automobiles from Japan into the markets of France, Italy, Spain, Portugal, and the United Kingdom have been limited to varying degrees through VERs. 14/ In July 1991, there was agreement to convert national VERs on Japan’s automobile exports to EC countries to an EC-wide monitoring arrangement (see Section III.3.a). Informal consultations between Japan and the EC have resulted in an apparent freeze on Japanese auto exports to the EC at 1.23 million units a year until 1999, replacing national restrictions, and to be monitored at the EC-level. Some of the EC countries now protected by VERs (France, Italy, and Spain) have argued that the automobile industry must remain an exception to the multilateral approach because of its economic importance and the large share of manufacturing jobs it provides within the Community. Moreover, some industry representatives have continued to argue that the phasing out of existing restrictions, even over the longer term, would need to be conditional on the achievement of specific target market shares for EC producers in Japan so as to bring bilateral trade in automobiles more closely into balance. Under current proposals in the Uruguay Round, the EC’s VERS on autos from Japan would be excluded from the general requirement to phase out voluntary restraints within 4 years.

A major step toward the completion of a single European market for financial services was taken in December 1989 with the Council’s adoption of the Second Banking Directive. 15/ The Directive, which will enter into force on January 1, 1993, will allow any EC-based credit institution to conduct the same kind of activities throughout the EC that it is authorized to conduct in its home member state, subject to a minimum capital requirement of ECU 5 million and certain other prudential requirements. 16/ The principle of mutual recognition underlying the Directive, which implies that banks from a second EC country could be authorized to conduct a wider range of activities than home country banks, is expected to create pressure for broad and uniform banking regulations across the member states.

The Directive stipulates that “the Community intends to keep its financial markets open to the rest of the world” with a view to promoting “the liberalization of global financial markets in third countries.” Toward this end, member states will be asked to report any difficulties encountered by their credit institutions in establishing themselves or conducting business in third countries following the Directive’s entry into force. Whenever it appears to the Commission that a third country has not granted effective market access to EC banks comparable to that granted by the EC to banks from that country, the EC may initiate negotiations aimed at securing comparable competitive opportunities. If, in addition, it appears to the Commission that the third country is not granting national treatment to the Community institution, the member state concerned may limit or suspend new requests for banking licenses from that third country. However, no limitations may be placed on the EC-wide operation of subsidiaries of third country banks already established in the EC. The same is not true for branches of foreign banks, which do not gain the new single banking license and the extensive freedom of establishment and operation associated with it. Rather, they essentially remain subject to the bilateral arrangements concluded between the branch’s home country and the host member state.

The provision to negotiate effective market access was motivated by the concern that trade liberalization based simply on national treatment might not adequately compensate the EC for its trade concessions if domestic regulations in the EC were more liberal, in the sense of providing greater market access, than those of the EC’s trading partners. Of particular concern to the EC are regulations in Japan and the United States which prevent credit institutions from engaging in both commercial banking and securities activities (the EC allows universal banking) as well as U.S. restrictions on inter-state banking. A reform of Japan’s banking and securities business now allows banks and securities houses to handle a certain amount of each other’s business through subsidiaries from January 1993. The United States has called on the EC to maintain a flexible approach to the question of effective market access in future framework directives, including those dealing with investment firms and insurance companies.

Continuing the process of opening up financial markets and harmonizing regulations for the single market, EC Finance Ministers have agreed (in June 1992) to proposals on an Investment Services Directive (ISD) and a Capital Adequacy Directive. These interdependent Directives establish minimum requirements for the authorization of securities firms and set regulation procedures, allow investment firms to operate freely in the EC, and establish minimum capital requirements for banks and firms trading in securities. The Directives, which have to be ratified by the EC Parliament before being finally approved by the Council, are seen as the last major element completing the unified market in financial services. Stockbrokers licensed in one member state will have the right to trade shares directly in any other EC member, and the common standards agreed for the disclosure of prices and volumes of transactions and for capital adequacy requirements should put all EC firms on an equal footing. EC subsidiaries of non-EC firms operating on the effective date of the ISD will be eligible for EC-wide authorization. Reciprocity considerations will guide treatment of applications from non-EC firms after that date. A timetable was also agreed for admitting banks to stock exchanges. Belgium, France and Italy are to grant banks direct access to their stock markets by the end of 1996, and Greece, Spain and Portugal by end-1999 at the earliest. EC Ministers have also agreed on liberalizing the non-life insurance sector. The third non-life Directive will enter into force in mid-1994 and allow insurance services to be provided throughout the Community on the basis of a single EC passport. Once a firm is authorized to trade in one member state, it can trade throughout the EC. Authorization is on the basis of a set of minimum standards, which can be expanded by individual members.

Trade in transportation services has traditionally been constrained by extensive national restrictions. Cabotage (the right to provide transportation services within any other member state) has generally been prohibited, while cross-border transportation has been subject to restrictive bilateral agreements. The Commission has established objectives for the transportation sector that include the right of establishment, the right to provide transportation services between any two member states, and cabotage. The Commission has also called for clarification and simplification of the role of the state in the transportation sector. Some progress has already been achieved in these areas. For example, limited cabotage in road transport went into effect on July 1, 1990, and EC Transport Ministers agreed on the deregulation of maritime cabotage in Europe in June 1992. Agreement was also reached by EC transport ministers in June 1992 on a “Third Aviation Package” under which EC airlines can, from January 1993, set their own fares on EC flights and operate between any two EC countries. Partial liberalization in 1993 will be followed by full liberalization of access and common air licensing and capital adequacy standards within the EC by April 1997. However, much work remains to be done on road haulage, state aid to the transport sector, and Commission proposals for a second, more far-reaching phase of air transport liberalization covering prices on international fares (still to be set by governments), market access, capacity, and competition.

