V Trade in Goods
- International Monetary Fund
- Published Date:
- December 1990
Most of the trade in goods between the EC and EFTA is in industrial products, which account for more than 90 percent of EFTA exports. Although fish products account for only a small percentage of total EFTA exports, they are the main source of export revenue for one EFTA member, Iceland. Since the EC and EFTA are not aiming at a common agricultural policy, the impact of the internal market on inter-bloc trade in agricultural products is likely to be small.
The main issues in the prospective trade in goods between the EC and EFTA will depend on the nature of their trading relationship. This relationship could take on a variety of forms, ranging from the status quo to a common market that includes all 18 countries. While a common market may have important benefits, the requirement of a common trade policy toward third countries would pose major difficulties for several EFTA members. Therefore, this chapter will not address issues associated with the creation of a common market.
Since the FTAs already assure free trade in industrial goods, the main issues from the EFTA’s perspective are how changes arising from the internal market may influence inter-bloc trade and what may be done to mitigate any negative side effects. The main areas of interest—although several extend well beyond goods trade—include the elimination of internal border controls and other physical barriers, the harmonization of technical standards and regulations, the liberalization of public procurement policies, the administration of rules of origin and anti-dumping rules, and state aid policies.
Border Controls and Other Physical Barriers
Border controls inhibit the free movement of individuals and constitute a costly impediment to the free flow of goods and services. These controls are motivated by a number of considerations, including commercial, fiscal, economic, health, statistical, and security ones. While both the EC and EFTA have eliminated customs duties and quantitative restrictions on their internal trade, border checks remain to assure compliance with national rules on indirect taxation and to enforce quota agreements with third countries. They also protect against terrorism, drugs, the entry of unwanted goods and individuals, and the enforcement of national and Community policies in such areas as agriculture and trade, and for various safety and health checks.
Border controls are costly to both firms and governments. The direct costs are mainly administrative. For importers and exporters, these involve the expense of staff and computing and processing for the additional paperwork needed for foreign trade. Governments must bear the costs of this paperwork and of manning internal borders. Additional costs also arise from shipping delays at border checks.28
The White Paper envisaged the elimination of all internal frontier controls within the EC, requiring that policies restricting the flow of goods, services, and individuals among member states be relaxed and eventually abandoned. In addition, policies regarding the EC’s external borders needed to be unified so that any individual or commodity entering one member state from outside the EC would be free to enter any other member state. This required harmonization of national regulations for the entry and exit of goods and individuals as well as confidence that these regulations would be effectively enforced.29
Ending internal border controls would affect the competitiveness of firms in non-EC countries in several ways. Reducing shipping and administrative costs for EC-based firms’ intra-Community trade would bring an autonomous improvement in their terms of trade vis-à-vis outside firms. However, non-EC firms trading within the EC would gain some benefits in cases where their goods were transshipped within the EC, or where firms had previously shipped goods into the EC by indirect routes to avoid costs associated with crossing internal frontiers. EC firms exporting to nonmember countries could also benefit from reductions in the cost of shipping goods across the EC.
Differing trade policies toward third parties are likely to force the retention of some form of border controls between the two blocs. Therefore, the competitive position of EFTA firms within the EC will partly depend on the administrative costs of these controls and the time involved in crossing protected borders.30 Much progress has been made in cutting the administrative costs of border crossings. In January 1988, the Single Administrative Document (SAD) and Common Transit Conventions came into force, greatly simplifying the administrative procedures associated with the goods trade between the EC and EFTA.31 In the conventions, the EC and EFTA agreed to replace most customs documents used in EC-EFTA trade with the single document used in intra-EC trade. The agreement also provided that the EC and EFTA countries would fully computerize their customs data and customs procedures by 1992, helping to minimize the relative cost disadvantage of EFTA exporters to the EC, while placing EC firms on an equal footing with EFTA firms trading in EFTA.
The potential savings from faster border crossings may vary depending on the countries involved. The impact of more uniform border formalities at the EC’s external borders will differ from country to country within the EC. Additional savings may arise by shifting some customs officials freed from working on the intra-EC borders to the EC’s external borders. However, the savings from eliminating intra-EC border crossings should also yield significant benefits for EFTA countries but, in any case, they are likely to be smaller than the savings on administrative costs.
