ASEAN and the EC: The Impact of 1992 9789814377003

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ASEAN:EC The Impact of 1992

The Institute of Southeast Asian Studies (I SEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A tenman Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

ASEAN;~~EC The Impact of 1992 Edited by

Norbert Wagner

ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Road Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1991 Institute of Southeast Asian Studies The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data --------------------------------

ASEAN and the EC: The Impact of 1992 I editor, Norbert Wagner. Papers presented at a workshop held on 17-20 October 1989 in Singapore. 1. European Economic Community--Congresses. 2. Europe--Economic integration--Congresses. 3. ASEAN countries--Commerce---European Economic Community countries-Congresses. 4. European Economic Community countries--Commerce--ASEAN countries-Congresses. 5. Investments, European--ASEAN countries--Congresses. 6. Capital movements--European Economic Community countries--Congresses. I. Wagner, Norbert. HF1592.5 E8E91 1991 s1s90-135364 ISBN 981-3035-70-6 Typeset by International Typesetters Printed in Singapore by Chong Moh Offset Printing Pte. Ltd.

Contents

List of Tabies List of Figures Acknowledgements

vii xi xiii

PART I: INTRODUCTION I.

The EC Internal Market and ASEAN: An Overview Norbert Wagner

PART Il: COMPLETING THE EC INTERNAL MARKET II.

Ill.

IV.

VI.

19

Completing the EC Internal Market: An Update and Problems Ahead Jacques Pelkmans

21

The EC Internal Market Programme: Implications for External Trade Dermot McAleese

72

The EC Internal Market: Implications for Capital Flows Alfred Steinherr

PART III: IMPLICATIONS FOR ASEAN V.

3

An Analysis of ASEAN-EC Trade in Textiles and Electronics, 1980-88 Gerhard Schmitt-Rink and Thomas Lilienbecker The EC Internal Market and the ASEAN Electronics Industry Wong Poh Kam

88

127

129

153

vi

Contents

VII. The EC Internal Market and the ASEAN Textile and Clothing Industry Mari Pangestu and Ida N. Hasni

190

VIII. The Harmonization of Technical Standards and Regulations in the EC: Implications for ASEAN Tanasak W ahawisan

241

IX.

The EC Internal Market and ASEAN-EC Trade in Services Rolf J. Langhammer

262

X.

The EC Internal Market and ASEAN-EC Direct Investment Flows Chia Siow Yue

XI.

The European Currency System and ASEAN Suthiphand Chirathivat

Contributors

289

318

343

List of Tables

Estimates of Total Economic Gains from Completing the EC Internal Market, EUR-7 Macroeconomic Consequences of the Completion of the EC Internal Market: The Community as a Whole in the Medium Term

7

11.1 11.2 11.3 11.4

Product Market Integration: Before and After the White Paper A Bird's Eye View of the White Paper White Paper Proposals: Numerical Progress, as of 6 February 1990 Difficult "1992" Dossiers: 1985 and 1989 Compared

24 26 33 35

III.Al III.A2

Foreign Direct Investment by Country of Origin, April 1988 ASEAN Trade with the European Community, 1987

84 85

IV.A1

Estimates of Potential Falls in Financial Product Prices as a Result of Completing the Internal Market Bank Branches, Population, and Gross Domestic Product, End of 1986 Indexes of Bank Profitability Representative Spread between Bank Lending and Deposit Interest Rates, April 1988 Size and Profitability of European Banks, 1987 Market Concentration and Share of Foreign Institutions, End of 1987

I.1

1.2

IV.A2 IV.A3 IV.A4 IV.A5 IV.A6

V.1(a) V.1(b) V.2(a) V.2(b)

EC-ASEAN Intra-Industry Trade Shares: Textiles and Clothes EC-ASEAN Intra-Industry Trade Shares: Electronics EC-ASEAN Relative Export-Import Unit-Price Differences: Textiles and Clothes EC-ASEAN Relative Export-Import Unit-Price Differences: Electronics

6

118 120 120 121 122 124 143 144 146 146

List of Tables

Vlll

V.3(a) V.3(b) V.4(a) V.4(b) V.5(a) V.5(b)

Constant-Market-Share Analysis: Textiles and Clothes Constant-Market-Share Analysis: Electronics Intra-Industry Trade Shares: Textiles and Clothes Intra-Industry Trade Shares: Electronics Export-Import Price Differences: Textiles and Clothes Export-Import Price Differences: Electronics

VI.1

Importance of the Electronics Sector in the Manufacturing Industry of the ASEAN Countries, 1981-87 Estimated Total ASEAN Electronics Export to the OECD Countries, 1987 Structure of Singapore's Electronics Industry, 1980 and 1987 Direction and Composition of Singapore's Electronics Export, 1988 Direction and Composition of Malaysia's Electronics Export, 1988 Direction and Composition of Philippine Electronics Export, 1985 Structure of Thailand's Electronics Export, 1984 Electronics Export as a Percentage of Total ASEAN Manufactured Exports by Market Destination, 1970-86 Share of EC Electronics Import from ASEAN, 1970-86 Composition of ASEAN Electronics Export to the EC-8, 1980-88 Major Source of Capital [nvestment in Singapore's Electronics Industry, 1987

VI.2 VI.3 VI.4 VI.5 VI.6 VI.7 VI.8 VI.9 VI.lO VI.ll

VII. I VII.2 VII.3 VII.4 VII.5 VII.6 VII.7 VII.8 VII.9 VII.10 VII.ll VII.l2 VII.13 VII.14 VII.15

Index of Textile and Clothing Production of Selected MFA Members, 1982-88 Textile and Clothing Employment of Selected MFA Members, 1982-88 Textile Imports of MFA Members, 1973 and 1987 Textile Exports of MFA Members, 1973 and 1987 Clothing Imports of MFA Members, 1973 and 1987 Clothing Exports of MFA Members, 1973 and 1987 Textile and Clothing Exports to Various Major Markets, 1983 Textile and Clothing Exports to Various Major Markets, 1987 Development of ASEAN Textile and Clothing Exports to the EC Comparison of Labour Costs, Spring 1988 Evolution of the European Community's Restrictions for Selected Countries List of the Twenty-Six Agreements and the Dates They Were Initialled Comparison of Flexibility Rates in the New MFA Agreements Comparison of Quota Allocations for Selected Countries in Eight Sensitive Items, 1987 Percentage Share of Developing Countries and Indicators of Restrictiveness of MFA on Extra-EC Imports

147 148 149 150 151 152

169 170 171 172 173 173 174 176 176 176 177

192 194 196 197 198 199 202 204 206 207 212 214 216 219 221

List of Tables

VII.l6 VII.17 VII.l8 VII.Al VII.A2 VII.A3 VII.A4 VII.A5

Quota Utilization of the ASEAN Countries in the EC Quota Utilization of the ASEAN Countries in the United States Percentage Share of Imports of Textile Products Subject to Quotas in EC and U.S. Markets, 1981-83 and 1985-87 Quota Utilization Rates of Malaysia, 1983, 1987, and 1988 Quota Utilization Rates of Indonesia, 1983, 1987, and 1988 Quota Utilization Rates of the Philippines, 1983, 1987, and 1988 Quota Utilization Rates of Singapore, 1983, 1987, and 1988 Quota Utilization Rates of Thailand, 1983, 1987, and 1988

VIII.1 VIII.2

Ranking of Market Barriers, by Business Estimated Results of Price Reductions of Intra-EC Imports to Changes in Thailand's Exports to the EC VIII.3 Estimated Percentage Price Reductions of Thai Exports to the EC to Maintain the Original Export Market Share After the 1992 EC Integration VIllA Revealed Comparative Advantages (RCAs) of Thailand and Intra-EC in the European Community VIII.Al Estimated Impact of the Single Market Programme IX.l IX.2 IX.A1

X.l X.2 X.3 X.4 X.5 X.6 X.7 X.8 Xl.1

Xl.2

Shares of the ASEAN Countries in West Germany's Total Imports of Private Services, 1975-87 Determinants of West Germany's Imports of Services from the ASEAN Countries, 1971-87 Determinants of West Germany's Imports of Private Services from the ASEAN Countries, 1971-87 Net Direct Investment Flows to the ASEAN Countries, 1975-88 Net Direct Investment Flows from Countries of the Development Assistance Committee to ASEAN Distribution of Stock of Foreign Direct Investment in ASEAN, 1978 and 1982 Indonesia: Approved Foreign Investment Projects, January 1967 to December 1987 Malaysia: Approved Foreign Equity Investment Projects, 1982-87 Philippines: Foreign Direct Investment, 1975-87 Singapore: Investment Commitments in Manufacturing, 1980-88 Thailand: Net Inflow of Direct Investment, 1978-87 Index of Variability of Nominal Exchange Rates against Currencies of the European Monetary System (Exchange Rate Mechanism) Official Exchange Rate Regimes of the ASEAN Countries

ix 223 223 224 235 236 237 238 239 244 252

255 256 260

269 270 283 295 296 299 301 303 304 305 307

323 326

Ust of Figures

IV.1 IV.2 IV.3 IV.4

Static Effects of Capital Mobility Gains from Integration: An Example of Non-Competitive Markets Gains from Integration Due to Predatory Threats Macroeconomic Effects of Financial Market Liberalization

V.l(a) V.1(b) V.2(a) V.2(b) V.3(a) V.3(b) V.4(a) V.4(b) V.5(a) V.5(b) V.6(a) V.6(b) V.7(a) V.7(b) V.8(a) V.8(b) V.9(a)

Value of EC Exports of Textiles and Clothes Value of EC Imports of Textiles and Clothes Shares in EC Exports of Textiles and Clothes to ASEAN Shares in EC Imports of Textiles and Clothes from ASEAN Shares in EC Total Exports of Textiles and Clothes Shares in EC Total Imports of Textiles and Clothes Growth Rates of EC Exports of Textiles and Clothes Growth Rates of EC Imports of Textiles and Clothes EC Exports of Electronics EC Imports of Electronics Shares in EC Exports of Electronics Shares in EC Imports of Electronics Shares in EC Total Exports of Electronics Shares in EC Total Imports of Electronics Growth Rates of EC Exports of Electronics Growth Rates of EC Imports of Electronics Constant-Market-Share Analysis of ASEAN Exports of Textiles and Clothes to the EC Constant-Market-Share Analysis of ASEAN Exports of Electronics to the EC

V.9(b)

100 102 105 109 131

131 133 133 134 134 135 135 136 136 137 137 139 139 140 140 141 142

VIII.!

Technical Barriers and 1992: Access for Third Countries

246

XI.l

Parities of Major Currencies in Terms of the Indonesian Rupiah, 1979-89

327

xii

XI.2 XI.3 XI.4 XI.5 XI.6 XI. 7 XI.8

List of Figures

Parities of Major Currencies in Terms of the Malaysian Ringgit, 1979-89 Parities of Major Currencies in Terms of the Philippine Peso, 1979-89 Parities of Major Currencies in Terms of the Singapore Dollar, 1979-89 Parities of Major Currencies in Terms of the Thai Baht, 1979-89 Parities of ASEAN Currencies in Terms of the U.S. Dollar, 1979-89 Parities of ASEAN Currencies in Terms of the Japanese Yen, 1979-89 Parities of ASEAN Currencies in Terms of the European Currency Unit, 1979-89

328 329 330 331 332 333 334

Acknowledgements

The research and publication of this study on "Implications of the EC Internal Market for ASEAN", launched by the Institute of Southeast Asian Studies (ISEAS), has been made possible by a generous grant from the Konrad Adenauer Foundation of the Federal Republic of Germany. We gratefully acknowledge this support. We are particularly grateful for the co-ordination and assistance rendered by Ms Anne Yeo in the preparation of this manuscript. Special thanks are also due to the staff of the ISEAS Publications Unit for their invaluable editorial assistance.

Part I Introduction

I. The EC Internal Market and ASEAN An Overview NORBERT WAGNER

1. Introduction European economic integration has gathered new momentum since Member States of the European Community (EC) signed the Single European Act in February 1986 aimed at creating a region with no internal frontiers and with a free movement of goods and services, capital, labour, and the professions by the end of the year 1992. Since then, numerous decisions have been taken by EC heads of governments, the EC Council of Ministers, the EC Commission, the European Parliament, and the twelve national parliaments in order to achieve this ambitious goal. As third countries are increasingly becoming more aware of the emerging EC internal market, they are increasingly concerned about the implications and repercussions of this single European market on their future economic relations with the EC and the impact on their national economies. The implications and repercussions of the EC internal market on economic relations with non-member countries and with the Southeast Asian economies in particular have to be studied thoroughly in order to enable these economies to adjust accordingly and to react positively to impending changes in the international economic environment. For quite some time, discussions on the external dimension of the EC internal market have been dominated by fears that the EC would become more protectionist and create a fortress Europe. Interestingly enough, the term "fortress Europe" emerged within the increasingly protectionist climate in Washington, where, in the context of the Omnibus Trade Bill debate, polemic slogans such as this obviously were perceived to be helpful to rally support for the introduction of stiffer protectionist measures on the part of the United States (see also NO!ling 1988). Fears regarding the implications of the EC internal market for non-members may have also been induced by a lack of detailed and comprehensive information and thorough analyses. Not only do non-member countries lack the necessary information, but the EC itself was preoccupied with the internal problems of the completion of a truly common market and almost entirely overlooked the external dimension of the EC 1992 programme.

4

Norbert Wagner

Since then serious studies and investigations have been carried out which found little evidence for increased protectionism other than the reciprocity clause in a draft directive on financial services. As a consequence, emphasis is gradually shifting from earlier worries to questions as to how non-member countries can respond to challenges posed and best make use of opportunities offered by the creation of the EC internal market. The positive attitude towards the EC internal market expressed by many American businessmen in recent surveys (for example, Peat-Marwick 1989) indicates that the private sector's assessment of the implications of the EC internal market reaches beyond the simplistic "fortress Europe" reproach, which, nevertheless, is still being emphasized by some politicians.