Telecommunications services have traditionally been provided by national monopolies in EC member states, with the role of private companies limited to providing equipment. Efforts have recently been made to open the sector to competition and to harmonize standards to allow interconnections. A Green Paper issued by the Commission in 1987 forms the basis for the current action program. The Commission, acting under its own authority, issued two Directives liberalizing the telecommunications equipment market, A third, harmonizing technical standards, was adopted by the Council of Ministers. In November 1991, a common position was reached on the Open Network Provision Directive which aims at harmonizing rules and standards for obtaining access to post, telephone and telegraph (PTT) networks. In January 1992, the Council adopted a resolution to harmonize technical standards for satellite communications. The EC’s pursuit of competition policy—see Section V—also supports the liberalization of the telecommunications sector. Guidelines published in September 1991 apply Article 85 (on restrictive practices) and Article 86 (preventing the abuse of a monopoly position) to telecommunications. The Commission nevertheless cleared Alcatel’s purchase of Telettra in 1991 even though it created high market shares in the transmission equipment market in Spain. As an important step in deregulating the sector, the EC Council agreed in principle, in mid-1992, to open up public procurement contracts in telecommunications to non-EC firms.

The Television Programming Directive was adopted by the Council in October 1989. Whereas earlier drafts of the controversial Directive had envisaged legally binding limits on the share of broadcast time devoted to foreign programs, the final version of the Directive took the form of a recommendation that the majority of air time should be reserved for programs of EC origin “where practicable” and “by appropriate means.” The United States has held consultations with the EC under GATT on the Directive, which it considers to be inconsistent with the EC’s GATT obligations and “the most disappointing single market directive adopted in 1989.” 17/ For their part, EC officials have defended the Directive as a cultural measure. They maintain that television programming is a service and therefore reject U.S. claims that the Directive is inconsistent with existing GATT rules. In 1991, the United States Trade Representative placed the EC on the Special 301 “priority watch list” because of the Broadcast Directive, and is pursuing the matter in the Uruguay Round services negotiation.

The Directive on capital movements provided for the complete liberalization of capital movements in eight member states by July 1, 1990. Four Community members (Ireland, Greece, Spain and Portugal) are allowed by the directive to keep certain restrictions on the movement of short-term capital, temporarily until the end of 1992. Capital liberalization is also advancing in these four member States and in certain cases, notably in Spain and Ireland, progress in the liberalization process exceeds their respective obligations.

In the area of company law, the Council adopted the Regulation on Merger Control in December 1989, 16 years after the measure was first proposed. The regulation, which became effective in September 1990, requires companies planning a merger with a “Community dimension” to seek the Commission’s prior approval. The regulation applies only to mergers that would result in a worldwide turnover in excess of ECU 5 billion, a higher threshold than the one proposed by the Commission. For a detailed discussion of the application of competition policy, see Section V.

The convergence of indirect taxation among member states remained an unresolved issue as the deadline for the single market approached. “The harmonization of legislation concerning turnover taxes, excise duties and other forms of indirect taxation” was provided for in the Single European Act 18/ “to the extent that such harmonization is necessary to ensure the establishment and the functioning of the internal market …”. The prospect of the removal of border controls led the Council in 1991 to adopt a new system—the postponed accounting system—to allow different VAT rates to exist until 1997. 19/ The Council also agreed in 1991 on a minimum standard VAT rate of 15 percent with some minimum reduced rates at 5 percent, and lower reduced rates for a transitional period. 20/ VAT rates diverge substantially in member states, from a standard rate of 25 percent in Denmark to 14 percent in Luxembourg and Spain. The issue is how far harmonized rates are necessary for the single market, with opponents pointing to different rates set in different states in the United States. Minimum excise rates on the main alcohol, tobacco, and petroleum products were also agreed in 1991, subject to review every two years, but these are still to be confirmed.

The Single Act of 1987 added to the Treaty of Rome the requirement that environmental protection should be part of all EC policies. The Maastricht Treaty (in Article 130r) went further and identified the objectives of provisions to protect the environment that could be adopted by the Council and included some broad parameters on financing. Under the fifth Environmental Action Program (for 1993-2000) proposed by the Commission in March 1992, the EC seeks stronger tools to ensure compliance with environmental directives and targets five sectors—agriculture, energy, industry, transport and tourism—for action. At present, the Commission can take action against member states under Article 169, which allows the European Court to condemn breaches of environmental directives. An Environment Protection Agency is to be established.