Consumers in the EC and EFTA should benefit from lower transport costs within the EC, as well as from reduced administrative costs in inter-bloc trade. However, the impact on EFTA consumers partly depends on what action, if any, is taken by EFTA firms and domestic authorities to offset the negative terms-of-trade effects of the relative decline in transportation costs within the EC. Improved customs procedures should also reduce the administrative costs to EC and EFTA governments, while the elimination of internal border controls within the EC would result in further administrative savings for EC governments.
Technical Standards and Regulations
A producer wishing to sell a good within the EC or EFTA may be subject to a different set of rules governing the product in each of the 18 countries. These rules fall into four categories: technical standards, which are formally voluntary but may have quasi-legal status by government decision or commercial practice; regulations, which are legal requirements set by the EC governments; testing procedures; and certification that the product conforms to the regulations or standards (Calingaert, 1988, pp. 25–26). In the EC and EFTA, standards, testing, and certification procedures are normally set by private groups, which may be national or multinational. The two main multinational groups, CEN and Cenelec, include all members of the EC and EFTA.32 EC firms consider these rules the single most important barrier to the internal market (Cecchini, 1988, p. 28). However, ending these differences will be difficult and complex because of their sheer volume. There are an estimated 100,000 different technical regulations and standards within the EC alone (EC Commission, 1988b, p. 43).
Divergent regulations and standards may distort firms’ behavior in several ways. By raising the costs of doing business in a larger market, firms may seek only to fill the niche created by their national regulations, instead of competing more broadly. Problems associated with divergent regulations and standards are especially severe for transport equipment and certain other investment goods, precision and office equipment, pharmaceuticals, food, and tobacco (EC Commission, 1988b, pp. 51–53). Domestic orientation not only reduces trade, but the resulting market fragmentation may also hinder research and development, especially in areas with major scale economies. Additional costs may include duplication of research and development and higher inventory and distribution costs. Public expenditures may also rise as a result of the duplication of testing and certification of products, while consumers must bear the direct costs passed on by firms and governments and the indirect costs of reduced competition and less rationalization of production and marketing.
The cost of technical barriers is believed to be high. However, they are difficult to quantify because they tend to be industry-specific and are often intertwined with other barriers, including content requirements and restrictive government procurement practices. 33
The White Paper proposed to reduce and eventually eliminate divergent regulations and standards using a three-part strategy of selective harmonization, mutual information, and mutual recognition. Selective harmonization requires legislation on the essential product characteristics. However, the passage of binding legislation is difficult, requiring Council unanimity.34 Thus, it will only be required when national regulations differ in essential characteristics in terms of health, safety, or consumer or environmental protection. In these cases, the EC standard—expressed in fairly general terms—will first be defined. These requirements are sufficient to allow the product to circulate freely within the EC. When no major disparity exists, mandated groups, mainly CEN/Cenelec, will be charged with establishing the detailed technical specifications of the European or EC standard. Once the standard is set, these groups will also set the final specifications that would conform to the standard.35 EFTA members are in a special position in this regard, since they not only participate in setting EC standards, they are also subject to the standards once they are passed.36
To ease replacement of national standards by EC standards, the Commission is working to strengthen the standard-setting bodies. However, while industry bodies will be charged with setting EC standards, the Commission has insisted that the interests of all sectors affected by the standards—including both sides of industry, commerce, and consumers—be taken into account. The Commission may also withdraw a mandate from any body that is not effectively and fairly fulfilling its task. The EFTA has worked closely with the EC both in helping to set the EC standards and in setting work priorities.
Much progress has also been made in the area of mutual recognition of technical regulations and standards within the EC. In the Cassis de Dijon decision of 1979, the European Court of Justice held that products lawfully produced and marketed in one member state must, in principle, be admitted into every other member state. Mutual recognition is to be accepted when harmonization is not essential or has not yet been introduced. Barriers are to be permitted “only when they are necessary to satisfy mandatory requirements, serve a purpose in the general interest and are essential for the purpose to be attained” (EC Commission, 1989b, pp. 39–40).