2. Elements of the EC Internal Market In 1985 the EC Commission issued a White Paper spelling out a programme and timetable for the abolition of persisting intra-EC barriers, the harmonization of regulations, and the approximation of legislation as well as of tax structures in order to achieve the EC internal marketby the end of 1992. Tariffs and quantitative restrictions on trade have been largely eliminated in the EC. The last remaining customs duties among the six founding members (Benelux, France, Germany, and Italy) were abolished by 1968. The barriers that still remain consist primarily of physical barriers, that is, controls and formalities of individuals and goods at the intra-EC frontiers; technical barriers, that is, divergent national product standards and technical regulations, public procurement, hindrances to the free movement of labour and the professions, as well as capital; and fiscal harriers, that is, different value-added tax rates and excise taxes. (Commission of the EC 1985a) There have been doubts that the timetable for the creation of the EC internal market can be met, and that all 279 individual measures (originally 300) listed in the White Paper as necessary in order to establish the EC internal market will be agreed upon by 31 December 1992. However, the Single European Act has sped up this process substantially. The Single Act allows the EC Council of Minister's decisions to be taken by a qualified majority instead of a unanimous vote for two-thirds of the measures related to the internal market, thus considerably improving prospects for the completion of the internal market. Unanimity is still required for all decisions regarding the harmonization of the national tax systems and the free movement of persons and the rights and interests of employed persons (see also Bieber 1988). By the end of 1989 the EC Commission had put forward proposals for about 261 of the 279 measures, with only eighteen more proposals to be drafted by the Commission till the end of 1992. Out of these 261 measures, 152 have already been adopted by the EC Council of Ministers. However, national parliaments have been somewhat slower in transforming these commitments into national laws and/or administrative rules. Member States are given eighteen months to implement the agreed measures. Out of the eighty-eight measures that should have been

The EC Internal Market and ASEAN: An Overview

5

implemented by the end of 1989, only fourteen had indeed been implemented by all twelve Member States. The EC Commission has modified the concept of harmonization of standards and technical regulations in favour of the principle of equivalence and mutual recognition of the rules and regulations of Member States. The basic principle followed is the one formulated first by the European Court of Justice in the Cassis de Dijon case in 1979 and reiterated since in other rulings (for example, German purity law and German beer, durum wheat and Italian pasta, ingredients of German sausages): "a product which is lawfully produced and marketed in one Member State may also be marketed in another Member State". As a result, a process of "competition among rules" may evolve instead of Community-wide harmonization. However, the principle of mutual recognition and equivalence may be waived if a Member State finds that a product might compromise the safety of individuals, domestic animals, or property. Harmonization is required in some sensitive areas such as health, security, and environmental as well as consumer protection, but will be restricted to the formulation of essential requirements and minimum standards. In addition, certain technical specifications and standards need to be defined in order to facilitate the realization of economies of scale and compatibility. European standards and technical specifications conforming to the essential requirements shall be defined by private organizations such as the Comite Europeen de Normalisation (CEN) and the Comite Europeen de Normalisation Electrotechnique (CENELEC), and the European Telecommunication Standards Institute (ETSI). These specifications will not be mandatory, however; and conformity with essential requirements can also be proven by third-party certification. Even though it is still debatable whether the timetable for the implementation of the EC internal market can be fulfilled entirely, 1992 has become a magic date. Some measures have already been implemented; more will become effective before 1992, for example, the free movement of capital is scheduled for mid-1990. The creation of the EC internal market has gained an astonishing auto-dynamism. Who would have expected, some years ago, that Italy and France would give up control of trans-border capital flows? Thus the creation of the internal market will be an evolutionary rather than a revolutionary process. The internal market will be established, possibly without reaching all the ambitious goals, perhaps in 1992, perhaps later. What is important, however, is the anticipatory behaviour of economic actors. European as well as non-European companies and their managers are already operating under the supposition that the internal market will be established. Cross-border take-overs, mergers, investments, and joint ventures are part of the private sector's preparation to meet the challenges and to take advantage of opportunities expected from the future EC internal market.

3. Economic Impact on EC Member States The primary stimulus to intensify European integration originated from the growing

6

Norbert Wagner

perception that Europe was lagging behind the United States and Japan in terms of technological development and world market shares for high-tech products. The fragmentation of the European market in particular was seen as a major obstacle to the development of new products and new technologies. 1 Moreover, European leaders felt that Europe should play a more powerful and influential role in the field of international trade relations, notably within the triangle consisting of the United States, Japan, and Europe. In addition, the business sector put strong pressure on EC governments to liberalize and deregulate their economies. The creation of the EC internal market has been deemed a massive supply-side economics programme designed to strengthen competitiveness, accelerate economic growth, and promote technological development on an EC-wide level. The internal market is expected to generate manifold static and dynamic benefits. It will give an enormous boost to the EC economy, and as a consequence will also stimulate world economic growth. It will reduce inflation, create new jobs, and provoke an extensive restructuring process and the development of new technologies. In 1983 the EC Commission reported to the EC Council that the annual costs of interventions at the intra-EC borders amounted to 12 billion European currency units (ECUs) (which is about US$13.3 billion at the 1989 exchange rates and equivalent to 0.5 per cent of the EC's gross domestic product [GDP]). Later, the Cecchini report attempted to estimate the "costs of non-Europe" by calculating the (static) economic costs of persistent barriers to the free flow of goods, capital, and people, and, in turn, gave some indications as to the potential economic gains of completing the EC internal market through the abolishment of these barriers (see Commission of the EC 1988 for a shorter version). Tables I.l and 1.2 show some of the estimation results. It has to be noted that these gains are static or, more precisely, once-and-forall gains in potential output, since border controls, fiscal and technical barriers can be removed only once. Hence, with a trend of a 2.5 per cent potential output growth, the EC could raise the growth rate by around 1.5 percentage points and attain growth rates of between 3 and 4 per cent for about five years (Giersch 1989). TABLE 1.1 Estimates of Total Economic Gains from Completing the EC Internal Market, EUR-7 (In 1985 prices) Source of Gains

Billion ECUs

Removal of trade barriers Removal of all production barriers Economies of scale Increased competition

8-9 57-71 60-61 46

Total gains

171-187

% ofGDP

0.2-0.3 2.0-2.4 2.0-2.1 1.6 5.8-6.4 --------

SouRcE: Commission of the EC (1988, p. 157).

The EC Internal Market and ASEAN: An Overview

7

TABLE 1.2 Macroeconomic Consequences of the Completion of the EC Internal Market: The Community as a Whole in the Medium Term Relative Change

%ofGDP

Consumer Prices

Absolute Change in Employment

Frontier controls Public procurement Financial services Supply effects

0.4 0.5 1.5 2.1

-1.0 -1.4 -1.4 -2.3

200,000 350,000 400,000 850,000

Total

4.5

-6.1

1,800,000

SouRcE: Commission of the EC (1988, p. 159).

However, it may be fair to assume that the dynamic effects of the creation of the EC internal market may be even more pronounced and enduring. The removal and abolishment of barriers and controls, the deregulation of previously regulated areas, the opening up of public procurement to foreign suppliers, and the liberalization of money and capital markets will result in substantial cost reductions and a tremendous intensification of competition. This shall lead to price reductions and accompanying increases in real incomes. In turn, demand, investment, employment, and overall economic growth will be stimulated. Government budget deficits will be reduced because of higher tax revenues (stemming from additional GDP growth) and lower expenditures (due to lower prices and reduced expenditures for the unemployed). Enhanced competition among EC producers can also be expected to improve the competitiveness of European products on the international market. Thus EC growth in the mid-1990s could well be ranging between 4 and 5 per cent (Giersch 1989). Assuming that the 1992 programme will contribute to a permanent increase in the EC's rate of investment, Baldwin estimates an even higher growth rate in the medium and long term (Baldwin 1989). 2 The present performance of the EC economy indicates that forecasts of higher GDP growth rates seem to be realistic. EC growth has been showing an upward trend since 1987 (Commission of the EC 1989). Anticipatory behaviour of markets has led to an investment boom, thus fuelling further consumption and overall economic growth. In this respect, the EC internal market of 1992 is already a reality. Apart from and in addition to the impact of the EC internal market, European economic growth may be further boosted by the recent opening up of the countries of Central and Eastern Europe. In fact, the scope of liberalization, deregulation, and privatization required in these countries over the next years may far surpass the 1992 programme that EC members have embarked upon. The restructuring of the economies of Central and Eastern Europe will surely enhance business opportunities for Western European countries, and will as well offer considerable chances for non-European countries.

Norbert Wagner

8

4. Implications for Non-Member Countries 4.1. EC Foreign Trade Policy The EC foreign trade policy is rather liberal in many aspects. Yet, there are some sectors with rampant protectionism, the most prominent and conspicuous of which is, of course, the Common Agricultural Policy (CAP), which affects the agricultural sector, particularly as regards moderate zone agricultural products. However, this protectionism, costly as it may be for non-EC producers but even more so for EC consumers, has nothing to do with the EC 1992 programme. With regard to industrial products, the EC import policy is fairly liberal. The average EC import tariff on manufactured products is below 6 per cent. Additionally, concessional access to the EC market is granted within the context of the EC Generalized System of Preferences (GSP), the Lome Convention between the EC and some seventy African, Caribbean, and Pacific (ACP) countries, 3 and for the associate Mediterranean countries. Nevertheless, there remain certain areas of concern, particularly with regard to countries of the Association of Southeast Asian Nations (ASEAN)- for instance, in the case of tapioca imports from Thailand or vegetable oils from Malaysia. Other export products specifically relevant to ASEAN that are facing far above average import duties in the EC include textiles and clothing, which are subject to a maximum tariff of 16 per cent, and electronic products of 14 per cent. Even more important are the various non-tariff barriers to EC imports, such as the Multi-Fiber Arrangement (MFA), quotas, voluntary export restraints (VERs), surveillance, and anti-dumping measures, to name only a few. The focus of the policy to establish the EC internal market, however, is to improve the economic conditions and enhance competition within the EC. The existing CAP, the present EC tariff rates, the Lome Convention, as well as other association agreements are not associated with the EC 1992 programme. Rather, problems as to how countries outside the EC may be affected have been almost neglected when the programme was designed. The White Paper devotes only one sentence to the implications of the EC internal market for the Community's trade policies with non-member countries: Moreover the commercial identity of the Community must be consolidated so that other trading partners will not be given the benefit of a wider market without themselves making similar concessions. (Commission of the EC 1985a, para. 19)

The discussion on the "external dimension" of the internal market, that is, the implications of the internal market for EC economic relations with non-EC countries has for long been focusing primarily upon the EC's relations vis-a-vis the United States and Japan. A graphic example is a notion by a former British Permanent Representative to the Community. He applied the sentence from the White Paper regarding public procurement to the United States in particular and recommended that "the Community should tell the US government that the time has come for reciprocity in public purchasing" (Butler 1986). Furthermore, the emphasis given to and the definition of "reciprocity" in the first banking draft directive triggered

The EC Internal Market and ASEAN: An Overview

9

a heated discussion between the EC and the United States, which calmed down only after the second banking directive was drafted by the EC Commission. Meanwhile, other industrial countries, especially the European Free Trade Association (EFTA) members, are adjusting to changes taking place in the Community in order not to be excluded from this new development. Some present EFT A countries may even join the EC in the near future: Austria, for example, has applied for membership. The Eastern European countries are re-defining their economic and political relations with the Community. Hungary, Poland, and the Czech and Slovak Federal Republic (CSFR) may not remain the only former Eastern bloc countries that are considering membership in the EC in the medium term and that will attain associate membership in the near future. And East Germany has been the first to join the EC formally by "simply" uniting with West Germany. The implications and repercussions of the EC internal market for developing countries have so far been almost left out of consideration. As non-EC industrial countries and developing countries become increasingly aware of the emerging EC internal market, their concern about implications and repercussions ("fortress Europe") also increases. It is feared that the intensification of intra-EC competition may provoke demands for higher protection against nonEC competition (Krenzler 1988; Scharrer 1987). And the EC Commission might be put under pressure to deliberately raise external protectionism at the Community level while maintaining competition within the Community. Moreover, the EC Commission too appears not unequivocally opposed to protectionist policies in order to promote the competitiveness of EC producers: The unification of the internal market must be accompanied by an external commercial policy designed to strengthen the competitiveness of European industry: the Community must create the conditions that will gradually put its industry in a position to fight international competition on its own market on equal terms. (EC Commission 1985b, p. 100)

The emerging and strengthening of trading blocs, such as the EC internal market and the United States-Canada-Mexico Free-Trade Zone, may raise bilateralism in international trade negotiations and thus weaken the system of the General Agreement on Tariffs and Trade (GATT). The principle of reciprocity may dominate international economic relations accompanied by the attempt to balance trade on a bilateral or even sectoral basis.

4.2. National Elements in EC Foreign Trade Policy Trade policy problems specific to the EC internal market will arise primarily from persistent national elements in trade policy which have to be replaced by Community policy in a real internal market. The two major elements of national trade policy within the EC are import quotas and surveillance measures applied by individual countries. There are a number of national quotas for manufactured products (especially for textiles and clothing, electronic products, steel, and cars) applied primarily in

10

Norbert Wagner

Spain, the United Kingdom, France, Portugal, Ireland, and Italy. But only a relatively small number of these quotas have been applied by invoking Article 115 of the EEC Treaty in recent years. community preferences for third countries (especially tariff preferences for developing countries under the EC GSP) which need to be divided into subquotas for individual EC-member countries. Another important problem arises from whether the Community's approach to harmonization and the mutual recognition of national standards and regulations will also apply to goods imported from countries outside the Community. The primary issue in the discussion of the future EC trade policy with nonmember countries is Article 115 of the EEC Treaty, under which a Member State can apply to the Commission to be authorized to introduce national import quotas vis-a-vis third countries, or intra-Community surveillance measures to monitor the flow of indirect imports. However, this exemption clause has to be abolished in a real common internal market with no internal customs posts. During the period 1986--88 there were 519 applications under Article 115, of which 426 were accepted by the Commission. The majority of these cases (337, including 54 cases which have been rejected) involve textile products, where Art. 115 is mainly invoked by France and Ireland. Other manufactured products count for 169 cases, including 39 rejected cases. These products are mainly shoes, umbrellas, radios, television sets, motorbikes, sewing machines, cars. Spain, France and Italy are the most frequent invokers of Art. 115 for non-MFA products. Art. 115 is hardly used for agricultural products, except for bananas. (Beuter and Pelkmans I 989, pp. 10, I I)

Generally, the trend of approved Article 115 cases has been declining, from 260 cases in 1979 to 119 cases in 1989. With seventy-three cases, France accounts for the overwhelming majority of successful applications, far ahead of Italy, with sixteen; and Ireland and Spain, twelve each, Great Britain, three; Greece, two; Portugal, one. Other EC members did not invoke Article 115 in 1989. The most prominent and conspicuous example among these national import quotas is the one applied against Japanese car imports, particularly in France, Italy, the United Kingdom, Spain, and Portugal. In 1987, for instance, the EC imported 1.18 million Japanese cars. In order to preclude the national import quota (for example, 3,300 Japanese cars per year in ltaly, 4 2,000 in Spain) from being circumvented through indirect imports of Japanese cars via other EC Member States, the EC Commission authorizes an applicant country to invoke Article 115 allowing it to prohibit those indirect imports. As a consequence, the share of individual EC Member State's imports in total EC imports of Japanese cars varies drastically between countries (for example, Italy, 0.8 per cent; France, 5.7 per cent; Getmany, 37.3 per cent). As for the ASEAN countries, quotas under Article 115 are only of limited relevance. Exports affected by Article 115 are mainly those from Thailand, Indonesia, and the Philippines. Spain, France, and Ireland are the EC countries that invoke

The EC Internal Market and ASEAN: An Overview

11

Article 115 to introduce import quotas against products originating in the ASEAN countries. The products affected are certain textiles, dolls, and toys. Overall, the incidence of Article 115 is almost negligible for the ASEAN countries. However, these national quotas and other surveillance measures are inconsistent with a real internal market without internal borders and customs posts. Consequently, they need to be removed. This applies similarly to the allocation of quotas in the context of the Community's MFA with twenty-three exporting countries in Asia, Latin America, and Eastern Europe.