A number of issues on the implementation of the environment program still remain to be resolved. On trade in waste, the major issue is whether each member should process its own waste, with trade only by specific agreement, or whether the Commission’s proposal for regulating such trade should be accepted. The Commission has also proposed a draft Directive (in May 1992) to limit carbon emissions to 1990 levels by the year 2000 through energy conservation and a tax on CO2 and energy. 21/ To meet strong opposition from EC industry, a conditionality clause was attached to the Directive making it subject to the adoption of similar measures by trading partners. Neither the United States nor Japan support such measures, while within the EC, Germany—which is unilaterally committed to reducing CO2 emissions—has criticized the conditionality clause. Agreement on the Directive has stalled.

Progress is, however, being made in other areas. The Commission is proposing the introduction, on a voluntary basis, of an “eco-audit” for companies to carry an “eco-label” adopted by the Council of Ministers in December 1991. The audit would cover energy efficiency, waste production, site safety and overall impact on the environment. The Commission is to set Community-wide criteria which will be used by national entities established to assess the eligibility of products to carry the label. National entities are to be established during 1992.

Progress on freeing the movement of people within the EC has been limited. Participants in the Schengen Agreements—France, Germany, Belgium, Luxembourg, Italy, Spain, and Portugal (Greece is an observer)—accept the principle of allowing free movement of people, while the United Kingdom, Ireland, and Denmark are opposed. The Schengen countries have agreed to eliminate passport controls on internal air travel once the Convention comes into force, but checks will continue on flights between the group and EC countries that are not signatories. Issues of concern to nonparticipants in the Agreements are the employment of immigrants in other member states, drug trafficking and terrorism, and the ratification of the Dublin Convention on asylum policy.

The integration of the EC market has been accompanied by moves toward establishing a monetary union within the EC. 22/ This goal, initially announced at the European Council summit in the Hague in 1969, was reasserted at the summit in Hanover in June 1988, when the Council appointed a committee (the Delors Committee) to propose concrete stages leading to economic and monetary union (EMU). The Delors Committee Report (1989) proposed a three-stage approach to EMU. The first two stages would involve the gradual elimination of all barriers to free capital mobility within the EC, participation of all members in the exchange rate mechanism of the European Monetary System (EMS), and greater coordination of monetary policies under the existing system of separately managed currencies. Full unification would be achieved in the third stage, in which a single currency would be adopted and monetary management would be transferred to the European System of Central Banks (ESCB). Implementation of the first stage began in June 1990 with the lifting of remaining exchange restrictions among EC countries; 23/ and the second stage is expected to occur in January 1994. Proponents of EMU argue that mobility of factors of production would be facilitated by reduction in transaction costs associated with exchange rate risk; increased mobility of factors of production would, in turn, facilitate adjustment in a single currency area. 24/

3. Interactions with Uruguay Round

The outcome of the Uruguay Round of multilateral trade negotiations will have an important impact on the EC’s external regime after 1992. In particular, the negotiations on agriculture, services, market access, safeguards (including VERs) and textiles have a direct bearing on the EC regime that will emerge after national restrictions are lifted.

When this paper was written, complex issues in the Uruguay Round were still under discussion, especially in the key area of agriculture. Agreement in May 1992 on the reform of the CAP (see Appendix I) helped bring the EC position closer to some of the provisions on agriculture under the Draft Final Act (DFA), although other aspects remained to be resolved. (The DFA text on agriculture is discussed in more detail in Section III.3e.) In addition to the issue of the appropriate size of the reduction in the volume of subsidized exports, the EC was concerned, inter alia, that its new system of direct farmer support should not be subject to reduction, and that EC agricultural policies should not be subject to challenge in the GATT (the “peace” clause). Negotiations on other issues such as services and market access have not been finalized and are pending resolution of agriculture. The EC, as an important service exporter, should benefit significantly from a global liberalization in services. The DFA includes a consolidated text on services, and the Group of Negotiations on Services, which is to take negotiations forward, was still discussing the scheduling of bilateral concessions in June 1992. In particular, the EC has sought liberalization in maritime transport, financial services, and in the government procurement of telecommunications. On nonagricultural market access, the EC is seeking a lowering of tariffs across the board and reduction of tariff peaks in sectors of particular interest, such as textiles, shoes, ceramics, and glass.

The outcome of negotiations in other areas in the Uruguay Round will also affect EC policies. In particular, the agreement on safeguards will affect the role of VERs in the single market. The EC had argued for selective safeguards; the DFA takes this partly into account by allowing—within the general principle of uniform application of safeguards—for departures in specific circumstances. “Grey area” measures (such as VERs and orderly marketing arrangements) are prohibited, and existing ones must be phased out or brought into conformity with the agreement within four years of the agreement entering into force. The DFA allows for maintaining one such specific measure after the deadline; the EC has chosen the permissable exception to be VERs on cars imported from Japan. EC policies on dumping will be affected by the DFA which clarifies and tightens rules on dumping. The DFA text establishes criteria to identify circumvention through final assembly using products with minimal value-added subject to antidumping duties.

The EC (along with several other industrial countries) had resisted calls for a speedy liberalization of existing restrictions on trade in textiles and clothing. The DFA provides for gradual liberalization of trade in textiles and clothing, and its incorporation (backloaded) into the GATT framework, with all MFA restrictions to be eliminated by January 2003. All MFA product trade (excluding that integrated under GATT transitional measures), whether currently under GATT rules or not, is included until 2003 under transitional safeguard measures of the MFA, which are potentially more protectionist than the GATT safeguard clause and require selective quotas without compensation. Under the single market program, national quotas would be replaced by EC-wide quotas distributed among member states on the basis of MFA quotas.