To help prevent the erection of new barriers in the interim, member states must give the Commission advance notice of all draft regulations and standards involving technical specifications. Implementation must then be delayed for up to one year to allow the Commission and other member states to determine if any elements are likely to create trade barriers and, if so, to take remedial action. Similar legislation was passed by the EFTA in 1987. Members of the EC and EFTA also have agreed to provide CEN/Cenelec drafts of all new regulations and standards as soon as possible to allow other members to comment and request changes.
Efforts are under way to use mutual recognition to avoid duplication of testing and certification procedures. However, countries have more faith in their own certifying systems than in foreign ones. To overcome this bias, the EC Commission and most EFTA members favor centering efforts in CEN/Cenelec. A major step was taken in June 1988, when EFTA and EC members signed a framework on the mutual recognition of test results and certification. While presupposing common guidelines for testing procedures, it was seen as a necessary first step toward EC-EFTA negotiations on framework and sectoral agreements (“Joint Conclusions …, ” 1988). However, this agreement is yet to be finalized.
Fears have been voiced that EC standards may be drafted to discriminate against nonmembers, but EFTA members discount this. Unifying regulations for 12 EC countries—18 including the EFTA—are sufficiently complex to discourage such efforts. Discrimination would also be against the interests of distributors and consumers in the EC and contrary to the Commission’s mandate. In addition, gains from discriminatory standards would be short-lived, since outsiders would modify production methods to meet the standard.
As members of CEN/Cenelec, EFTA countries generally are obliged to accept EC standards as they are enacted. However, closer EC-EFTA cooperation should bring increased efforts to remove technical barriers between the blocs, including efforts by EFTA members to incorporate virtually all EC standards as they are passed. One potential issue is whether EFTA members will be allowed to retain or enact tougher standards than those in the EC, notably regarding the environment. This could cause problems, since it could result in situations where goods produced by the EFTA member meet the EC standard, but goods meeting the EC standard do not meet the domestic standard of the EFTA country. No matter what the rationale, this could be seen as discriminatory.
While eliminating technical barriers to trade will involve a major effort for the EC and EFTA alike, the EFTA is well positioned to move in step with the EC. The outlook is good for several reasons. First, as members of CEN/Cenelec, EFTA members already participate in the decision-making process in these organizations. Second, most EFTA countries already use EC standards whenever possible. In cases where there is no standard, the only requirement for sale in the EC is that the product meet the standards of some member state; if it does not meet the standards in the country in which it is sold, the product must be shipped through a member state where it does meet the standards.37 Third, increased EC-EFTA cooperation is likely to result in an agreement to eliminate technical barriers between the two blocs, which will probably follow along the lines of the measures being taken in the EC.
In May 1990, the EC and EFTA also agreed to create an institution called the European Organization for Testing and Certification (EOTC). The EOTC will work to harmonize testing and certification throughout Europe, including eliminating the need to retest goods when they cross national frontiers. The EOTC will have a standing on par with CEN/Cenelec and will be formed in three stages, the last taking effect on January 1, 1993.
Public sector purchases of goods and services by all levels of government and public enterprises accounted for roughly 15 percent of Community gross domestic product (GDP) in 1986.38 While much of this involved purchases that were noncompetitive, nontradable, or in quantities too small to be covered by EC rules on contractual procedures, contractual purchases by the public sector—public procurement—were equivalent to 7–10 percent of Community GDP. Public sector purchases in the EFTA countries are estimated at about 10 percent of GDP, implying public procurement in the range of 4.5–6.5 percent of GDP (Pintado and others, 1988, p. 27).
Public procurement has remained largely closed, despite legislation that was to open up public works contracts in excess of ECU 1 million (1971) and public supply contracts of over ECU 200,000 (1977). In 1986, about 20 percent of the tenders covered by the directives were published, while 2 percent went to bidders from other member states. This was caused mainly by two factors. First, energy, transport, telecommunications, and water supply were exempt from the rules. Second, EC legislation has been bypassed and ignored, showing “that the Community legislator has proved no match for national and local purchasing bureaucracies” (Cecchini, 1988, p. 18).
The costs of nationalistic procurement policies are high.39 The savings may be divided into three categories; the static trade effect of buying from the cheapest EC supplier; the competitive effect of opening closed sectors; and the restructuring effect of forcing small firms in protected sectors to grow to take better advantage of scale economies. The savings would be even greater if procurement were fully open to non-EC bidders. In addition, the savings to private buyers from less restrictive trade practices and the dynamic effects of greater competition, innovation, investment, and growth may also be large.
