Despite the implementation of the Common
Market, European economic integration still remained unachieved in the mid-1980s.
The "costs of Non-Europe" were addressed in the White Paper of 1985, proposing
some 300 measures to promote the liberalisation of trade in goods and services
and of factor movements, such as the cancellation of border formalities and non
tariff barriers having survived the Common market, the liberalisation of public
procurement practices, the mutual recognition of technical standards, and financial
integration and deregulation, the free movement of citizens. Ex ante studies -synthesised
in the Cecchini report- suggested that the Single Market would tend to lower prices
through increased competition, induce market structure transformations, and foster
a concentration of resources in more efficient uses. These effects would translate
into sizeable welfare gains, increases in GDP, and increased competitiveness vis-à-vis
non-member countries.
Even if trade per se was not the core of ex ante studies, the implicit assumption was that trade liberalisation would translate into an increase in trade flows within the Community, and that most of this increase would be intra-industry trade (IIT), i.e. simultaneous exports and imports within the same industries. Adjustment costs in that case are generaly considered to be much smaller than those associated with an inter-industry specialisation driving towards a concentration of economic activity on a limited number of industries and the abandon of others. This optimistic reasoning was built upon the experience of the implementation of the Common Market: contrasting with the conclusions of a traditional theory of international trade linking integration and inter-industry trade, the European integration was accompanied by a sharp increase in intra-industry trade.
New developments in international trade theory, such as agglomeration economies or the vertical differentiation of products need to be taken into account when assessing the Single market and giving an overview of intra-European trade patterns
Bilateral intra-European trade flow statistics for some 10,000 products are used in order to break down trade into three categories: inter industry trade, intra-industry trade in horizontally differentiated products and, finally, intra-industry trade in vertically differentiated products (products of different quality). As expected, intra-industry trade has increased since the mid-1980s: thus, on the whole, this evidence does not support a possible scenario of concentration of industries in a limited number of countries. Contrasting with the conclusions of ex ante studies, the share of intra-industry trade of varieties has remained remarkably stable over time, whereas the share of intra-industry trade of qualities has increased rapidly, and is now the most important trade type in intra-European trade. As a result, the deep integration of European economies has not so far implied deep specialisation. Spain and Portugal have successfully managed their openness to European competition withdrawing from a scheme of residual specialisation in those (labour intensive) activities abandoned by the core countries.
Nevertheless the importance of intra-industry trade in qualities, and not in varieties, suggests a qualitative division of labour within the Community. Adjustments are taking place within industries along the quality spectrum, rather than between industries.
The increase in intra-industry trade is the result of numerous determinants, here identified using an econometric model having four dimensions (country, partner, industry, time) and combining explanatory variables on country characteristics (comparative advantage, size etc.), market structure (returns to scale, product differentiation), and European integration (non tariff barriers for example). One of the main conclusion is that the share of IIT in vertically differentiated products increases with the economic distance between countries, a result so far rather associated to inter-industry trade. This suggests that the adjustment costs associated with intra-industry trade in vertically differentiated products are all but negligible.
The Single market in itself has only had a limited direct impact on this evolution of intra-EC trade patterns. The cancellation of boarder formalities represents a visible shock, reinforcing the more general trend of decreasing transaction costs pushing towards IIT. In contrast, the cancellation of non tariff barriers seems to favour inter-industry trade, possibly revigorating the specialisation process among member countries. Finally -despite evidence for industries like chemicals and automobiles- there is no evidence of generalised agglomeration economies potentially fuelling asymmetries among member states.
In total, more general determinants are at work. For example, the market size favours more variety as well as a larger quality spectrum, especially for rich countries. Returns to scale also lead to a higher share of IIT, a phenomenon reinforced by the wave of intra-European mergers and acquisitions. These factors, which may be indirectly associated to the Single market, have thus contributed to reinforce the intra-industry nature of intra-EC trade.
Thus, so far, the first years of the Single market have neither validated the optimistic scenario entailed in ex ante studies, nor led to a more pronounced specialisation of European members potentially associated with cohesion costs. Adjustments have taken place within industries, on the quality spectrum. This suggests that a qualitative division of labour has emerged in Europe, in which countries as different as Ireland (due to inward foreign direct investment) and Germany are specialised on up-market products, whereas Southern member states are specialised on the low and medium quality. |
Abstract |