4.3. EC Foreign Trade Policy After 1992 There is some implicit danger that the replacement of national elements in trade policy by Community-wide regulations can, if at all, be achieved only at the expense of a higher-than-before protection against third-country imports. "Reciprocity" is the strategy favoured most by the EC Commission for resolving this problem. As EC President Delors puts it: "the Single Market will be open, but it will not be given away". The EC internal market is seen as a negotiation lever to improve access to non-EC markets. The Commission reserves the right to make access to the benefits of 1992 for nonmember countries conditional upon a guarantee of similar opportunities in those firms' own countries. This means that the Commission will offer free access to 1992 benefits for firms from countries whose market is already open or which are prepared to open up their markets on their own volition or through bilateral or multilateral agreements. (EC Info Memo, p. 2)

On the other hand, it has been argued that more than about 40 per cent of EC exports (10 per cent of the EC's GDP) are shipped to countries outside the EC. Hence it should be in the EC's own interest to secure free trade with third countries. Unfortunately, however, countries do not always act in accordance with their own overall interests; instead, particularly strong interest groups may succeed in preventing them from doing so. The future EC foreign trade policy is, of course, difficult if not impossible to predict. In order to clarify the options available it may be appropriate to distinguish three possible scenarios with regard to prospective changes in the EC's trade policy after 1992 (Langhammer 1988). Each scenario is accompanied by different implications with regard to the economic benefits of the EC internal market for EC members themselves as well as regarding its impact on non-member countries. The pessimistic scenario assumes that EC members will not reach an agreement to abolish all national quotas and other national elements of foreign trade policy. As a result, intra-EC trade will then continue to be regulated. This would imply that the intra-EC border controls could not be removed for regulated products and/or that a cumbersome process of controls of certificates of origin would be required. A certain minimum value-added content would have to be defined in order to distinguish "EC products" from "non-EC products". If this does not reduce external competition, however, this value could be adjusted or other interventionist measures

12

Norbert Wagner

could be introduced. The current dispute between France and the United Kingdom over the Nissan Bluebird car produced in the United Kingdom is an example of this screw-driver factory problem. At the other extreme, the optimistic scenario assumes that the national quota shall be abolished completely together with Article 115 EEC Treaty. Within this scenario EC members as well as third countries could benefit most from the establishment of the EC internal market. It remains to be seen whether the realization of this scenario can be blocked by powerful interest groups or that the awareness of its benefits is strong enough to supersede protectionist tendencies. In between these two extremes, the middle scenario assumes that national interventions are replaced by harmonized Community-wide protective barriers, the height and extent of which are, uncertain, however. This is especially so when the degree of protection varies considerably between EC members, as for instance in the case of Japanese car imports (Germany without restrictions; Italy with a quota of 3,300 cars per annum). Harmonization of trade barriers does not necessarily imply that the protection level of the least open member will be adopted. A middle approach could be followed instead. Yet, it might prove extremely difficult to translate the various national quotas into a Community-wide average. Generally, one may not be far wrong to expect that interest groups favoured by a higher degree of protection (such as companies and employees in the respective industry) are much better organized than those who might lose (such as consumers) and will therefore be more successful in their demands for a higher degree of protection. However, as a study by Daimler-Benz on "The Restrictions of Japanese Car Imports and Its Consequences" (1988) shows, there is a wide range of opinions even among the respective interest groups. The study argues in favour of a complete liberalization of these imports into the EC after 1992. It concludes that the protected producers did not benefit from protection as expected; rather they lost market shares in non-protected EC markets, whereas the major beneficiaries were the unprotected, especially German, producers. Yet, one can expect that the restriction on sales of Japanese cars to Europe would in the long run also affect German producers of luxury cars. Japanese car producers would tend to circumvent quotas (defined in numbers of cars sold) by selling larger and more luxurious cars with a higher value added than smaller cars (Odrich 1990). As a rule, however, it seems realistic to assume that many of the national quotas will be totally eliminated by the end of 1992 and not replaced by Communitywide quotas. Nevertheless, for some sensitive products, such as steel, cars, electronics, and textiles, national quotas will not be given up without the respective EC members demanding compensation. Community-wide quotas are not likely to be accepted by the more liberal countries such as the Netherlands and Germany. It is not possible to raise tariffs within the confines of GATT. As a consequence, the EC Commission might seek to negotiate VERs with the respective trading partners. Given the limited incidence of Article 115 cases for the ASEAN countries it seems most unlikely that the EC will bother to negotiate VERs for those products. Rather, these national quotas affecting ASEAN exports are likely to be abolished by the end of 1992 and

The EC Internal Market and ASEAN: An Overview

13

not be replaced by Community-wide quotas. Generally, there are already clear indications that future EC foreign trade policy will be less protective than initially anticipated, that it will be much closer to the middle (or even optimistic) scenario than to the pessimistic one outlined above. Thus, for instance, in June 1989 the EC Commission dropped plans for a Community-wide car import quota to replace the national quota of some EC Member States. The Commission has already accepted a temporary export monitoring system to be later (date yet to be specified) followed by a system of completely free access of foreign car producers to the EC market. In December 1989 the EC Commission further decided that it would seek to negotiate VERs by Japan on the sale of cars after the national quotas on car imports are abolished by 1 January 1993. Yet, according to EC Commissioner Andriessen, the opening of Europe's car market must be linked to better access for European goods in Japan. This means that the principle of reciprocity will be applied. He added that the final goal, however, would be full liberalization of the EC car market.

5. Implications for the ASEAN Countries The possible impact of the EC internal market on non-member countries, such as the ASEAN countries, depends to a large extent upon trade policies adopted by the EC after 1992, that is, upon whether national protectionist policies still existing in some sensitive sectors will be replaced by Community-wide measures instead of being dismantled entirely (Article 115 EEC Treaty; see also Hiemenz and Langhammer 1988). There may be only very few repercussions and consequences of the creation of the EC internal market specific to the ASEAN countries alone. Rather, as has been argued previously, it is very likely that existing national quotas within the EC affecting ASEAN exports will be abolished by the end of 1992, without being replaced by Community-wide quotas. Moreover, ASEAN as a whole, and even more so the individual ASEAN countries, unlike the United States, Japan, and other major players in the international economic arena, are hardly in a position to influence the decision-making process within the EC. In terms of international trade theory, the ASEAN countries are in the "small country position" vis-a-vis the EC. But ASEAN, as for the other non-member countries, will certainly be affected one way or another by the implementation of a true common trade policy and the creation of an internal market. Therefore, and regardless of whether the actual decisions taken by the EC seem to be favourable or unfavourable, the ASEAN countries and ASEAN companies have to examine the reactions and structural adjustments necessary in order to minimize possible negative effects and to take advantage of the opportunities offered by the formation of the world's single largest market of 340 million people (including East Germany) with a gross national product (GNP) of US$4.3 trillion and a GNP per capita of US$13,400; monitor emerging EC regulations and directives for individual sectors and

14

Norbert Wagner

industries; adjust to changes in the regulatory framework; identify policy options and their implications in the area of international and national economic policies; and explore new avenues for policy co-ordination and other actions in the arena of international economic relations vis-a-vis the EC. (1) In general, it is very likely that the European countries will focus primarily on intra-EC affairs in the years to come. The removal of barriers to the flow of goods and services as well as to the movement of labour and capital will offer additional opportunities for EC individuals and companies. Intra-EC exchange of goods and services, flow of capital, and movement of individuals may increase more rapidly, thus redirecting these flows further towards the EC. (The paper by Pelkmans provides a comprehensive introduction into the most recent developments and the future problems of the completion of the internal market; the paper by McAleese focuses on the external trade aspects; and the one by Steinherr on the aspects of external capital flows of the internal market.) (2) Intensified competition among EC producers will result in an extensive restructuring process within the EC. As a consequence, EC producers may focus their attention on intra-EC investments in order to innovate products and processes. (3) An investment boom is already taking place within most EC Member States. Investment in the EC in 1988 increased by 8.1 per cent over that in 1987. Investment was booming particularly in Spain and Portugal: in Spain investment surged by 14.5 per cent, and in Portugal by 15.5 per cent. In 1989 investment within the EC rose by a further 6.2 per cent. And for 1990 an acceleration of this investment boom was expected, particularly in the southern EC countries of Greece, Spain, and Portugal. (4) The realization of economies of scale will substantially reduce the costs of production, thus rendering cost-motivated direct investment in third countries less imperative. This development could further contribute to the already observable "relocation back North" of investment and production (Liitkenhorst 1988). (5) EC Member States with low labour cost such as Spain and Portugal may gain additional attractiveness for EC direct investments because of the secure free movement of capital and goods. (6) EC funds for regional and structural policy will be additionally boosted (up to 12 billion ECU s in 1992) in order to compensate for the lack in competitiveness of relatively backward areas, thus diverting investment flows towards these areas. (7) The prospect of the establishment of a EC internal market and a corresponding anticipatory behaviour of the private sector as well as the fear (justified or unjustified) of the EC increasingly discriminating against non-EC companies have already contributed to substantial amounts of foreign direct investment inflows into the Community. These investments from outside the EC originate primarily from the United States and Japan, but increasingly also from countries such as South Korea and Taiwan. The prospect of the creation of the EC internal market

The EC Internal Market and ASEAN: An Overview

15

in particular triggered a boom of Japanese investment in the EC (Heitger and Stehn 1989; Ministry of Finance 1989). Japanese direct investment flows to the EC went up by 89 per cent in fiscal year 1987 (ending March 1988) over the previous year and by another 33 per cent in fiscal year 1988 (ending March 1989) (see Ministry of Finance 1988, 1989). More than 82 per cent of these two years' investment went to the United Kingdom, the Netherlands, and Luxembourg (the paper by Chia Siow Yue analyses the implications of the internal market for ASEAN-EC capital flows, particularly ASEAN-EC direct investment flows; see also Wagner 1989). The creation of the EC internal market may as well contribute to boosting EC external economic relations and thus favouring the ASEAN countries too. (8) A jump in the GDP growth of around 6 per cent or more in the major EC countries due to the elimination of internal barriers will raise their demand for imports and enhance their investment capability, at home and abroad. Dynamic growth effects are expected to be even higher. The long-term trend in the growth rate in EC Member States might well increase by two percentage points. As the average GNP per capita is lower in the EC than in the United States and Japan, the growth potential of EC Member States is still high and promising. (9) At a given propensity to import, a higher GDP implies higher imports from outside the EC, including imports originating from the ASEAN countries. Thus, for instance, between 1973 and 1985 each percentage point of additional EC GDP led to an accompanying increase of 1.5 per cent in imports from non-member countries. At this import propensity and without changes in the regional import structure of the EC, ASEAN exports to the EC could well increase by around 10 per cent as a result of the removal of intra-EC barriers alone. The medium- and long-term impact may be even stronger. The product composition of ASEAN exports with a high percentage of manufactured products, such as telecommunication equipment, electrical and electronic products, and data-processing machines, may further enhance the export prospects of increasing exports to the EC (see the analysis by SchmittRink and Lilienbecker on ASEAN-EC trade in textiles and electronics; the paper by W ong Poh Kam on the electronics industry, and the paper by Pangestu and Hasni on the textile and clothing industry). In this context, the EC GSP is of some relevance, too; though it is not an Europe 1992 issue. (10) There is concern, however, about a fall in the average propensity to import after the completion of the internal market, because of changes in the production structure towards the service sector, which has a relatively low demand for import (the paper by Langhammer analyses ASEAN-EC trade in services and the repercussions of Europe 1992). ( 11) The prospects for suppliers from outside the EC may be further improved as foreign producers face only one single market with common technical regulations and standards instead of hitherto separate markets with national standards, norms, and regulations (the paper by Tanasak assesses the implications of common technical regulations and standards for ASEAN exporters). (12) New technologies and new production techniques may be developed in

Norbert Wagner

16

the course of intra-EC restructuring. Foreign companies, including those from the ASEAN countries, could take advantage of these new developments and opportunities through joint ventures, industrial co-operation, tapping R&D sources, or even through investment in the EC. (13) The EC countries established the European Monetary System (EMS) with an European Exchange Rate Mechanism (ERM) which has since been rather successful in stabilizing exchange rate fluctuations between EC currencies. In 1989 the EC countries accepted the Delors Plan and thus embarked on creating a European Monetary Union (EMU) (see the paper by Suthiphand on the European Currency System and its repercussions for ASEAN).

NOTES I.

2. 3. 4.

It has been calculated that European companies spent US$! 0 billion in developing ten different digital switching systems, while three American companies spent US$3 billion and two Japanese firms US$1.5 billion (Tugendhat 1986, p. 207). On the macroeconomic effects of the internal market see also the articles by Waelbroeck and Bakhoven in Siebert (1990). The fourth Lome Agreement (Lome IV) was signed by sixty-eight ACP countries and the twelve EC members on 15 December 1989 in the capital of Togo Lome. Yet, it has been estimated that the total number of Japanese cars-~ inclusive of "illegally" imported ones -registered per annum in Italy amounts to about 15,000.

REFERENCES Baldwin, R. "The Growth Effects of 1992". Economic Policy, no. 9 (October 1989), pp. 247-82. Beuter, R. and J. Pelkmans. "The External Dimension of the Internal Market: A Survey". Paper presented at a colloquium on ASEAN and Europe 1992: Implications and Responses, lOll July 1989, Kuala Lumpur. Bieber, R. et al., eds. 1992: One European Market? A Critical Analysis of the Commission's Internal Market Strategy. Baden-Baden: Nomos, 1988. Butler, M. "How Europe Can Fight the Multinationals". Financial Times, 5 February 1986. Commission of the EC. Completing the Internal Market. White Paper from the Commission to the European Council, Brussels. 14 June 1985a. ---~

. "Memorandum to the European Council on Strengthening the Technological Base and Competitiveness of Community Industry". Bulletin of the European Communities, no. 3 (1985b).

---~

. "The Economics of 1992: An Assessment of the Potential Economic Effects of Completing the Internal Market of the European Community". European Economy, no. 35 (March 1988).