The EC, along with other participants, has supported the creation of a Multilateral Trade Organization (MTO), provided for in the DFA to represent an umbrella organization for all agreements under the GATT and those being negotiated in the Uruguay Round. The MTO would also oversee surveillance over trade policies of its members and collaborate with other international organizations including the Fund and the Bank. In this regard, the EC has indicated the importance it attaches to fostering better international coordination among monetary, fiscal, and trade policies and to ensuring greater exchange rate stability. The MTO would also integrate and strengthen the dispute settlement process, allowing for faster decisions and more uniform and equitable procedures.

III. Trade Policy Developments

1. Policy setting and external environment

The reduction in internal trade barriers that accompanied the implementation of the common external tariff in the 1960s contributed to a rapid expansion in Intra-EC trade. Intra-EC exports grew from 38 percent of total EC exports (12 percent of world exports) in 1960 to 50 percent of EC exports (20 percent of world exports) in 1970 (Tables 1 and 2). In the 1970s, however, the trade-creating impact of the customs union began to wane, and although the share of intra-EC exports in total EC exports increased marginally during the decade of 1970s, the share of intra-EC exports in world exports declined. During the 1980s, the terms of trade improvement resulting from the decline in oil and commodity prices contributed to an increase in intra-EC trade, both as a proportion of total EC trade and world trade. Trade with third countries declined somewhat, with offsetting trends in trade with various trading partners. There was a marked decline in imports—as a percent of EC imports—from developing countries, which are primarily commodity exporters, and a considerable increase in trade with Japan and the Asian newly industrialized economies (NIEs), with imports from the latter two outpacing exports to these countries.

Table 2.

European Community: Level and Direction of Trade

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Source: International Monetary Fund, Direction of Trade, various issues. NIEs=Newly Industrialized Economies.

Includes the original six EC members plus Denmark, Greece, Ireland, and the United Kingdom. The same group of countries is maintained throughout the period to avoid distortions arising from EC enlargement.

Includes the present six EFTA members throughout the period.

These developments occurred against the background of the global recession in the early 1980s, which led to a sharp decline in the growth of world trade and an intensification in protectionist pressures in industrial countries. These pressures persisted even after economic growth began to recover in 1984. In part, this reflected the unsuccessful attempts of EC governments, among others, to use commercial policy to reduce the growing trade imbalances and other consequences of inappropriate macroeconomic policies. More fundamentally, however, the persistence of these pressures reflected resistance to the unprecedented pace of change in the structure of world production and trade. In particular, the continued rise in the share of Japan and NIEs in industrial countries’ imports of manufactures resulted in substantial competitive pressures on import-competing industries of industrial countries. At the same time, the new markets created in the NIEs for industrial countries’ exports were intensely competitive, leading some industrial-country exporters to demand increased assistance from their governments in such forms as subsidized loans and the tying of aid projects to trade. Labor market rigidities in industrial countries have also contributed to demands for protection.

As industrial countries had bound most of their industrial import tariffs at low levels through successive rounds of multilateral trade negotiations, the rise in protectionism in the 1980s was manifested in a proliferation of nontariff measures. While quantitative restrictions were sometimes employed, these were subject to GATT disciplines and therefore generally avoided. Rather, increasing use was made of VERs, which are more ambiguous under GATT law (they are commonly referred to as grey area measures because their legality under the GATT has never been fully tested even though GATT Article XI prohibits the use of quantitative export restrictions). By enabling importers to “target” restrictions squarely on the most efficient global producers (unlike GATT-sanctioned safeguards which must be applied on a nondiscriminatory basis) and by eschewing price-based measures, VERs introduced major new inefficiencies in the pattern of world production and trade. Other inefficiencies arose from policies designed to insulate particular sectors from the effects of exchange rate changes, and from a sharp rise in agricultural export subsidies which contributed to growing agricultural surpluses and budgetary problems in the EC. The rise in competitive pressures also gave rise to a more aggressive use of antidumping measures by the EC since the mid-1980s, increasingly directed at developing countries. 25/ In the 1990s, protectionist pressures have been contained partly in response to ongoing negotiations in the Uruguay Round.

2. Instruments of trade policy

As in other major industrial countries, the EC’s trade policy instruments include tariffs, tariff quotas, quotas, variable import levies, VERs, import licensing, safeguard actions, antidumping and countervailing duties, price undertakings, rules of origin, and legislation permitting retaliation against unfair trade practices abroad. The EC is a signatory to all of the Tokyo Round Codes and Agreements. These deal with import licensing, government procurement, technical barriers to trade, trade in civil aircraft, subsidies and countervailing measures, antidumping measures, customs valuation, beef products, and dairy products. The EC has established rules of origin that designate traded goods as originating in specific countries for purposes of (a) granting preferential tariff treatment; (b) applying antidumping duties; and (c) enforcing quantitative restrictions. Compared with many other industrial countries, the EC makes frequent use of antidumping investigations and quantitative trade restrictions, including VERs.