The White Paper laid out a three-part strategy for opening public procurement. First, legislative loopholes would be closed and efforts made to increase the transparency of public tenders to encourage greater participation by other member states. Second, losing bidders would be given improved legal redress and the Commission would be given greater powers to police and enforce compliance. Third, procurement rules would be extended to energy, transport, telecommunications, and water supply, and later to the services sector.
Efforts to implement these plans have begun, but progress has been slow. A program of action was set by the Commission in mid-1986. In 1988, three directives were tabled before the Council of Ministers: one opening the energy, telecommunications, and water supply sectors to international tender, and two others designed to ensure compliance with existing public procurement directives. In April 1989, a revised report on opening protected sectors was presented to the European Parliament for supply contracts worth over ECU 750,000 and works contracts over ECU 5 million (Committee on Economic and Monetary Affairs …, 1989). In February 1990, after some delays, the directive was passed.40 One change—which caused the delays—was a “buy European” clause that gave bidders from member states a 3 percent margin of preference relative to bidders outside the EC, unless the outside bids contained at least 50 percent “European content.” The ministers also stated that the content requirement would be waived if a worldwide agreement to drop such requirements could be made under the General Agreement on Tariffs and Trade (GATT). Discussions on public procurement of services are next on the agenda.
The Luxembourg Declaration listed public procurement as a primary area where EC-EFTA cooperation was desirable, but advanced no proposals. Discussions began in 1986. Efforts have focused on gradually opening up public works contracts at all levels of government. EFTA ministers have also agreed to provide copies of tender requests in accordance with the GATT agreement for publication in the EC’s official paper and inclusions in data banks regarding public procurement. Plans have also been discussed to revise EFTA rules on surveillance and enforcement (EFTA, 1989, pp. 2–3). These rules, which must be enacted at the national level, are equivalent to those in the EC.
While the level of concern about opening public procurement varies among EFTA members, progress is possible in this area.41 As noted, agreement at the EC-EFTA meeting in December 1989 was based on the principle of free movement of goods and services and that, with limited exceptions, EFTA members would follow actions taken by the EC. This implies that joint agreements may eventually have to be reached on opening procurement policies on equal terms to bidders throughout the two blocs. However, while the accord grants EFTA members greater input in the EC’s own discussions on this topic, joint progress is likely to be slow until the EC completes its own work in this area.
Rules of Origin and Anti-Dumping Rules
The EC has two sets of origin rules.42 Preferential rules are used to determine if a product originates in a particular country and is eligible for preference under special agreements, including the FTAs and the Generalized System of Preferences. These normally require that the product undergo sufficient processing to change the product’s tariff heading. Other tests may also be used, such as the form of processing or the percent of value added. Nonpreferential rules relate to commercial policy measures and rules, including antidumping measures. They are based on the “last substantial operation” rule, which may be based on either a technical test on change in product properties, an assessment of the importance of the last operation in the totality of the manufacturing process, or a value-added criterion.43
Until 1989, a major concern for EFTA members was the cumulation rules in their FTAs with the EC. These rules were originally bilateral between each individual EFTA member and the EC, so that a good produced by one EFTA member would only qualify for duty-free status under its FTA if the proportion of the final price added by its own inputs plus those added by EC members exceeded the minimum requirement. Thus, the contribution of other EFTA members was not counted. However, in January 1989, this rule was changed so that all materials and inputs originating in EFTA and EC countries now count against the minimum.
Under EC procedures, the definition of dumping is based on the price in the exporter’s home market. However, if this is not considered representative of costs, prices in third countries may also be used (Kelly and others, 1988, pp. 95–96). If dumping is detected, GATT provisions permit the imposition of a countervailing duty if injury is found and if the dumping is attributable to state subsidies. Anti-dumping regulations are not applied to intra-Community trade, since the maintenance of price differentials is, in principle, not possible within a free market.