__________ . "The EC Annual Economic Report for 1989/90". European Economy, no. 40 (November 1989).

The EC Internal Market and ASEAN: An Overview

17

Daim1er-Benz, AG. "Die Beschrankung japanischer KFZ-lmporte und ihre Auswirkungen". Information der Volkswirtschaftlichen Abtei1ung, Stuttgart, 1988. Mimeographed. Giersch, H. "EC 1992: Competition Is the Clue". European Affairs 3 (1989): I 0---17. Heitger, B. and J. Stehn. "Japanische Direktinvestitionen in der EG- ein trojanisches Pferd fiir 1993". Die Weltwirtschaft 1 (1989): 124-36. Hiemenz, U. and R.J. Langhammer. ASEAN and the EC: Institutions and Structural Chanf?e in the European Community. Singapore: Institute of Southeast Asian Studies, 1988. Krenzler, H.G. "Zwischen Protektionismus und Liberalismus. Europaischer Binnenmarkt und Drittlandsbeziehungen". Europa-Archiv 43, no. 9 (1988): 241-48. Langhammer, R.J. "Das handelspolitische Regelwerk der EG und seine Veranderungsperspektiven nach 1992. Eine okonomische Einschatzung". Kiel, ]\'ovember 1988. Mimeographed. Liitkenhorst, W. "Challenges from New Trends in Foreign Direct Investment". Intereconomics 23 (September/October 1988): 220---27. Ministry of Finance, Institute of Fiscal and Monetary Policy. Financial Statistics of Japan I988. Tokyo, 1988.

______ .Financial Statistics (JfJapan 1989. Tokyo, 1989. Nolling, W. "The Impact of 1992 on European Integration and Relations with the United States". Intereconomics 23 (November/December 1988): 255-60. Odrich, P. "Beschrankung japanischer Autolieferungen trafe deutsche Hersteller". Franlifurter All[?emeine Zeitunf?, 26 March 1990. Peat-Marwick. Asian Wall Street Journal, September 1989. Scharrer, H.-E. "Protectionism: A Necessary Price for Achieving the European Internal Market?" lntereconomics 22 (January/February 1987): 9-13. Siebert, H., ed. The Completion of the Internal Market. Ti.ibingen: Mohr, 1990. Tugendhat, C. Makin[? Sense of Europe. Hammondsworth, 1986. Wagner, N. ASEAN and the EC: European Investment in ASEAN. Singapore: Institute of Southeast Asian Studies, 1989.

Part 11 Completing the EC Internal Market

11. Completing the EC Internal Market An Update and Problems Ahead JACQUES PELKMANS

This chapter first deals with general issues such as a proper delineation of 1992, a bench-mark definition of "internal market" and the basic principles employed in the 1992 exercise. This prepares the ground for the achievements to date, major issues today, and achievements expected by 1993. 1. What Is 1992? The following attempts to pin down how 1992 can be given substance and where the demarcation lines may be drawn. However, this approach should avoid a too rigid and static view as the dynamism in the 1992 process is forceful and has not yet petered out. 1.1. Three Meaninf?s of the Common Market The colloquial English name for the European Community (EC) is the "common market". Indeed, that is what the Treaty of Rome sets out to construct as one of the two means to achieve the four economic aims as well as the political aim of Article 2. Since the common market is the very core of the EC enterprise, we must assume that Member States, public opinion, and decision-makers have a fairly good notion of what it is they are striving for. Even a cursory inspection shows that this is unfortunately far from being the case. 1.1.1. The common market before the White Paper: The Treaty of Rome does not define the common market. Lawyers have made up for this by employing the operational formula of the four freedoms, the free movement of products, services, labour, and capital. There can be no doubt that the idea of the four freedoms is echoed in the Treaty of Rome to a considerable extent. However, since Europe has mixed economies, with governments regulating some markets while intervening in others, the necessary condition of the four freedoms is not a sufficient one for a common market to come into being. On the sufficient conditions as specified in the Treaty of Rome, reputable lawyers have expressed different views. 1 Therefore, the statement that the common market had remained incomplete up

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Jacques Pelkmans

to, say, 19S5, is unclear because the final objective is imprecise. In 19S5 this did not matter much because the actual accomplishments of the Community fell short of what a common market would signify even in the most restrictive view. I have spelt out in detail these omissions for industrial product market integration (Pelkmans 19S6). In agricultural product markets, monetary compensatory amounts (which require frontier controls) and plant and animal health inspection were causing serious fragmentation. Transport markets were not integrated, only connected through quota systems and extensive administrative checks or via other bilateral agreements, accentuating the lack of a common policy; this was true for road, rail, maritime, and air, less so for inland shipping. Barriers to cross-border bus services were also high. Financial services were regulated domestically, and in about half of the Member States the "openness" remained dependent on exchange controls. Labour markets remained almost fully separate; even "persons", other than "workers", had residence problems. All that was accomplished was non-discrimination in local labour and social security provisions, which is laudable but contributes little to labour market integration. In short, the common market before the White Paper2 was essentially a common product market, with omissions and shortcomings, nevertheless more ambitious than anything with a hint of integration elsewhere in the world. The accomplishments, omissions, and the White Paper proposals for product market integration are listed in Table Il.1. 1.1.2. The internal market in the Single Act: According to Article SA of the Single European Act, the "internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured in accordance with the provisions of this Treaty". Hence, the Single Act goes much further than the Treaty of Rome It defines the "internal market", whereas the latter does not. It facilitates the formal achievement of the aim by enlarging the number of Articles with qualified majority voting. It unequivocally establishes the obligation of integration of services and capital markets, domains in which the Treaty of Rome is not entirely clear or complete or where it is only conditional. The economic ambition in this aim is undisputedly much greater than that of the half-baked Treaty of Rome. There are three possible drawbacks of the Single Act. First, the target date of 1 January 1993 "does not create automatic legal effects" according a joint declaration of Member States. This might play a role in late 1992. Second, the apparent legal formality of the addition in Article SA "in accordance with the provisions of this Treaty" is a bit puzzling. Quite a few provisions of the Treaty of Rome do not accord well with the White Paper and some of them are inconsistent with the internal market as defined (for example, Article 6S, EEC; Article 115, EEC). If the EC Court simply sticks to its usual view that competitive market conditions should approach as closely as possible the situation of a domestic market, no problem should arise. But in the Casati case and the four insurance cases, 3 the Court proved to be unwilling to give precedence to negative integration (that is, market access)

Completing the EC Internal Market: An Update and Problems Ahead

23

above positive integration (for example, in direct insurance, to harmonize the essential requirements of consumer protection). So, a degree of uncertainty lingers on. The third drawback is clear: the EC shies away from labour market integration in as far as the Single Act and the White Paper are concerned. As shown in section 4.4, the possibility of a very gradual approximation of national social provisions can no longer be ruled out since the political acceptance of the higher ambition of the "social dimension of 1992".

1.1.3. The economic perspective of a common market: An economic perspective of a common market focuses on the conditions under which economic agents will determine their behaviour in markets. Neither the access to the market, nor the legal rules (for example, commercial or industrial property rights) for the proper functioning of any market, nor the competitive conditions (due to domestic economic regulation or domestic financial intervention) should create nationally different incentives for market behaviour. A common market entails a state of matket integration among Member States in which no differential economic significance attaches to either national frontiers or residency or the nationality of the economic agents of the Member States. (Pelkmans and Robson 1987, p. 183)

Among mixed economies, a common market must therefore imply some form of confederation. Political processes at the confederation level of government will determine the details of positive integration (for example, harmonization of market regulation) as well as the linkages between the allocative function of governments on the one hand and the redistributive and macroeconomic stabilization functions on the other. The latter two economic functions are so central to domestic electoral processes that a true common market without a confederal political process juxtaposed to a domestic one would seem to be inconceivable. The paramount question of European integration is whether the so-called internal market will remain encapsulated inside a set of allocative EC functions which carefully excludes direct linkages with domestic redistribution and macroeconomic stabilization. Such a construction could be stable4 but would imply a failure of the 1992 programme. However, if the 1992 programme is followed consistently in all its economic implications, the Single Act will collapse under its own success and a confederal rewrite of the Treaty will be adopted. A critical link in this chain is the relation between capital market liberalization (and financial services), monetary policy, and joint exchange rate stabilization. A possible link is the social dimension.

1.2. The White Paper: A Bird' s Eye View Table 11.2 provides a bird's eye view of the White Paper. The perspective is an economic one. Unlike the arbitrary distinctions of technical, physical, and fiscal barriers used in the presentation of the White Paper, measures for completion are classified into those needed to ensure "market access", those needed to prevent market failure ("market functioning"), and those required to approximate sufficiently similar competitive conditions in the jurisdictions of Member States. For a few

TABLE 11.1 Product Market Integration: Before and After the White Paper

EC Achievements to Date Dismantling Barriers

Common Policies or Approximation

Rating"

White Paper Proposal

Market access

Tariffs Quotas

Abolished intra-EC Abolished intra-EC

Common extra-EC (Mostly) common

A B

Voluntary export restrictions Measures with equivalent effects to quotas

Prohibited intra-EC Prohibited; ECJ's review very effective

Not so common yet Exceptions for health and safety dealt with by approximation

B B B

Payments

Free (for intra-EC traded goods)

A,B

Transport of goods

Free access or transit, but restricted choices dependent on mode (Some abolition, following the introduction of VAT)

Exchange controls not to affect trade, except as temporary safeguards Various, but degrees of failure according to mode

Indirect taxes and excises Customs co-operation

B,C

One VAT system; one taxable product base, with material exceptions Approximation and unification of procedures and execution

B

Commission (+ ECJ) surveillance, weakened by Member States

A,B

A,B

Unspecific call on Member States to align No specific proposal Traditional harmonization; numerous proposals; also a flexible "new approach" No specific proposal on removal of safeguards Far-reaching proposals

Far-reaching proposals being formulated Proposed common customs code; abolition of intra-EC frontier controls

Competitive conditions

State aid to industry

Forbidden, with substantial exceptions

Call on Member States; promise of special paper on state aids

Public procurement State distribution monopolies Competition policy

Formal prohibiting of discrimination Prohibition of discrimination and effective judicial review

Some harmonization of procedures

c

Far-reaching proposals

A Common for restrictive practices and abuse of dominant position; fairly effective Commission + ECJ surveillance

A,B

Proposals for merger control

Some approximation of national policies; a modest common policy Modest common policy in some areas

B

No detailed proposals

B

Some specific proposals (e.g. telecoms and information technology) Several proposals, some outside the purview of the EEC Treaty

Market functioning

Regional policy

Restrictions on national measures

Research and development policy

Ceilings for national subsidies

Legal conditions

(See also Market access)

Approximation or harmonization or unification of standards, patents, trade marks, company laws, etc.

B

Common agricultural policy

National restrictions abolished (agreed national) quotas constrain intra-EC trade in some product markets)

Common, except for monetary compensatory amounts and controls for plant/ animal health

B

Proposals to abolish all frontier controls in the CAP

Steel, coal

National restrictions abolished (exemptions for some subsidies)

Common; the steel "crisis regime" freezes intra-EC trade and capacity in some products

A,B

Call to reduce subsidies further

Sectoral policy

NoTE: ECJ = EC Court of Justice. Ratings: A = accomplished; B = some achievements, but supplementary action needed; C = omission or failure to act.

a

SouRcE: Pelkmans (1986).

TABLEII.2 A Bird's Eye View of the White Paper Markets Measures

Products

Services

Persons and Labour

Capital

Market access

Abolition of intra-EC frontier controls; approximation of (a) technical regulations and (b) VAT rates and excises; unspecified implications for trade policy

Mutual recognition and "homecountry control"; removal of licensing restrictions (in banking and insurance); dismantling quotas and freedom of cabotage (road haulage); access to inter -regional air travel markets; multiple designation in bilaterals (air transport)

Abolition of intra-EC frontier checks on persons; relaxation of residence requirements for EC persons (esp. unemployed); right of establishment for various highly educated workers

Abolition of exchange controls; of securities listed in one Member State to another; measures to facilitate industrial cooperation and migration of firms

Competitive conditions

Promise of special paper on state aid to industry; liberalization of public procurement; merger control

Introduction of competition policy in air transport; approximation of fiscal and/or regulatory aspects in various services markets

European "vocational training card" (see also "Market functioning")

Proposals on take-overs and holdings; fiscal approximation on (a) double taxation, (b) security taxes, and (c) parent-subsidiary links

Market functioning

Specific proposals on R&D in telecoms and IT; proposals on standards, trade marks, corporate law, etc. (see also "Capital")

Approximation of (a) market and firm regulation in banking (solvency ratios, deposit insurance, etc.) and (b) consumer protection in insurance; EC system of permits for road haulage; EC standard for payments cards

Approximation of (a) income tax provisions for migrants and (b) various training provisions; mutual recognition of diplomas (esp. for professionals)

European economic interest grouping; European company statute; harmonization of industrial and commercial property laws; common bankruptcy provisions

Sectoral policy

CAP proposals: (a) abolition of frontiers (e.g. MCAs) and (b) approximation and mutual recognition in veterinary and phytosanitary policies; steel: call to reduce subsidies

Common crisis regime in road transport; common air transport policy on access, capacity, and prices; common rules on mass risks insurance

Largely silent on labour-market provisions

Call to strengthen EMS

SouRcE: Pelkmans and Winters (1988).

Completing the EC Internal Market: An Update and Problems Ahead

27

special cases, regulation is so far-reaching that the behaviour of economic agents is almost entirely determined by sector policies: clearly, these national sector policies must either be dismantled via deregulation or be set up in common (Table ll.2 assumes that they be commonly regulated even though the current trend in Europe is strongly towards at least some degree of deregulation). The standard breakdown of markets into products, services, labour, and capital is employed for the sake of simplicity.

1.3. The Rising Ambitions of 1992 There are six degrees of increasing ambition with regard to 1992: l. 2. 3. 4. 5. 6.

the White Paper programme of 1985 ("Completing the Internal Market"); the Single European Act (a collection of amendments of the treaties); the external dimension of items (1) and (2); the social dimension; economic and monetary union; and "political" union.