Import licensing procedures are applied at the Community level as well as by some individual members for import control purposes. At the Community level, licenses are required for imports of industrial or agricultural products that are subject to quantitative restrictions or monitoring. Separate regulations apply for imports of textiles, and, until recently, for imports of products originating in state-trading countries (the latters’ regimes have now been considerably liberalized). Automatic licensing is granted to imports that are subject to surveillance. The Commission is authorized to require licenses for imports that cause or threaten to cause material injury to Community producers or when “critical circumstances” make immediate action necessary. Licensing requirements, necessary to implement safeguard measures taken under Article XIX of GATT, are subject to EC Council confirmation. National restrictions on imports of goods from third countries that are in free circulation within the Community are enforced through Article 115 of the EEC Treaty or, if the restrictions are not officially recognized by the EC, through national import licensing procedures.

Agricultural trade is governed by a separate regime under the EC’s CAP (see Section III.3.e below).

3. Recent trends in trade policies

a. Voluntary export restraints

On the basis of unofficial information compiled by the GATT Secretariat, the EC (as an importer) accounted for 60 percent of all VER arrangements in the world (excluding arrangements under the MFA) in the period from September 1987 to March 1989 (Table 3 and Chart 2). 26/ The VERs maintained by the EC were fairly evenly divided between national and EC-wide arrangements (national VERs totalling 96 out of 173). Several of these arrangements have originated from antidumping duties that were discontinued when VERs were implemented.

CHART 2
CHART 2

European Community: Number of Voluntary Export Restraints

Citation: IMF Working Papers 1992, 094; 10.5089/9781451950687.001.A001

Source: See source for Table 3.1 Unidentified countries included.
Table 3.

EC: Voluntary Export Restraint Arrangements, March 1989

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Source: GATT, Review of Developments in the Trading System, March 1989.

The September 198B-February 1989 GATT report on developments in the trading system Indicates that 96 national VERs were in force as of March 1989, most of which are industry-to-industry arrangements. Of these, 26 VERs were reported for the United Kindgom. However, the U.K. authorities have indicated that they are aware of only sight such arrangements, which apply to imports of automobiles, transport equipment, and machine tools from Japan, as well as footwear from Czechoslovakia, Poland, and Romania. They have also indicated that two of these arrangements (forklift trucks and machine tools from Japan) were no longer justified and would be allowed to lapse.

EC is the European Community; E. Eur. is East Europe; OLDCs are other developing countries; OICs are other industrial countries; LDCs are developing countries; ICs are industrial countries. The term “other” in OLDC and OIC refers to countries other than those identified in the particular classification.

Not specified.

Industry-to-industry arrangement.

The bulk of VERs imposed by the EC restrain trade in agricultural products, textiles and clothing products, electronics and autos and transport equipment. The EC accounted for between 41 percent and 89 percent of all VERs reported worldwide in these sectors as of March 1989. About one third of EC VERs were targeted at developing countries, of which Korea accounted for one third. Another third of the total—63—was targeted at Japan, and the remaining third was about equally divided between other industrial countries and Central and Eastern European countries. The share of textiles, clothing, and footwear in total EC VERs tended to rise after September 1987, with a corresponding increase in the share targeted at developing countries.

More recent information from the GATT 27/ on narrowly defined voluntary restraint measures shows the main product areas are still, in order of importance, agriculture, textiles, steel, electronics, and motor vehicles. Some export restraint arrangements with Japan in machinery, electronics and motor vehicles are accompanied by retrospective surveillance. This was stated to be necessary because the imports had been made at “relatively low prices, thereby depressing the price levels and financial results of the community industry and thereby threatening to cause injury.” 28/ In January 1991, the EC decided to continue surveillance of certain Japanese goods, in particular the VERs on automobiles. As mentioned earlier (Section II 2.), national VERs on Japan’s automobile exports to EC member states were converted in 1991 to an EC-wide monitoring arrangement.

b. Article 115 authorizations

Article 115 of the Treaty of Rome empowers the Commission to authorize a member country to apply protective measures against imports from third countries if such imports threaten the domestic production of the product concerned and cause injury. An Article 115 authorization temporarily restricts free circulation of goods within the Community and prevents circumvention of the national restriction through imports via other member countries.

Total authorizations under Article 115 gradually declined to 79 in 1990, and to 48 in 1991—just over one fifth of their 1980 level, and the percentage granted to the total requested has fallen (Table 4). The decline partly reflects a tightening of the criteria used by the Commission in assessing member countries’ requests. This assessment is based on the evolution of the member country’s imports of the item concerned relative to total EC imports as well as the industry’s profit position and employment trends. By product, textiles and clothing continued to account for the bulk of Article 115 authorizations. However, their share in total authorizations declined from 74 percent in 1980 to 67 percent in 1991, with a corresponding increase in the share of other products, including electronics, machine tools, and footwear. By country, Spain accounted for about 42 percent of the total authorizations granted in 1991, followed by Italy and France.

Table 4.

European Community: Authorization of Article 115 1/ Actions, 1980-91

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Source: Data provided by the EC Commission.Note: … = not available; - = not applicable.

Temporary restrictions on free circulation of goods within the Community under Article 115 of the Treaty of Rome.

Only partially disaggregated data available for 1991.