EFTA members have sought exemption from the EC’s anti-dumping regulations, arguing that they discriminate against EFTA-based firms since large price differentials exist within the EC. EFTA members also fear that, after the start of the internal market, price cuts will be necessary to maintain market share within the EC, making EFTA-based firms vulnerable to antidumping actions. The Commission has stated that the EC would be prepared to drop anti-dumping rules with regard to the EFTA, if they were replaced by uniform competition rules. The negotiations following up the Oslo-Brussels process could lay the groundwork for progress in this area.
The White Paper states that a strong-competition policy requires that “discipline on state aid be rigorously enforced” (White Paper, para. 158). EFTA members stress the need for this discipline to the EC and report lapses they detect (Council of State, Report to Parliament …, 1989, pp. 32–33). These protests are usually based on the FTAs, which state that “any public aid which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods” is incompatible with the functioning of the FTAs (EFTA, 1987a, p. 100). The EFTA convention has a similar prohibition covering trade between EFTA members. While disputes may be brought before the GATT, EFTA and EC members generally seek to avoid settling their differences in this way.
Talks on state aid have begun. The first goal is to develop a system for reporting all state aid in EC and EFTA countries and a consultation procedure for problem cases. Preliminary proposals in both areas were advanced in November 1988 and are under study. One problem is that the EFTA countries do not have a monitoring and enforcement mechanism enjoying the same legal status as the EC’s. Work has also begun within the EFTA to strengthen its internal procedures; progress is thought to be a precondition for successful inter-bloc discussions. It is hoped that an enforcement mechanism may be developed as part of the institutional changes associated with the Oslo-Brussels process.
Fisheries and Trade in Fish
Within the EFTA, only Iceland views the discussions regarding fisheries and trade in fish as important.44 In Iceland, fisheries and fish processing account for one sixth of GDP and about three fourths of merchandise exports, half of which go to the EC. While the FTAs did not cover fish, Iceland was given favorable terms on its sales of fish and fish products to the EC, with about 50 percent of its fish exports enjoying special preferences (Gislason, 1987). 45
The current version of the EC’s Common Fisheries Policy (CFP) will remain in effect until 1991. This policy uses catch quotas to help conserve fish stocks, while seeking to modernize the fishing industry to increase competitiveness. To assure a sufficient supply of fish within the EC, fishing rights are bought from third countries or negotiated in exchange for access to markets. To protect the fishing and fish processing industry, tariff barriers and quotas are imposed on fish imports. While fishing within EC waters has been limited to conserve the fish stocks and because of pollution, fish catches outside EC waters have also decreased. Falling catches, however, have meant that the EC’s fish processing industry has had to import more fish from outside sources.
In 1988, 5 percent of EC imports of unprocessed fish came from Iceland. While Iceland’s fish exports to the EC have gradually risen, EC policy on processed fish has caused problems for Iceland, particularly for its trade in salted fish. The principal customers for salted fish are Greece, Italy, Portugal, and Spain. When the FTAs were signed, Greece, Portugal, and Spain were not members of the EC. Their accession to the EC has made their imports of salted fish subject to the same restrictions under the CFP as the other imports of EC member states. As a result, the share of Icelandic fisheries exports that enjoy preferential treatment in the Community fell by about 15 percent (Olafsson, 1989).
Icelandic exporters have been forced to make price concessions to maintain market shares. Partly to offset the fall in revenue from salted fish, more unprocessed fresh fish is exported. Recently, the Icelandic Government imposed temporary export restrictions on fresh fish to protect employment in the fish processing industry. Further measures may be taken if the trend continues. Icelandic firms may have to move their processing operations to the EC to evade trade barriers and to furnish traditional southern European markets.
In its negotiations with Iceland, the EC Commission insisted on access to Icelandic fishing grounds as the price for freer access to the EC. Because of its heavy dependence on fisheries and the fact that Iceland’s fishing zones are already fully used, such an agreement is not considered a feasible option for Iceland. There is also a political consensus in Iceland in support of this position.
The question then becomes what is the most appropriate strategy for negotiating with the EC. At present, the EFTA is being given a central role in the talks. This became possible when intra-EFTA trade in fish was freed in March 1989. While this agreement had little economic significance for the EFTA, it was seen as a key precedent for inter-bloc negotiations. However, it is still not clear whether negotiating through the EFTA will give sufficient weight to Iceland’s interests. If an extension of the free trade arrangements to processed fish cannot be achieved, Iceland may have to look elsewhere for markets if it remains unwilling to increase its fresh fish exports. Neither the Luxembourg Declaration nor the Oslo-Brussels accords indicate the course these negotiations are likely to take.