Items ( 1) and (2) are firmly established as essential elements of 1992. Two-thirds of the programme under item (1) has already been adopted. The Single Act has been ratified and is in force. Its impact on policies undertaken is manifest in such new treaty areas as "economic and social cohesion" (the February 1988 structural funds decision- see section 3.3), research and technology, environment (where the EC is now competent for issues other than the harmonization of national environmental laws in the framework of the "internal market"), and the European Monetary System (EMS, which is formally brought into the EC sphere of competence). Items (4) and (5) are firmly and high on the political agenda, although neither can be found in the White Paper. In only a few years' time the social dimension became a major issue for the European Council of heads of state and government, resulting in a Social Charter and an action programme for legislation during 199091 (see section 4.4). Since 1988 the Economic and Monetary Union (EMU), purposefully excluded from the Single Act, has been under preparation and the decision to initiate the first stage on 1 July 1990 was taken in December 1989 (see section 4.5). This breathtaking ambition for a group of economically integrating countries has profound implications for domestic (economic) policies and electoral politics. The shift of powers away from Member States to an EC Central Bank, as well as the joint supervision of national budgetary policies, poses serious issues of political "accountability" at the EC level. Hence, the call for "political union", an even higher ambition aimed at the strengthening of EC institutions, including the European Parliament. · The external dimension (3) is not a clear "objective", of course, but it does represent a higher ambition since neither the White Paper nor the Single Act touch upon the external dimension. 5 The Single Act itself reflects a higher ambition than the White Paper because of the institutional changes it introduced and the new

28

Jacques Pelkmans

areas of competence it confers on the Community. This amazing dynamism in barely five years renders 1992 a moving target with ever-changing definitions. The above approach in our discussion provides some degree of clarity. At the same time. at least three other aspects which are closely associated, if not identified, with 1992 should be brought into the picture: a set of necessary "flanking" policies, domestic prerequisites, and certain bandwagon effects. These aspects will be dealt with in turn.

1.4. A Brief on Flanking Policies One should beware of working mechanically with the White Paper without keeping in mind the economic objectives that it serves. In particular, the White Paper should be seen in a broader setting of economic policy-making which optimizes economic conditions so as to extract the most from 1992. The central purpose remains how the great EC market can best contribute to renewed dynamism and a competitive economy (Pelkmans and Winters 1988, chap. 3). The potential can best be exploited if four economic policies accompany the programme: Vigorous competition policy: The very same reasons why Articles 85/86, EEC, were included in the Treaty of Rome apply today. A slow but steady increase in the number of o1igopolistic industrial sectors over the thirty years of EC existence, the greater ease with which cross-frontier mergers will be possible, and the likelihood of similar continental oligopolies in services make a vigorous competition policy imperative. The common market has the virtue of providing enough room for enterprises growing big - exploiting economies of scale yet keeping enough of them to maintain sufficient rivalry. The thrust of this normative perspective has been adopted as the Commission's policy view. It has led to a much stricter policy on state aids, a new "merger control" policy, and a significant role in all services sectors. Low external protection: The objectives of the White Paper logically imply an open stance towards the world economy. Promoting competitiveness, responsiveness to demand, innovativeness, adaptability, and the virtues of competition are inconsistent with a "fortress Europe" approach. Where the EC lacks comparative advantage in global terms, protection is costly, raising input prices for European products, and weakening the demand for exports. Where economies depend on a market larger than Western Europe, or allow only one or two firms, external economic openness may be the only feasible competition policy. Although the overall perspective of the EC is undoubtedly inspired by this view, there are some painful exceptions (see section 5). Predictable macroeconomic policies: Two important macroeconomic questions have to be addressed in the context of a completed internal market. First, macroeconomic instability at Member State level can hinder the functioning of the common market and impose serious costs. Thus, the EC must persuade Member States to pursue a macroeconomic policy that yields the desired

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29

stability. Second, the liberalization of financial services and capital movements will make the link between macroeconomic policy convergence and exchange rate stability much tighter. It will complicate the problems of pursuing stability in the presence of independent national policies. Convergence and stability may become so demanding as to require permanent consultation on, and effective co-ordination of, macroeconomic policies. Indeed, the successful execution of this co-ordination in the EMS and the unconditional removal of exchange controls has prompted the search for a more lasting form of effective co-ordination, namely, the EMU. Correcting market failures: Markets, whether national or European, may sometimes fail to function properly. European policies and rules to correct market failures include R&D policy, but in a fashion that is as market-oriented as possible, and legal market rules such as appropriate patent laws, trade-mark protection, and adequate incentives to write European standards. A politically more conspicuous issue is that of regional market failures in the EC. The economic problem here is whether the structural deficiencies themselves and the "low" starting position are the only issues or whether I 992 is an independent additional cause of (increasing) market failure. There is a lot of suggestive or political literature on the point, and for understandable reasons. It is a standard accomplishment of Western democratic policies that their citizens/voters do not tolerate unbounded disparities, especially not downward. Yet, it is only under common citizenship, with a feeling of nationhood, that redistributive systems, including regional programmes, progressive taxation, and social security, truly develop. The EC has developed a system of redistributive, "specific-purpose" grants paid out from the so-called structural funds (see section 3.3). Apart from this, convergence (or the prevention of regional market failure) is entirely supply-side oriented. At the same time, with the labour markets remaining segregated and mobility between these separate labour markets remaining low, it is difficult to substantiate the notion that divergence would be attributable to 1992 and not to structural factors in the first place. Economic mechanisms in product and capital markets may well work proconvergence if domestic policies are appropriate and stable and infrastructural conditions are significantly improved.

1.5. Domestic Prerequisites The White Paper may be considered as the greatest supply-side initiative ever undertaken in non-socialist economies. It has deregulating effects which are of course stronger in those Member States where regulation was restricting competition in general or foreign competition in particular. One should expect the White Paper to remove discrimination against other EC suppliers. Moreover, in the four types of markets shown in Table II.2, it is difficult to conceive of the maintenance of domestic restrictive regulatory regimes because they are either made more marketoriented by EC legislation or subjected to "regulatory competition" by means of the principle of "mutual recognition" of national laws among Member States. It is not

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a priori clear that regulatory competition would always imply a downward adjustment to the lowest "standard" - this depends on a complex weighing of various costs and benefits (Kenyon 1987; Pelkmans and Vanheukelen 1988; Pelkmans 1990a)but one would expect to find the most restrictive regimes under severe pressure to adjust. Therefore, the domestic prerequisites to exploit 1992 for "welfare", growth, and jobs will imply deregulation and other pro-market measures. Sometimes the link is fairly clear (for example, the Italian financial reform), sometimes 1992 and pro-market moves coincide and the link is hard to prove. An area where national regimes clearly respond to one another is taxes: corporate taxation rates in Europe are falling everywhere, whilst downward adjustment of very high value-added tax (V AT) rates have begun to facilitate fiscal decisionmaking in Council. As the experiences of the United States and Canada show (Pelkmans and Vanheukelen 1988), fiscal competition will intensify (but also assume a multitude of forms) once the frontiers have definitely gone. Member States have also justified national budget cutting and major infrastructural investments with explicit references to 1992. In particular, it is expected that the single market will heighten the sensitivity to public influences on competitiveness and locational (dis )advantages.

1.6. Bandwagon Effects The 1992 programme is an ongoing test of political will. For five consecutive years it has been successful. Decisions are taken at surprising speed, some difficult ones just as swiftly as the "easy" ones. No wonder that this invites proponents of other policies to jump onto the bandwagon. This is not the place to examine the bandwagon effects at length but a few examples will be provided as an illustration. The Commission launched the "new impetus" programme for consumer protection in November 1985. That paper is still influenced by principles of detailed (consumer) regulation even though the programme is presented as an essential building block of 1992. One of its more important items- a general directive on product safety, which stipulates that those who produce or sell products in the EC are under a general duty to make sure that the products are safe - is now put before the Council. In 1988 the Commission published a paper entitled "The Realization of the Internal Energy Market", 6 touching on a topic which is considered sensitive for several reasons. Energy policy is influenced by national security considerations; energy is transmitted by natural (network) monopolies for gas and electricity but distributed by private or public local monopolies (power may also be generated privately for own consumption); price policy is determined by the share of nuclear energy as well as by social policy in some countries. The pricing issue is of paramount importance for the internal market, be it for the input costs of tradables, in particular those produced by large energy users (EC energy inputs can be up to 25 per cent more costly than in the United States, for instance) or for trade in energy itself (which increases rapidly). Regulatory fragmentation, and the national roles of the

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utilities always prevented a solution. Proposals to tackle price transparency in energy started in 1989. 7 However, any mention of the internal energy market is absent in the White Paper. Few EC observers realize that the EC lacks even an external policy on energy except for the sharing-out mechanism in case of shortages in oil supply. Other examples of the bandwagon effect include a recent initiative to set up a separate Directorate-General (XXlll) for "enterprise policies". This DirectorateGeneral executes an ambitious programme for small- and medium-sized enterprises with the avowed aim of helping to improve their capacity to compete in the completed internal market. Recently, a section for distribution and marketing was established with a view to fostering market integration. Again, these initiatives are not in the White Paper, although there is one explicit reference to small- and medium-sized enterprises in Article 130F of the Single Act (the reference relates to technology and research).

2. The Guiding Principles of 1992 The significance of 1992 is not merely that of a "quantum leap" in European integration. The methods employed and the principles on which the new momentum is based are at least as interesting. It would require another chapter to do justice to these qualitative aspects of 1992. Several principles are original or unprecedented in relations among nation-states. To briet1y sum up the eight guiding principles of the completion of the internal market, one may begin to appreciate the phenomenal change of political and bureaucratic minds. How otherwise could a group of twelve diverse nation-states succeed in taking many difficult decisions for almost eight years in a row? There are three institutional and five substantive principles. The institutional guiding principles are more qualified majority voting: here "more" means more Articles under which countries can be overruled and more actual use and acceptance of majority voting without veto threats; subsidiarity: that is, only when national policies are inefficient and/or ineffective in pursuing the objective, should the EC level of government deal with it; and no major new powers to the Commission. The substantive guiding principles are no internal frontiers; mutual recognition; usually in combination with joint regulation in terms of major objectives, avoiding details, or delegating it to special bodies; joint frameworks for (national) supervision, approvals, licences, certification, and so forth, so that they too can be mutually recognized; and an emphasis on rule-making, not on budget outlays (apart from the structural funds issue).

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The flexibility and delicate balancing between the two levels of government - in a solidly founded body of Community economic law and well-respected structures -has engendered a co-operative thrust and a preparedness to give and take in the light of the overall purpose. Even without further analysis, readers will note that these principles reflect a measured acceptance of "regulatory competition" among Member States, an avoidance of excessive bureaucracy, a rejection of central ism in European integration, and a belief that, if subject to appropriate basic regulation, market forces are the most effective uniters of Europe, particularly in pursuing the four economic objectives of the Treaty of Rome (in Article 2).

3. Achievements to Date This section will survey the achievements of the 1992 process up to early 1990. The ranking order of ambitions as set out in section 1.3 determines the order of presentation. 3.1. Progress on the White Paper Table 11.3 presents the numerical progress over the four-and-a-half years after June 1985, when the White Paper was embraced at European Council level. The "numbers game" is not without political and psychological meaning but its economic importance, to say the least, is dubious. The approximately 300 measures proposed differ enormously in their economic impact and a mere count of Council decisions taken says little about the nature and speed of progress in substantive terms. Another preliminary point also needs attention. The breakdown into physical, fiscal, and technical barriers, as suggested in the White Paper and strictly adhered to in all progress reports hitherto, 8 is unsatisfactory. Technical barriers should relate to the free movement of goods only; all the other categories, which are not in "physical" and not in "fiscal", have little in common. In Table 11.3, four groups are distinguished: physical barriers, leading to certain checks at borders (called "frontier controls"); fiscal barriers (which also prompt customs controls); technical barriers to trade; and "other proposals", which include public procurement, free movement of labour and the professions, financtal services, transport, new technologies and services, capital movements, company law and taxation, property rights, and the application of Community law. Frontier controls on goods have first been simplified and are currently in the process of being dismantled. The transit note will be removed soon and vehicle checks will no longer be done at inner borders. Remaining problems are linked with other '92 issues such as the removal of national quotas (see section 5) and fiscal issues (see section 4.1 ). One suspects that the checks on traffic of persons are more sensitive still, as they touch upon visas and asylum policies, immigration issues, drugs, criminal law, and the rights of the police in country A to chase a criminal in country B, at least until the local police can take over. Furthermore, the right of residence, linked to long-run claims on social security and health care, is at issue although this has been solved in 1989. The so-called Schengen group (France, Benelux, and Germany) has fulfilled a forerunner function on persons controls.

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TABLE 11.3 White Paper Proposals: Numerical Progress, as of 6 February 1990

Proposals"

Partially Adopted

To Be Adopted

Adopted

---------

Frontier controls Goods Persons Technical harmonization Veterinary Phytosanitary Food Industrial goods Fiscal proposalsb VAT Excises Other proposals Public procurement Labour/professions Financial services Transport Capital movements Others Total

5 4 24 10 15 41

4 4 3 2

40 5 16

3

10 11

3 7 15 4 3 8

3 7 7 7

143

2

13 9

127

NoTE: "To be adopted" includes six common positions of the Council. " After reshuffling and some withdrawals, the White Paper programme is no longer fully congruent with the Annexe to the White Paper, as published in June 1985. h The original number of the fiscal White Paper proposals has limited significance, in the light of two major revisions of the approach taken (in 1987 and 1989).