The revision of the EEC Treaties at the Maastricht Summit in December 1991 maintained Article 115. Although expected to be invoked only rarely when the single market program is established in 1993, the continuation of Article 115 is a potential source of distortions.

c. Antidumping

The EC has made extensive use of antidumping instruments (Table 5), although usage had declined by 1991. In 1986, the last year for which comprehensive cumulative data are available, the EC maintained 123 outstanding antidumping actions, with the number of antidumping investigations initiated ranging from a low of 24 in 1986 (which the Commission attributed partly to its own staffing problems), to a maximum of 49 cases in 1984. In 1988, the last year for which comprehensive annual data are available on a comparable basis, 29/ 40 cases were initiated, about the same as in 1987. 30/ However, provisional antidumping duties were imposed in 28 cases in 1988, more than twice as many as in 1987, while the application of definitive antidumping duties doubled to 18. In 1990, the EC reported having initiated 43 new investigations, but less than half that number—20—in 1991. This decline continued to be accompanied by high levels of provisional and definitive duties; 19 cases of each in 1991 compared with 23 and 18, respectively, in 1990.

Table 5.

EC: Antidumping and Countervailing Investigations, 1983-88

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Sources: EC Commission documents (87)178, (89)106, and (90)229 Fourth, Sixth and Seventh Annual Report of the Commission on the Community’s Antidumping and Antisubsidy Activities. Brussels, April 28, 1987, March 21, 1989, and June 13, 1990.

The figures exclude seven investigations initiated under the EC “screwdriver” legislation to prevent circumvention of existing antidumping duties. These are listed separately on Table 6.

Including actions on investigations initiated in previous years.

The share of antidumping investigations concerning imports from developing countries increased from about one quarter of the total during 1983-85 to about one half during 1986-88. Investigations involving developing countries have covered a wide range of products, including a variety of consumer electronics (e.g., small screen color televisions, telephones, cellular mobile radios), metals and minerals, food additives, textile products, video and audio cassette tapes, and some steel products. The People’s Republic of China, Hong Kong, and Korea have been among the most frequently investigated developing country exporters, with other investigations involving Argentina, Brazil, Egypt, Indonesia, Macao, Taiwan Province of China, Thailand, Trinidad and Tobago, Turkey, and Venezuela.

Investigations initiated against industrial countries were targeted mainly at Japan and countries belonging to EFTA, and concerned a variety of products including consumer electronics, diesel engines, chemicals, and steel products. Investigations involving Central and Eastern European countries principally concerned chemicals and steel products.

The EC introduced new legislation in June 1987 that permits, in certain circumstances, the imposition of antidumping duties on products assembled in the EC by subsidiaries or affiliates of foreign companies. The legislation was intended to counteract perceived efforts by foreign companies to circumvent antidumping duties on certain imported products by setting up or expanding final assembly operations (referred to as “screwdriver plants”) in the EC. 31/ Eight antidumping investigations were initiated in 1988 and 1989 under the new legislation, all of which were directed against Japanese companies that assembled products in the EC (Table 6). 32/ Of these, four resulted in the imposition of definitive antidumping duties, all of which were subsequently revoked on the basis of minimum price undertakings by the companies concerned. In May 1990, the GATT Council adopted a finding that antidumping duties assessed under the screwdriver legislation violated GATT rules on national treatment (Section V).

Table 6.

European Community: Antidumping Investigations Under “Screwdriver” Legislation

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Sources: GATT, Review of Developments in the Trading System, (various issues); and European Report (various issues), and EC Commission.

Initiated on the basis of Article 7 of Regulation EEC 2324/88.

In 1986 the EC extended the concept of dumping to a service industry (shipping), which is not subject to GATT rules. An investigation was initiated against a Korean shipping company based on a complaint by EC shipping companies that it was practicing “predatory pricing” on the EC-Australia route. Despite objections to the shippers’ complaint by EC exporters, who argued that the Korean fares permitted them to be competitive in the Australian market, definitive antidumping duties of 37 percent were imposed in January 1989, forcing the Korean shipping company to give up the EC-Australia route.

d. Rules of origin

The increase in Japan’s direct investment in the EC in recent years and its perceived impact on the ability of EC firms to compete in their own market has raised the issue of defining origin rules for purposes of providing EC treatment to goods that are assembled in the Community. The issue of nationality of goods assembled in the EC or third countries using imported components arose in connection with the imposition of antidumping duties on such goods under the new EC “screwdriver” legislation, as well as in connection with the possible inclusion of such goods in VERs maintained by individual EC countries. In particular, the rising exports to other EC countries of automobiles manufactured in the United Kingdom by a Japanese company (Nissan) raised the issue of whether existing instruments of selective protection, such as national VERs and Article 115 authorizations, could legitimately be used to curb such exports. Current GATT rules (Article IX) extend certain disciplines, such as MFN treatment, to the use of marks of origin but do not define rules of origin per se. However, one of the proposals submitted to an early GATT working party was later adopted in the Kyoto Customs Convention of 1965. It states that: “The nationality of goods resulting from materials and labor of two or more countries shall be that of the country in which such goods have last undergone substantial transformation,” (emphasis added). 33/