An EC-financed study estimated the total cost of border controls at about 0.3 percent of Community GDP, mostly administrative costs to firms. In addition, importers estimated the rise in intra-EC trade from eliminating internal border controls at 1 percent, while exporters estimated the rise at 3 percent. See Ernst and Whinney (1988).
The White Paper envisaged the complete dismantling of all border controls and other physical barriers within the EC by 1993. However, progress has been slower than hoped. In December 1989, the Schengen Agreement was to be signed by Belgium, France, Germany, Luxembourg, and the Netherlands, removing all border controls and allowing people to travel freely within the five-country region. The agreement was delayed until June 1990 because of a dispute between the Federal Republic of Germany and its partners regarding the status of East Germany. The accord still must be approved by the parliaments of the five-country signatories.
Some relaxation of border controls is possible. For example, from July 1991, customs checks will be randomized for goods being transported between the EC and Switzerland. However, the benefits to the Nordic countries from such an initiative would be limited.
This was a top priority item of the High Level Contact Group working on implementing the Luxembourg Declaration. This agreement was the first EC-EFTA accord to come out of the Luxembourg Declaration.
CEN and Cenelec are French acronyms for Committee for European Standardization and Committee for European Electro-technical Standardization, respectively. A third body, the European Telecommunications Standards Institute (ETSI), sets standards in the area of telecommunications. For details on the design of technical regulations and standards in the main European standardization organizations, see Nicolas (1988).
The Cecchini Report estimates the costs of the EC’s internal barriers for seven industries, accounting for 43 percent of EC industrial output. The estimated savings from the removal of barriers from technical regulations, import restrictions, and restrictive government procurement policies is equivalent to about 0.3 percent of EC GDP. Half are in telecommunications equipment and result from the ending of restrictive government procurement practices. Cecchini (1988), pp. 25–27 and 50–68.
On the other hand, passage of technical standards by CEN/Cenelec requires only a qualified majority.
While the EC standards are not mandatory, goods meeting the standards are assumed to fulfill the essential requirements test. A manufacturer not meeting the EC standard must be able to prove that the products meet the essential requirement.
Voting in CEN/Cenelec requires a two-thirds majority, but efforts are made to achieve unanimity. EC country institutions’ voting weights are based on the EC treaties, while EFTA members’ weights are negotiated. EC institutions have special rights in the implementation of new documents. If a document does not receive a qualified majority, a count is made of only the EC institutions. If a qualified majority of this group is in favor, EC institutions must implement the decision along with EFTA institutions voting for it. EFTA institutions voting against the document are theoretically not required to implement it.
Presumably, EFTA states will be required to give reciprocal rights to EC member states and probably to other EFTA members as well.
Atkins (1988) studied Belgium, France, Germany, Italy, and the United Kingdom, using some 40 product categories and 1984 data. The estimates, extrapolated to the EC-12, showed a potential saving of about ¾ of 1 percent of EC GDP, about one fifth from defense. About half the savings were in telecommunications, power turbines, and data processing.
In December 1989, the Ministers also reached agreement on recourse rules for firms that were unjustly excluded from public works or supply contracts. It is scheduled to take effect in January 1993 for all member states except Greece, Portugal, and Spain.
For example, Finland, which sees its policies as open, argues that competition should be as free as possible; see Council of State, Report to Parliament… (1989), p. 34. A Swedish bill on the internal market did not list procurement as a major policy goal; see Swedish Ministry of Foreign Affairs (1990), p. 24.
In October 1989, the EC Commission adopted a directive on rules of origin stating that the EC would apply these rules in a way that would not affect trade or investment. See European Community (1989), pp. 1–3.
As set out in the EC Council’s Regulation No. 802/68, June 27, 1968, and incorporated in the 1973 Kyoto Convention, which laid out the general principles of an international system of rules of origin.
Norway and Sweden both share their fishing rights with the EC in exchange for preferential treatment for their fish exports.
Although the Free Trade Agreements were reached in 1972, the dismantling of EC duties on certain fish products came into force only in 1976, when the “cod war” between Iceland and the United Kingdom was settled.