However, the Schengen Accords, due to be signed on 15 December 1989, were in fact not signed because of the large influx of East Germans and the problems this presented. Meanwhile, the national parliaments have also shown signs of resistance. On the other hand, the Council at the EC level has begun to tackle the issues with draft conventions on visas and asylum. The fiscal category has fallen greatly behind. Of course, once a breakthrough was achieved, entire packages of measures would be decided so that the numerical delay would disappear almost immediately. Furthermore, it is uncertain whether the original idea of adopting thirty fiscal directives is still necessary - one should not take this total too literally (see section 4.1 ). The removal of technical barriers is proceeding surprisingly well, thanks to the "new approach" (see Pelkmans 1987, 1990a; and the chapter by Tanasak in this volume) and qualified majority voting. The acceptance of the new approach has

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helped to fulfil the demanding conditions for its implementation, namely, actual use of majority voting; a preparedness not to go into exaggerated detail when defining health, safety, or environmental objectives in EC directives (the so-called essential objectives); more funding for the Comite Europeen de Normalisation (CEN) and the Comite Europeen de Normalisation Electrotechnique (CENELEC), the EC-EFf A (European Free-Trade Association) standards bodies; a reform of CEN's voting rules and procedures; the separate establishment of a telecom standards institute, the European Telecommunication Standards Institute (ETSI), founded in 1988); a strategic programme for the formulation of European standards, based where possible on ISO/IEC standards (ISO = International Standards Organization; IEC = International Electrotechnical Committee); the adoption of "mutual recognition" of certification on the basis of an overall policy (first laid out in 1989); 9 and a timely and consistent implementation in the national legislation. At the same time some old approach directives have also been adopted with greater ease than ever before (for example, tractors). In food, a temporary blockage, due to a refusal to delegate too much executive and regulatory powers to the Commission has been partially overcome (the Commission has been delegated powers under framework directives on materials in contact with foodstuffs, nutritional uses, and labelling, but not in the area of additives, which is a key area). In pharmaceuticals, the so-called Transparency Directive 10 constitutes a breakthrough, while high-tech medicines have been brought under a central approval system. The Commission intends to propose the establishment of an EC drug agency, that is, a single system for evaluating medicines. A little-noticed but great success in fighting technical barriers is the "mutual information" Directive 83/189/EEC, which has been extended to cover all products. The procedures in this directive have shown to block effectively new technical barriers from arising, despite the regulatory output of Member States. The "other categories" are a mixed bag. The prominent ones include (1) financial services, where a breakthrough was accomplished with the famous Second Banking Directive (in December 1989); (2) public procurement, with a breakthrough about the extension to the so-called excluded sectors: water, energy, public transport, and telecommunication; (3) transport, with breakthroughs in maritime shipping (December 1986), road haulage (June 1988), and a beginning in air transport (December 1987); (4) the removal of exchange and capital controls (June 1988); and (5) property rights, with progress in trade marks and development at a snail's pace with regard to European patents. The progress on the White Paper cannot be adequately presented without getting into details. However, this would be undesirable for the purpose of this chapter. One alternative to the "numbers game", however, provides an easy, though rough, verification of qualitative progress. Table II.4 gives a list of difficult and very difficult dossiers, as they were viewed (by the author, as he read them and as he read expectations among experts) in 1985/86, juxtaposed to the situation today. Again for present purposes, this is presented in a simple and crude form, yet it is hoped to be sufficiently informative. Except for the special issue of "economic and

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TABLE 11.4 Difficult "1992" Dossiers: 1985 and 1989 Compared

Difficult Dossiers in 1985

Situation in Early 1989

Very difficult I. Fiscal, indirect taxes

2. Exchange controls removal 3. Patents 4. Quotas- cars/textiles 5. Air transport

Still blocked; climate improved because proposals altered twice Adopted ( 1988) Still blocked; eased since conference in December 1989 Not yet tackled Stages approach breakthrough ( 1987); principles stage 2 accepted ( 1989)

D(tf!cult 6. Economic and social cohesion, budget transfers" 7. Animal/plant health controls 8. Road transport (quotas/cabotage)

9. Insurance 10. Food law 11. Public procurement, excluded sectors

12. Persons, frontier checks

13. Merger controls 14. Cross-front1er broadcasting 15. Telecommunication, especially access for services (the "Open Network Provision")

Adopted ( 1988) Reasonable progress; one-half adopted Quota removal adopted (1988); limited cabotage accepted; road taxes/charges unsolved yet Still blocked for "mass" risks; good progress for large risks Framework directives adopted; little progress on detailed measures "Common position" Council (February 1990) Has become controversial; delay in Schengen Agreement; two draft conventions Adopted (December 1989) Adopted (October 1989) Adopted (December 1989)

Strictly, the transfers proposal emerged from the Single Act, not from the White Paper. However, it was widely regarded as a conditio sine quo non for progress on the White Paper programme. a

social cohesion", the table specifies fourteen (very) difficult dossiers from the White Paper of 1985. In another subjective reading more "difficult" dossiers might have been identified, such as the mutual recognition of university diplomas or EC trade marks (both adopted). Table II.4 shows that out of five very difficult dossiers, one has been adopted

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(exchange controls), one shows signs of progress (air transport), and three are still blocked, although in all these three cases steps have been taken to facilitate the final solution. Out of ten difficult dossiers not a single one is entirely blocked. The most difficult series of cases is probably the one related to checks of persons at the frontiers, although mass risks insurance, fiscal issues in road haulage, and certain executive measures in food law also present considerable problems. The enormous legislative tasks in veterinary and phytosanitary legislation initially caused major delays but since 1989 the Council has begun to catch up. A major success is the decision that such controls will no longer be held at inner borders. Otherwise, four dossiers have been adopted ("cohesion", merger control, broadcasting, and access to telecom networks) and one, public procurement in hitherto excluded sectors, has been agreed by the Council but awaits a second reading by the European Parliament. The underlying idea of Table II.4 is that the adoption of the more difficult dossiers is a more realistic measure of progress on the White Paper. The outcome of this test for early 1990 is that more than half of this list of potential hurdles have been taken or the hurdles have been lowered significantly; blockages are still only partial or being eased. This is an impressive result if one realizes how sombre and dismal the outlook for these questions were only half a decade ago. One ought to dismiss, therefore, the oft-heard argument that progress has been satisfactory merely because all the difficult dossiers have yet to he addressed. The argument is ahistorical: the determination of Member States and the set of innovative and flexible principles guiding 1992 have succeeded to alter coalitions, to strengthen the hands of national politicians vis-a-vis sectoral interests, to mollify the positions of opponents and, ultimately, to engender a kind of roller-coaster effect sweeping even the toughest corners of the 1992 programme. In an ahistorical context the point is void of any meaning, a tautology; of course, once decisions are taken, they can no longer be characterized as difficult, hence "only the hard ones" must (always) remain.

3.2. The Single Act The Single Act is no more, and no less than a collection of amendments of the Treaties of Rome. Initially, its significance was played down and especially Community law specialists were very critical (Pescatore 1986; Ehlermann 1987). Judge Pescatore was especially concerned that the rewrite of the harmonization Article 100, EEC by adding 100A contained the seeds of retrogression. Little noticed by lawyers is the substantive advance of the Single Act above the EEC Treaty in that the common market is defined unambiguously (see section 1.1 ), in a way consistent with economic usage. This Article SA is the key to the Single Act ~ behind the clear definition one should read the White Paper programme (note that the White Paper is not quoted in the Single Act). The main institutional provisions of the Single Act include the extension of qualified majority voting to Article lOOA (except for fiscal issues ~ see the new Article 99 of the Act; except for the free movements of

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persons and the rights and interests of workers), to Article 84 (on transport), to Article 59 (on the provision of services with the EC), and a few other Articles; and the so-called co-operation procedure between the Council and the European Parliament, strengthening the influence of the latter. The main substantive provisions of the Single Act include The codification of competences for the EC level of government on domains in which the Community was already active either inter-governmentally (the meetings of "representatives of the Member States in the framework of the Council") or under the catch-all Article 235, EEC: They include the explicit reference to the EMS (but no genuine new powers), a host of specifications with respect to research and technology, a recognition of the "social dialogue" between the social partners at EuropPan level and the harmonization of health and safety provisions at the workplace. Outside the economic area, the European Political Co-operation is brought under special EC rules. The codification of new powers: The only addition is environmental policy, until the Act only treated in the form of harmonization directives for the purpose of the internal market. Because environmental issues have become very prominent since 1985 this is no minor addition. Furthermore, the text states that Member States are determined to ensure that the "technological and industrial conditions" needed for their security are maintained, and will if desirable, do this at Community level. This vague phrase is of cardinal potential importance since it breaks the ban on security issues, proclaimed by (neutral) Ireland. It also plays a role with respect to a possible Austrian membership. It may facilitate the resolution of delicate border cases such as the free movement of double-purpose goods (civil/military) and Cocom export controls. In the light of the present restructuring of the European weapon industry, it is not excluded that cross-border industrial and technological co-operation at the market level will increasingly come to reflect the political co-operation on security at EC level and West European Union (WEU) level. The recent membership of Spain and Portugal of WEU points in the same direction.

3.3. Economic and Social Cohesion, or the North-South Problem in the EC Regional imbalances in the EC were originally considered as a national problem. Since the establishment of the European Regional Development Fund in 1975 and several reforms of the Social Fund, the link between ever-intensifying economic integration and regional income and employment disparities became increasingly recognized by Member States. New memberships by Greece (in 1981) and Spain and Portugal (in 1986)and given the major problem of the Mezzogiorno - turned the question into an intra-EC North-South problem. The completion of the internal market only made the improvement of the physical, educational, and social infrastructure in the EC-

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Jacques Pelkmans

South more urgent. Both for political reasons (the "price" of agreeing to 1992) and economic motives (infrastructural improvements would facilitate a process of convergence of standards of Jiving through intra-EC export growth and inward direct investments), the Single Act introduces the concept of "economic and social cohesion" as an integral element of 1992. This diplomatic label defies a precise definition, but, in practice, it boils down to two elements:

major transfers to the EC-South (and a few other regions, including Ireland as a whole) via the three Structural Funds (the two mentioned above plus an Agricultural Fund for structural issues and rural development); and temporary derogations and delays in the implementation of 1992 measures, which would otherwise significantly worsen adjustment problems of the ECSouth. In view of the vagueness of the concept, EC labour unions have argued that "social cohesion" should be interpreted as a parallelism between economic and social progress on the internal market. In rhetorical terms this parallelism has been politically accepted at European Council level in the framework of the "social dimension", but without explicit reference to the cohesion concept. This prudence might be explained by the understandable fear that a link with (social) cohesion might invite claims for EC-financed social securities. Before the definite establishment of monetary union, however, such claims would be totally unacceptable. Even in the present debate on monetary union, social securities remain national. The budgetary plank of "cohesion" was viewed as a very difficult dossier, giving the miserable experience of budget quarrels in the 1980-84 period. The Commission proposal to double the Structural Funds, while reducing the share of day-to-day farm spending on the basis of a (modest) reform of the common agricultural policy (CAP), implied a decision on budget increases of perhaps thirty times the size of the sums at issue during the early 1980s. It also assumed that the CAP expenditure could be contained, an idea received with great scepticism. Nevertheless, within less than a year, an astounding package of decisions were taken; the doubling of the Funds was accepted and "automatic" stabilizers were introduced into the CAP. In addition, major reforms of the Funds were announced, which have been implemented during 1988 and 1989. 11 The reforms cause a shift from project orientation to programme orientation, abolish the "quota" system of Member States, intensify greatly the day-to-day collaboration of both Member States and the regions themselves with the EC Commission, and significantly widen the notion of "infrastructure" to matters such as "innovation centres", educational and business training support and programmes for small- and medium-sized enterprises in the EC-South. Planning and control procedures were tightened as well. This chapter is not the place to deal with these reforms. However, it is crucial to realize the implications in the medium and longer run. First, the sums involved are considerable: by 1992 an annual transfer to the EC-South of 14 billion European

Completing the EC Internal Market: An Update and Problems Ahead

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currency units (ECUs), that is, US$15.5 billion. Second, the supply-side oriented adjustment forced by EC membership and the single market is expected to be accelerated by great and more systematic involvement of EC structural policy. This should rapidly increase the competitiveness of EC-South countries, especially in sectors with relatively labour-intensive production and with existing technology. ASEAN exporters may therefore encounter more competition from EC-South countries inside the Community. Whether and to what extent the "external dimension" of 1992 will endeavour to protect these intra-EC industries with comparative advantage and provide opportunities for trade diversion has critical implications for ASEAN. In theory one may argue both ways: on the one hand, the EC-South has an incentive to join the protectionist forces in the EC-North; on the other hand, there is a case for the proposition that, precisely because of the ambitious "cohesion" programme, the EC-South may (and can afford to) soften its protectionist stance in the light of rising competitiveness. The latter proposition is almost certainly correct if rephrased as follows: the cohesion programme as well as the temporary derogations prevent a non-conciliatory stance of EC-South on fortress Europe in the product markets. The exceptions to the liberal external dimension will be determined by a complex political economy in which the EC-South is far from being decisive. In this sense, cohesion is a necessary condition for a Community open to the world economy in these sensitive sectors; whether this is sufficient is not yet clear.

3.4. Higher Ambitions All higher ambitions are beginning to be seriously addressed. We will not discuss political union, except briefly in section 6. The external dimension is not developed on the basis of an overall strategy but a few broad, liberal guidelines have been published by the Council in October 1988 (see section 5 and the other chapters in this volume). The social dimension was left out of the White Paper for two reasons. First, a number of directives had already been adopted in the 1970s, partly as a followup from rulings of the Court of Justice of the EC, eliminating discrimination of foreign (EC) workers in local social laws, social security, contracting, and so forth. From a narrow conception of the internal market some argued that, given the removal of discrimination in domestic treatment of EC labour and labour mobility, there was little else of social policy standing in the way of "completing the internal market". Second, there was a political "ban" on social harmonization in the Social Council due to an intolerant attitude of the United Kingdom. The social dimension reappeared in a weak and ad hoc fashion in the Single European Act. The so-called Social Dialogue was agreeable to the United Kingdom, which also recognized the distortive nature of different health and safety regulations for workers in the workplace as well as in such situations outside (for example, dangerous machinery, hazardous transport). But the pressure not to leave 1992 to "big business" and to create a "social Europe" as well grew steadily. Elaborate and repeated calls from the Economic and Social Committee of the EC and the European Parliament, in addition to a campaign by the European Labour Unions, made it

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Jacques Pelkmans

difficult to ignore the issue. Observing the popular groundswell, the socialist prime ministers in the European Council and Commission President Delors began to rally support for a "social dimension"; the (Christian Democratic) Belgian Prime Minister Wilfried Martens used the Belgian presidency of the Council to discuss a communitarian "social socle" on which the internal market should be constructed. The Hanover Declaration (June 1988) marking the end of the German presidency, speaks already about the maintenance of high social standards. With three socialist governments in the chair for a total of one-and-a-half years (Greece, Spain, and France) and the European Parliament elections in June 1989 the social dimension became an incontestable element of 1992 (see section 4.4 ). The EMU has emerged from, on the one hand, the breakthrough in the dossiers of financial services as well as exchange controls and capital movements, and, on the other hand, the success of the EMS. The success of the EMS was first of all remarkable because at the outset it was sharply criticized in monetarist circles as being unstable, if not inflationary. The reader is merely reminded that the EMS succeeded gradually in achieving external (that is, exchange rate) stability and later in reducing inflation dramatically (and the latter without any instrument other than consultation and persuasion). The EMS withstood a high-dollar period and lived through two low-dollar periods. It survived (only barely) the worst recession after 1950 as well as the stock market crash of October 1987. It has never lost a member to its exchange rate mechanism, and recently welcomed Spain to it. For a while the disinflationary slant acted as a brake to growth but since 1987 this is surely no longer correct. With the advent of one European capital market, the independence of monetary policy in Member States in a stable EMS became more and more questionable. The Hanover European Council appointed the Delors Committee, which reported in April 1989 on a three-stage plan for building an EMU. The Madrid summit did no more than ask the finance ministers (and the Commission) to start preparations so as to be able to decide soon on an inter-governmental conference in the framework of the first stage. The Strasburg summit of December 1989, however, decided to initiate stage l in July 1990 and organize an inter-governmental treaty revision conference before the end of 1990 (see section 4.5).