Although the EC incorporated the Kyoto Convention definition in its 1968 origin regulation, it also gave the Commission authority to issue product-specific implementing rules “for controversial or new products.” 34/ The Commission issued two controversial regulations clarifying origin rules for photocopiers (which are subject to antidumping duties when imported from Japan) and semiconductors. 35/ The regulation on photocopiers did not specify a local content rule but instead takes a negative approach by listing manufacturing operations that do not confer origin, including the last assembly operation. The regulation has been viewed as being tailored to deal with photocopiers manufactured by a Japanese company (Ricoh) in the United States. Under the regulation, these photocopiers are considered of Japanese origin and could be subjected to, antidumping duties in the EC. The regulation on semiconductors similarly defined the last assembly operation as not conferring origin. 36/ This definition implied that EC producers of semiconductors could carry out the last assembly operation in low-wage third countries and still qualify for EC treatment, whereas third country producers who carry out only the last assembly operation in the EC would lose EC origin designation. Both regulations seem to indicate that the EC is moving toward a definition of origin based on the “most substantial” (and technologically most advanced) rather than “last substantial” transformation. Japan has expressed concern that EC origin rules may be used in a discriminatory manner against specific countries and products, and has submitted proposals for multilaterally endorsed origin rules in the Uruguay Round (Section IV.1).

e. Agricultural policies

The CAP provides the main framework for agricultural support in the European Community, although national support also remains important. 37/ Support mechanisms under the CAP cover about 85 percent of EC agricultural production. For most agricultural products, support takes the form of “target” prices that are the upper end of the range within which prices are permitted to fluctuate. At the lower end of this range is the “intervention” price at which specialized public entities stand ready to buy what is offered to them, albeit with reductions in recent years in both the volume and the time span of purchases of certain products. Intervention prices exceed world prices by considerable margins in most cases Protection against imports is provided through variable levies set at a level that equalizes import prices to a reference price (often referred to as “threshold” price) set at around the middle of the range between target and intervention prices. For exports, variable subsidies-referred to as export refunds—are provided to exporters to offset the difference between EC and world market prices. Some products with tariffs bound at zero in GATT are protected through VERs and supported by production subsidies. Quantitative import restrictions and the variability of import levies and export subsidies insulate the EC farm sector from exchange rate movements between EC currencies and those of competing suppliers. Exchange rate movements among EC currencies—other than within the narrow band of the EMS exchange rate mechanism—are similarly offset through monetary compensatory amounts (MCAs), to ensure the equality of agricultural prices expressed in ECUs within the Community.

Until 1988, financial support under the CAP was virtually open-ended. With no limits on what could be sold to intervention agencies at guaranteed prices, expenditures under the CAP more than doubled, from ECU 11.3 billion in 1980 to ECU 23.2 billion in 1987, reflecting the combined influences of expanding EC production and declining world market prices (Table 7). Under the pressure of these mounting budgetary costs, changes in the CAP’s structure were introduced in February 1988. These included the introduction of restraints on intervention prices (effectively a freeze on nominal prices expressed in ECUs) 38/; guidelines limiting the overall level of EC agricultural support to 1.2 percent of GNP of the EC, and limiting the growth in agricultural support to no more than 74 percent of the increase in GNP of the EC; automatic stabilizers to reduce benefits when production exceeded quota levels; a shortening of the period during which intervention purchases could be made; and a land set-aside program. Price restraints involved a freeze in intervention prices (Table 8), but this was not effective in restraining production because of the high initial level of prices and productivity increases that compensated for price reductions in real terms. Also, the impact of price restraints were partly offset by the operation of MCAs, which permitted an increase in prices expressed in national currencies in 1987/88 (Table 9). Moreover, the 1988 reforms left import barriers intact and did not provide a mechanism to contain the growth in export subsidies. Budget expenditures reached a new peak of ECU 27.7 million in 1988.

Table 7.

European Community: European Agricultural Guarantee and Guidance Fund—Guarantee Section, Expenditures by Sector, 1980-91

(In millions of ECUs)

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Sources: Commission of the European Communities, The Agricultural Situation in the Community (Brussels), various issues and Financial Report on the European Agricultural Guarantee and Guidance Fund.

Preliminary draft budget.

Including the financial contribution from cereal and milk producers.

Including food aid refunds.

Clearance of accounts plus interest following reform of financing arrangements, free distribution of intervention products and set-aside of arable land. Figure for 1987 includes clearance of the 1983, 1984 and 1985 accounts. Figure for 1990 also includes rural development schemes linked to market operation.

Table 8.

European Community: Target Price for Selected Commodities, 1980/81-1990/91 1/

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Sources: Commission of the European Communities, The Agricultural Situation in the Community (Brussels), various issues, and Bulletin of the European Communities (Brussels), various issues.

Beginning of marketing year.

Prices for cereals, rice and sugar include the application of the stabilizer system (Regulation 1412/89). For milk, price also includes the reduction decided upon is part of the increase in the milk quota of 1 percent.

Prices for cereals, rice and sugar exclude the application of tha stabilizer system.

Intervention price.

Sheep meat end goat meat were not covered by the Common Agricultural Policy prior to 1980/81.

Table 9.

European Community: Average Increase in Common Agricultural Prices, 1985/86-1990/91

(In percent)

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Sources: Commission of the European Communities. The Agricultural Situation in the Community (Brussels), various issues.

Common price in European currency units (ECUs) (intervention price or equivalent price) weighted by national agricultural production.

Common price in ECUs converted into national currency at “green” exchange rate, after adjustment in “green” rate by all measures taken.

Rate of inflation measured by the GDP deflator (agricultural year) prior to 1986; from 1986, calendar-year basis.

Including adjustments of Greek prices resulting from membership agreements.

Including the impact of the alignment on common prices according to the accession agreements from 1987/88 on.

These figures refer to the average of EC(10) for 1985/86, 1986/87 and 1987/89.

Implementation of the CAP reforms in 1988 was followed by a marked deceleration in EC agricultural support payments which remained below their 1988 level in 1989 and 1990 (Table 7). The rate of assistance as measured by producer subsidy equivalents (PSEs) 39/ fell from a peak of 50 percent in 1986 to 41 percent in 1989 (Table 10). The improvement evident in the lower subsidies in 1989 was partially attributable to the introduction of production quotas (most significantly in the dairy sector), but much of the improved financial performance in 1989 can be traced to the increase in world commodity prices (denominated in ECUs) in 1988-89 which significantly moderated the cost of export subsidies. As international commodity prices began to weaken once again in 1990, doubts resurfaced about whether the present structure of the CAP was sufficient to bring about a sustained reduction in financial support for agriculture. One immediate problem, with repercussions for the 1990 budget outturn, was that a fall in the Community’s market price for beef was triggering large intervention purchases to stabilize the market. Another development, which had its full impact only in 1991, was a sharp decline in the world market price of wheat which threatened to drive up outlays on export subsidies. More generally, developments suggested that the financial impact of the automatic stabilizers and land set-aside program could have been smaller than initially expected. Thus, although agricultural expenditures in the draft budget for 1991 (ECU 30.4 billion), remained well within the guideline ceiling (ECU 32.5 billion) set by the 1988 reform, the margin was far smaller than in 1989-90.

Table 10.

EC, Japan, United States: Producer Subsidy Equivalents (PSEs)

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Source: OECD Agricultural Policies. Markets and Trade: Monitoring and Outlook, Paris (1989, 1990, 1991, 1992 issues).

Estimates.

EC(10) in 1979-85; EC(12) in 1986-89.

By 1991, as commodity prices continued to weaken and production—particularly of cereals—strengthened, structural problems reemerged. Agricultural support payments rose by over 20 percent in 1991 after a small increase in 1990, to ECU 32.4 million (Table 7). In 1991, subsidies were 49 percent of producer prices in the EC, compared with 30 percent in the United States and 66 percent in Japan (Table 10). Assistance per farmer measured by producer (Table 10) and consumer subsidy equivalents also rose. The OECD 40/ notes a 25 percent increase in total PSE payments in 1990, two-thirds of which was due to a higher unit PSE, and a 0.5 percent decline in 1991 from lower unit PSEs. The costs of the CAP also fall as an implicit tax on consumers. The OECD reports a consumer subsidy equivalent (CSE) to EC agriculture totalling $63 billion in 1991, compared with $84 billion in direct assistance to producers, and $45 billion and $60 billion of CSE and PSE, respectively, in 1989. The increase in 1991 was due to higher transfers (rather than volumes consumed) from lower United States dollar prices, partly offset by the depreciation of the ECU against the dollar.

Reflecting partly the higher costs of these subsidies, and partly a concern with growing surpluses (particularly of cereals, dairy products and beef), wide-ranging proposals for reform of the CAP were presented by the Commission in October 1991 (the MacSharry proposals). These were based on a perceived need to change the direct link between agricultural production and support and the incentives for higher production and intensification which created difficulties for market stability, farm incomes, the budget and the environment. The essential features agreed at a political level by the EC Ministers of Agriculture in May 1992 are given in Appendix I. This political agreement covered some 75 percent of marketed agricultural output and would be phased in over four years. Substantial reductions were envisaged in support prices, with offsetting payments to farmers. Target prices for cereals would be reduced from their present level of about ECU 155 per ton to ECU 110 per ton by 1995/96—a cut of 29 percent (the cut amounts to 35 percent comparing actual cereals prices with the target). Farmers would be compensated for this loss by income support—based on area under the crop in a base year and regional average yields. Large farmers would receive income compensation if they joined the scheme to set 15 percent of land aside—i.e., out of production—on a rotational basis. Set asides were not required for small farmers. Compensation rates are still to be determined. Intervention prices for beef were to be cut in equal steps by 15 percent by 1995/96, and prices of butter by 5 percent. Milk quotas remained for 1992/93 but beef and sheepmeat would be subject to new quotas. Other proposals covered the introduction of quotas for tobacco production. The CAP reforms were complemented by rural development measures to encourage environmental protection, afforestation, and restructuring by providing incentives for early retirement for farmers.

The recent CAP reform is a positive step in the evolution of the EC’s trade and trade-related policies. It represents an important move toward reducing agricultural distortions over the next three years, although the reform process will need to be strengthened and sustained over a longer term if distortions are to be completely eliminated. The positive features of the current reform are the moves to bring domestic agriculture support prices closer toward world levels, to shift from reliance on subsidies through price supports toward direct income support, and to induce a reduction in the area under subsidized food production. Given that direct income support is replacing price support, the impact on the EC’s budget may not be significant, at least in the next three years.