4. Major Issues Today 4.1. The Fiscal Imbroglio Some of the fiscal problems involved include VAT, excises, fiscal issues in transport and insurance, taxation of (highly mobile) capital and savings income, and corporilte tax issues. For VAT and excises, the long history of attempts at tax harmonization in the EC amounts to a slowly increasing recognition of the notion of "fiscal competition" among Member States in an open, frontierless, single market. The recognition has occurred both at Member State level and at Commission level. The original ideas were strictly "uniformist"; the 1987 proposals were more flexible on V AT, le~s so

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on excises (where actual differences in the national rates applied are large and taxevading arbitrage would be very profitable); the recent 1989 proposals are even more flexible and are explicitly based on the notion of tax competition among autonomous fiscal domains. Of course, the basic objectives remain the same: removing intra-EC frontiers while avoiding (too great) distortions in competitive conditions of fiscal origin. The proposals of Madame Scrivener, Commissioner for taxation, include a minimum standard rate of V AT and no upper limit (set by "fiscal competition"); acceptance of zero-rating for some products (important for Portugal, Ireland, and the United Kingdom); mail orders and car sales subject to the rate in the country of final consumption; a clearing system among Member States of net VAT due (because traded goods will henceforth include V AT in their prices), based on macroeconomic estimates and statistical samples; and differentiated minimum rates for alcoholic beverages/spirits as well as tobacco products; rate bands for car fuel. Other technical aspects of the 1987 proposals are maintained. Even these proposals were not acceptable to the Finance Council. The stumbling block is the shift to the origin principle in general, and the budgetary consequences of a speedy transition to it for some Member States in particular. Typically, today's Member State governments are not courageous enough to accept these consequences. In October 1989 they decided to postpone the shift to the origin principle to a date beyond any of the governing periods of any of the ruling national cabinets. In November and December 1989 the Council took the following decisions: the shift from destination to the origin principle will probably be made in 1996; as of 1993 there will be no (fiscal) border formalities, hence customs can be removed at intra-EC borders; enterprises will have the fiscal duty to declare (for VAT purposes) intra-EC transactions on both ends of the trade; the formalities for business will be kept at an absolute minimum; for instance, statistical and VAT forms will be merged; and inter-administration co-operation will have to ensure fraud prevention and sanctions. On the basis of these principles, detailed proposals are discussed in Council working groups in 1990 and early 1991. With respect to other issues, some brief notes may suffice: The general policy on excises is still a problem although Member States have individually begun to adjust their rates in a converging direction. The controversial issue of road haulage taxation is not resolved. Germany has

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unilaterally decided to raise tolls for trucks using the highways, probably as an attempt to force the principle of letting actual users rather than residents pay the infrastructure (that is, shifting to the so-called territoriality principle). The problem is bound up with excises (on fuel), purchase taxes on trucks, and annual road taxes for vehicles. The EC Commission recognizes that differences in these forty taxes distort competition in the emerging single market for road haulage. Note that the United States and Canada suffer from similar problems in their internal markets (Pelkmans and Vanheukelen 1988). The taxation of savings and capital income threatened to block, at first, the removal of the last exchange controls. A gesture by France in December 1989 has removed this threat. There is now a competitive downward spiral of the rates of taxation among Member States. A conflict remains about combatting fraud, an area in which Luxembourg (a tax haven with strict bank secrecy laws) is very resistant to. There will be no proposals to approximate corporate tax rates. Fiscal competition will deal with it just as in the United States. Three very old proposals to prevent double taxation for subsidiaries (for example, consolidation of accounts for concerns) and to reduce fiscal barriers to cross-border mergers are still pending before the Council.

4. 2. Insurance Three out of the eight guiding principles (see section 2) govern the radical breakthrough in all financial services: banking, insurance, and security: I.

2. 3.

harmonization of prudential rules and standards will be limited to the minimum necessary; no endeavour will be made to harmonize all financial legislations of Member States; the principle of sufficient but minimal harmonization is also applied to solvency and management standards of financial institutions as well as to the maximum influence of shareholders on banks; mutual recognition of the (remaining, divergent) national laws, provisions, and market practices, so as to give full freedom to the supply of services; and "home-country control", that is, supervision, based on the harmonized rulessee (I) - is conducted by the authorities of the country of residence of the head office, with a few complementary functions for the host country.

Whilst (2) will ensure competition among market participants, the three principles together will also lead to regulatory competition. This competition among national regimes will put pressure on the more restrictive ones as locally based financial institutions will be put at a competitive disadvantage when foreign entrants will supply services from their home base that are prohibited or rationed when produced locally. Regulatory competition will form a sort of substitute of the harmonization process at Council level, beyond the harmonization achieved under (l), which is considered indispensable. The approach will work well, especially in banking and securities (see Steinherr, in this volume). In insurance, a group of four EC Court of Justice cases has raised

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the minimum level of harmonization necessary for direct ("mass risks") insurance, while lowering it for commercial risk insurance with larger firms. The criterion for the Court is the need for consumer protection. Bigger enterprises are considered to be capable of evaluating insurance policies independently and hence are in little need of regulatory protection, unlike individual consumers or small shop owners. This means that, while re-insurance is free since the early 1960s, and eo-insurance since 1978 (and factually since 1987), direct insurance will suffer from its being trapped between harmonization in Council and weak case-law from the Court. After the Court judgement the Commission set out a strategy for achieving real cross-frontier competition in the supply of insurance services. The Commission based itself on the Court's acknowledgement that not all policyholders need the protection of their national legislation or of a detailed harmonization of Community law. In June 1988 the Council adopted a directive, the so-called Second Non-Life Insurance Directive, according to which all non-life insurances can be supplied across borders. This means that an insurance company established in one Member State can sell insurance policies in another without any longer being obliged to establish a branch or an agency there. This directive constitutes a decisive step towards an internal market for insurance. It recognizes that mass risks (that is, smaller policyholder~;) require more protection than "large risks". Companies insuring "mass risks" may. however, be required by the host country to conform to the authorization requirements and controls which the Court permitted, whereas for "large risks", regulation will be carried out largely in the home country. The EC Commission is on record for recommending that this provisional solution, which still leaves room for host-country control, should soon be superseded by one based on home-country control, with the necessary harmonization to be worked out before 1993. The same approach was followed in two new draft directives proposed by the Commission in December 1988; one for motor liability insurance, the other one for life insurance (the so-called Second Life Insurance Directive). For motor insurance, the Commission has extended the distinction between large risks and mass risks. If the Directive is adopted (the Council has agreed but awaits the European Parliament), the larger car fleet or commercial vehicle owners will be able to buy their insurance whenever they want within the Community. The Second Life Directive constitutes a modest first step in the direction of a real cross-frontier competition in the life sector. In its draft, the Commission has made a clear distinction between the "active" and "passive" consumer, by introducing especially liberalized rules in order to remove the barriers to cross-frontier "own initiative" insurance. This latter aspect, which allows a potential purchaser of insurance to approach an insurance company in other Member States through a broker in his own Member State, is likely to be resisted both by parts of the insurance industry and perhaps by some of the supervisors, using the argument that the consumer is not adequately protected (Fitchew 1989). Current preparatory work in insurance is focused on the liberalization of group

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insurance, in particular pension schemes, and the details of harmonization in order to introduce home-country control in "mass-risks" insurance. Questions arise as to the need (or indeed the desirability) to hold x per cent of assets of insurance companies in (national) government securities or y per cent in (national) real estate, or the desirability of model insurance policies which would (like technical standards) be voluntary but provide helpful bench-marks. On the first question, the answer depends as much on larger questions of the stability of the (national?) financial system as on consumer protection; prudential norms serve both aims, but not necessarily in an identical fashion. Europeanization of assets will of course be greatly fostered by the elimination of exchange risks through advanced monetary co-operation. Insurance in Europe suffers from a great many obstacles, having emerged from a long history of almost complete national insulation. A lot of the resistance has everything to do with vested producer interests and little with genuine consumer concerns. A clear example can be found in the resistance put up against the crossborder activities of independent insurance brokers. The EC Commission is preparing infringement procedures in this field. Some of the hesitation is more legitimate; tax differences in insurance among different policies and among Member States can be as high as 25 per cent or more. This might engender alliances between existing producers and certain Member State governments, to the detriment of progress on 1992.

4.3. Air Transport Air transport is a sector with the most extreme form of mercantilism and bilateralism in the world economy, oddly enough in an economic activity which is thoroughly international. 12 The EEC Treaty is conditional about air transport, and not explicit on any principles on which to base "an internal market for air transport services". The reason behind this is that the EC countries did not want to give up (any) sovereignty over the air space above their territory, whether for "national security" or protection of national flag carriers or other vested interests (for example, workers, including pilots, in this sector). The Chicago Convention is extremely restrictive on this and other points. But even when the EC countries want to give up the application of the Chicago Convention inside the Community, third countries have a legal right to revoke the bilateral treaties or renegotiate them. In the course of the 1990s one should expect the EC to propose renegotiation of all bilateral treaties concluded with Member States, perhaps in combination with a proposal to revise the Chicago Convention. There are some 700 bilateral treaties on civil aviation between Member States and third countries, not counting Memoranda of Understanding, Exchange of Ministerial Letters, and so forth. Note that even deregulation in the United States has not altered anything on its external dimension: access to the United States, via landing rights and designation of "gateway airports", is purely on a bilateral basis, governed by commercial power relationships (and of course without cabotage). The United States is also very restrictive in allowing foreign airlines even a minor share in U.S. airlines.

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One external dimension of EC deregulation is that access to EC air transport market increases on the basis of existing fifth freedom rights, without it being matched by extra rights for the EC on the foreign markets. Another difficult and more fundamental issue is that EC competition policy as well as intra-EC freedom to provide (air transport) services are at odds with the bilateral relationships with third countries in as far as they manifest themselves inside the internal market. Thus, if Alitalia wants to fly passengers to Tokyo from Paris or London, it must - because of the bilaterals - do this via Italy! There are bound to be tough negotiations between the EC and third countries so as to increase EC access to airspaces elsewhere while at the same time realizing a true internal market for air transport. In all likelihood the EC-EFf A relationship will be renegotiated first, on request on EFTA airlines and governments. Given the close collaboration of the EC and EFT A in the European Civil Aviation Authorities Conference (ECAC) and the interlinkages in their networks, one may consider this a special case. It may even be brought into the overall EC-EFfA "economic space" which is currently developing (see section 6.2). After EFTA the pattern will be set by EC-U.S. negotiations. The intra-EC and external dimensions in air transport are inextricably linked. However, the internal dimension is only gradually taking shape in civil aviation and what constitutes its final contents is not yet clear. The scope and degree of the dismantling of national restrictive regulation is greater than in almost any other field in the 1992 programme. Indispensable for an internal market in civil aviation is the freedom to provide air transport services throughout the Community, at least for EC suppliers. Equally crucial is the fact that these suppliers will have to be authorized, on the basis of objective criteria and non-discriminatory treatment, to fly. These seemingly simple principles require a complete overhaul of the bilateral system inside the Community, with its manifold restrictions, protectionism, and national discretion. It also means that EC competition policy will be applied to air transport, which will create a novel situation for the airlines. The 1987 "package deal" applies from I January 1988 to I June 1990 and includes the application of competition rules to air transport (for the first time); certain broad exemptions to the above, at this stage still under conditions that are few in number and weak; slight increase in fare discounts; and some flexibility in capacity sharing, away from the 50-50 per cent rule. The proposals for the second phase, published in July 1989, include inter alia: air fares EC regulations should also cover fares on domestic routes and routes to/ from third countries; and moves from the current system of double approval plus zones of flexibility

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to a system of double disapproval (plus safeguards against predatory pricing), which is as liberal as the U.K.-Netherlands bilateral; capacity further flexibility of from 67.5 to 32.5 per cent until April 1992; then 75 to 25 per cent (regional services fully free); and temporary protection of new interregional air services for three years against access by large carriers (such protection is a unique form of procompetitive regulation); access right of access of any domestic carrier to any route if it is economically "viable"; lower thresholds for multiple designations; and general fifth freedom rights for EC carriers, subject to a (high) capacity ceiling; competition extension of the implementation rules of competition to EC-third countries traffic, including the power to negotiate (after a Council mandate); earlier than anticipated in the light of a transfer of regulatory power to the EC (expected to be slow); it is a court case (Ahmed Saeed case) which has given urgency to this extension. Essentially, the court has indicated that fares consultation, which eliminates price competition, constitutes abusive behaviour of a dominant firm, or of joint dominance, under Article 86, EEC, irrespective of whether it is intra-EC or on a route to third countries. This ruling strikes at the heart of the old bilateralism. However, neither the airlines can alter this, nor the civil aviation authorities separately, nor (currently) the Commission; so the Council is suddenly under pressure to act. extension of implementation rules to domestic air transport, plus the power to grant exemptions both to domestic and EC-third country traffic. In December 1989 the Council has agreed to a set of guidelines and conclusions which help to clarify the contours of the second stage (mid-1990 to late 1992). From the language of the conclusions one may also infer that there is an implicit acceptance of the full implications of 1992 in air transport, a reversal of its tradition of blockages preceding the agreement on the first stage. In particular the Council accepts the proposals of the Commission on capacity and access, subject to elaboration. On fares, the Council finds it too early to introduce double disapproval before 1993, whereas on competition rules, the Council insists on greater specification of the terms of the exemption policy for the second stage. One should view this insistence against the backdrop of corporate strategies of airlines as they are "preparing for 1992". The Commission has understandably seized the opportunities presented by several mergers and acquisitions to develop a case-law in this (new) area. However, since there is only one precedent (the British Caledonian [Airways]/British Airways merger) and no obvious policy

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framework, the precise application of the competition rules is at present unknown, thereby causing great uncertainty among the airlines. The acquisition of Air France (UTA; Air Inter) will serve as a test case, no doubt. Other conclusions of the Council are at long last Eurocontrol will be strenghtened and a draft directive should be discussed on the harmonization of technical standards for (new) air navigation equipment; priority will be given to the harmonization of personnel licences and (pilot) qualifications, flight duty time, and air-worthiness standards; and cabotage is recognized for 1993, but not (yet) for the second stage. The Community is momentarily witnessing an acceleration of the pace of reform in air transport. However, some governments and airlines, each in its own way, will try to slow down, and (many) third countries will greatly complicate the process. It will, therefore, extend beyond 1992, even though major reforms will already have been accomplished in that year.

4.4. Social Dimension After the European Council meetings at Hanover (in June 1988) and Rhodes (in December 1988), there can no longer be any doubt about the political need for a "social dimension". The question is what, precisely, are the contents behind the semantics? However, few persons actually subscribe to the properties Mrs Thatcher attributes to this greater emphasis on the social aspects, namely, that detailed "social harmonization" is pursued, that social engineering is attempted from Brussels, and that a centralist, regulatory tradition is manifest in the drive towards the social dimension. Quite the contrary, the (national) social partners are very sensitive to a uniformist approach to the social dimension. At the same time, one of the two social partners - the labour unions - fears that a purely economic approach to 1992, including the freedom to exploit regulatory competition in the social field, would erode (national) accomplishments and entitlements and lead to a downward spiral of "social standards". A first approach to the social dimension prevents this downward spiral. The Social Charter, adopted as a political document at the Strasburg European Council meeting of December 1989, aims at guaranteeing a broad set of social rights in order to prevent regulatory competition to undermine such values. 13 All or virtually all of these rights are long recognized at International Labour Organization (ILO) conventions or those of the Council of Europe and should present no problem. The contentious aspect is the way of formulating them and, more important still, the choiCe between making them enforceable rights in court or a political declaration of intent. The compromise at Strasburg was to avoid a legal format for the Charter with enforceable rights for EC citizens, while at the same time accept an "action programme" of the Commission, leading to a series of legislative actions by the Social (or internal market) Council during 1990 and 1991. 14 However, the action programme is modest and reflects the emphasis on subsidiarity in this field. Out of

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forty-five initiatives only seventeen will be directives and two regulations, the rest being recommendations. There will be proposals on night shifts, the maximum number of working hours, over-time work, and health and safety measures at the workplace, most of which have already been adopted. The second approach is generally less contentious, though limited in its consequences. It is based on the three basic reasons that the social dimension is crucial for the internal market (and the internal market crucial for the social dimension). First, the objective behind 1992 is an increase in economic growth and a fall in unemployment, which should be viewed as economic and as social objectives. Hence, this could be viewed as supporting "social cohesion" and providing some prospect for the unemployed. Second, a balance between the social and the economic aspects of the internal market is necessary for the stability and continuity of the EC. Third, a combination of maintaining social values and "more market" should be found, but this must imply some rock-bottom minimum of values and obligations known at the outset. Upon reflection, both approaches, though having different starting positions, overlap considerably.

4.5. Economic and Monetary Union This chapter cannot hope to discuss adequately the fascinating developments leading towards an EMU in the EC. As this chapter is only a survey and an update, it provides only a few highlights. One may wonder, first of all, why monetary union re-emerged as an issue after the failure of the early 1970s and after the explicit exclusion in the Single Act. The more important reasons include the remarkable success of 1992 in general; the fact that, viewed in a 1992 context, exchange rates changes or even exchange risks and costs remain as the only general and conspicuous "barrier" for intra-EC economic intercourse, which is therefore targeted for removal; the further decline in the effectiveness of national monetary policy in the light of the internal market for financial services and the complete freedom of capital movements; the need to maintain "credibility" in money and foreign exchange markets for EMS members, which must remove exchange controls; and, finally, the success of the EMS in reducing inflation has strengthened the desire to share policy-making with the Germans, who are dominant in monetary policy setting within the framework of sound macroeconomic objectives, such as strict price stability. On the instruction of the Hanover meeting of the European Council, the Delors report, published in April 1989 (Committee for the Study of Economic and Monetary Union 1989), initiated the debate. The two guiding principles should be (1) subsidiarity, hence some degree of national autonomy, (2) parallelism, especially during the build-up phase, between bringing about the monetary union, and bringing about the economic union. The latter comprises four elements: the internal market; adequate competition policy;

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adequate structural policies, especially so as to reduce regional imbalances; and co-ordination of national macroeconomic policies. The monetary union consists conceptually of two elements from the internal market (full convertibility and complete freedom to provide financial services and to engage in capital movements), completed by irrevocably fixed exchange rates (or one money). The Delors report states that this must imply a centralist position on monetary and exchange rate policies. Hence, a proposal is forwarded to establish a European System of Central Banks (ESCB), or "EuroFed" (an analogy to the U.S. Federal Reserve System). The ESCB should be independent and responsible for maintaining price stability. In contrast, national budgetary policies should remain as decentralized as possible (subsidiarity). Nevertheless, the Delors report stresses the importance of binding rules for the magnitude and method of financing of budget deficits. Whether such rules should be binding or whether the discipline of world capital markets imposed via interest rates, debt servicing, and credit ratings -can effectively contain deficits is at the core of the debate on EMU today. The Delors report proposes three stages, even though it is uncompromising in saying that, before embarking on stage I, the final aim must be accepted first. The European Council had meanwhile decided that stage 1 would begin on I July 1990. This phase consists of three crucial elements, on the presumption that the internal market will be accomplished by 1992 (which, as shown, is a reasonably realistic supposition for the issues at stake here): full membership of the EMS for all Member States (that is, the United Kingdom, Portugal, and Greece should join the exchange rate mechanism in the narrow band); further convergence of inflation rates at very low levels and reduction of the budget deficits and levels of outstanding debt; a revision of the Treaty via an inter-governmental conference (IGC) transferring the necessary powers, plus its ratification by the twelve national parliaments. The second stage is a transitional stage during which the new institutions can learn without yet formally disposing of the competences. The EMS bands would be narrowed, money growth targeting would be tried out on a voluntary basis, and budget deficit rules would be voluntarily applied. Stage 3 removes the exchange risks entirely by fixing the parities irrevocably whilst responsibility for monetary policy shifts fully to the ESCB. The current debate shows surprisingly rapid progress. 15 Even the United Kingdom seems to be shifting to a more co-operative position, although reservations are formally maintained (in fact, the real worries are with Greece, given a sharply diverging macroeconomic policy caused by deep rifts in its domestic politics). There is unanimous agreement on the full independence of the ESCB, a key issue thought to be a major hindrance only a few years ago. Priority for price stability is undisputed as well. Exchange rate policy vis-a-vis third currencies is still under debate, especially with respect to the sharing of responsibilities between the Council and the ESCB (the execution is left to the ESCB). More problematic are the binding rules about budgetary deficits.

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There is consensus about certain minimum rules such as ( 1) no compulsory monetary financing (however, there must be some room for very short-run financing of, say, weekly shortages of revenues); (2) no obligations for financial institutions such as banks to maintain portfolio investment in public bonds or other paper; and (3) a no-bail-out rule among Member States, as a signal to the markets that Member States themselves have to accept the consequences of secular borrowing. Whether, and to what extent, EC rules or rather national rules will impose sound budgetary policies is still undetermined. Another central issue is "accountability", or the combination of "political legitimacy" and "democratic control" at the EC level. It is obvious that political legitimacy must be derived from ratification. In turn, however, this is bound up with the shift of power to the European Parliament and the ways it can control the Council (note that the European Parliament can at present control only the Commission). On the other hand, the independence of the ESCB is inconsistent with parliamentary control; the solution is probably a regular reporting, both orally by the president of the ESCB and via an annual report. Also the nomination procedures provide opportunities for influence. Finally, it should be noted that the very rapid shift to East/West German monetary union has no doubt accelerated the process towards the EMU. At press time (October 1991), it was decided to have two paralleled so-called Intergovernmental Conferences rewriting the EC Treaty, one on the EMU (ambition no. 5 in section 1.3), and one on "political union" (ambition no. 6 in section 1.3). The latter, new ambition, is essentially a response to the problem of accountability caused by the prospect of the EMU.

5. The External Dimension This being an overview, the external dimension will not be treated in great detail. The reader is referred to other chapters in this volume where appropriate. Nevertheless, a broad assessment of the external dimension as a whole has value added and will be provided in the present section. 16 Certain sensitive dossiers are still under debate and this creates some uncertainty, which has to be taken into account. First, the liberal thrust of the external dimension will be explained by a brief discussion of the "fortress paradox" and "reciprocity". Second, the 1992 issues which fall under rules of the General Agreement on Tariffs and Trade (GATT) will be surveyed. Third, the most problematic category of these issues - quantitative protection - is singled out for a sectoral overview. Finally, the beyond-GATT issues are touched upon.

5.1. A Liberal Thrust In third countries, 1992 has become known through what 1992 is definitely not: "fortress Europe". A greater paradox can hardly be found. Assurances by EC officials that 1992 is anything but a fortress still meet with suspicion, in the Association of Southeast Asian Nations (ASEAN) as well.

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There are three reasons for the fortress Europe paradox. First and foremost, the Community's existing protection in agriculture, textiles and clothing, and leather goods, as well as its recent vigour in anti-dumping actions vis-a-vis the Asian newly industrializing countries (NICs) and Japan, tends to undermine the credibility of the EC as a responsible world trading partner. The question of credibility is affected most by the CAP. The defence by the EC that generally the Community is not more protectionist than most other countries of the Organization for Economic Co-operation and Development (OECD), that it is by far the largest agricultural importer in the world, that it spends much less on subsidies per farmer than the United States does, that it allows fairly high growth rates of imports in clothing and leather goods, and that non-EC suppliers' shares in the EC market of consumer electronics are already very high, is not without merit, but does not in and by itself heighten credibility. Of course, 1992 as such should not be confused with the existing trade policy of the EC. In other words, 1992 can be very liberal even though the CAP is not altered: the greatest impact of this liberal approach is in services and in technical barriers to industrial trade. There are, however, good prospects that some of the pre-1985 protection in product markets will be diminished as well. Second, the external dimension is not addressed in the White Paper. Given the problem of credibility, this led inevitably to suspicions by third countries. The firm policy declaration on the external dimension 17 has reduced these fears of the unknown. Moreover, third countries have greatly improved their understanding of how the EC functions and what the details of 1992 are, which has led to a better appreciation of the external dimension. Third, the somewhat cautious EC attitude in the first stages of the Uruguay Round has generated an impression of curious imbalance: if 1992 is so liberal and open, why be so prudent if not reticent in Geneva? Although this imbalance is being redressed at the moment, the leadership that the EC is gradually assuming is to be found especially in new fields for GATT, where 1992 places the EC in a strong position to propose bold approaches. Its hands are tied in agriculture, whilst protectionist pressures in traditional industries also have to be reckoned with. Therefore, 1992 is not only for the Europeans. This proposition will be substantiated in the following sub-sections. The main point is that "access" remains equal or improves; in some instances the improvement of access is purely unilateral. The central question left over from the fortress Europe debate is the nature and economic significance of the reciprocity clauses. At present there are only three instances where reciprocity has been introduced: the second Banking Directive (see Steinherr, in this volume), adopted in December 1989; the public procurement directive for the "excluded sectors" (see section 5.4); and the mutual recognition of tests and certification, done in third countries, between the EC and those third countries (see section 5.4). The draft directive on securities trade contains provisions similar to those in the Second Banking Directive. Finally, complex questions of extra-territoriality might arise under the Mergers Control Regulation, 18 also adopted in December 1989 but they would not seem to be

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fundamentally different from other questions of extra-territoriality in the application of EC competition law. This chapter will ignore this issue. The reciprocity clause in financial services is the most elaborate treatment thus far of this topic in the framework of 1992. Reciprocity clauses are recognized by the OECD. As a basic principle of trade negotiations, reciprocity forms one of the corner-stones of GATT. Therefore, the extension of the notion of reciprocity to the beyond-GATT area of financial services cannot be surprising. The issue is what concept is utilized and how it will be applied. Reciprocity is not applied retroactively; in financial services this is of great economic importance as the EC financial markets are very open. Hundreds of non-EC banks are already established in the EC. If non-EC financial institutions have a subsidiary (not a branch or representative office) in the Community, they are legally a Community undertaking (Article 58, EEC) and hence benefit fully from any single market measure. The EC will neither seek "overall" reciprocity (for instance, by linking different sectors) nor "mirror" reciprocity (that is, legislation identical to EC regulation). The two criteria for reciprocity will be "effective market access" and "national treatment". If the first criterion is not fulfilled, the Council of Ministers decides on a negotiation mandate for the Commission; if the second criterion is not fulfilled (together with the first one), the Commission may directly open negotiations. Inside the Community (regulatory) sanctions may be imposed in case of requests by financial institutions from such countries (this means that the freedoms of establishment and services provision may be limited in product range and/or countries). When applying reciprocity, the degree of development of the third country will be taken into account, an aspect of importance to ASEAN. Even though the removal of exchange controls is an essential element of the single market in financial services, this aspect will not be considered when assessing equivalent treatment between the EC and a third country. Again, this is worthy of note for ASEAN. The use of reciprocity in this beyond-GA TT field is therefore restrained and anything but "aggressive", let alone protectionist. However, the EC will not tolerate a free ride for financial institutions of some third countries, thereby bolstering their global competitiveness - which is decisive in modem finance - whilst the achievement of global competitiveness of its own firms is hindered by access or other restrictions in major financial markets elsewhere. In Brittan (1990), the EC Commissioner for Financial Services has identified major access or other restrictions in six countries including Japan, South Korea, and Singapore. The overall conclusion on reciprocity should be positive: it is applied in a few cases only; it has no protectionist intent or effect, will be applied less stringently (or not at all) to developing countries, and may lead to greater liberalization, both multilaterally and bilaterally (for example, Sweden and Finland).

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5.2. GAIT-Controlled Issues At the moment, GATT rules apply exclusively to product markets. Industrial EC tariffs and a few agricultural EC tariffs are bound in GATT and hence cannot be raised. In any event, there are no arguments for considering tariffs because the EC has been a customs union since 1968 and therefore employs a common external tariff: in terms of tariffs the single market is long in existence. This implies that the Community's Generalized System of Preferences (GSP) must set common preferentiai rates - this having no relationship with 1992. The 1992 programme in product markets is about non-tariff barriers. More specifically, it is about those barriers which, up to now, have caused the internal EC market to remain fragmented in one way or another. Because GATT does not exhaustively deal with non-tariff barriers, some of the 1992 measures are in GATTcontrolled fields, others are not. It is the official policy of the EC to adhere to and support the GATT system. For tariffs, customs valuation, and some minor issues this presents no problem. In matters of quotas and grey-area measures such as voluntary export restraints (VERs), this official policy statement may mean different things to different people. Therefore, section 5.3 deals with it separately. The two most prominent GATT codes which deal with non-tariff barriers are the Public Procurement Code and the one on Technical Barriers to Trade. Both have been signed by the EC at the end of the Tokyo Round. The first code is generally considered to be a failure: it simply does not lead to effective, nondiscriminatory access for foreign bidders. The EC knows the problem only too well. Several proposals in the White Paper (which in the mean while have been adopted) amount to a considerable tightening of the (EC) rules, closing loopholes and improving both ex-ante publications and information obligations (while extending the mandatory waiting periods) and ex-post review possibilities. The GATT code is much weaker, however, and its review possibilities (without a court) are of little use. The code, moreover, does not apply to non-central government whereas the EC directives do; this implies that the tightening up in the framework of 1992 improves the economic significance of the code (for foreign bidders for contracts at all government levels in the EC). In addition, the EC has moved beyond the sectoral scope of the code by liberalizing the so-called excluded sectors; this "beyond-GA TT" issue will be sketched in section 5.4. The Technical Barriers Code is also weak but its modesty has at least led to much greater interest (more signatories, more countries with observer status) and satisfactory compliance. However, already before the 1992 programme was initiated, the EC's ambition in removing (intra-EC) technical barriers was much greater than the code aims for even after two (minor) revisions. The discrepancy between the EC approach and the code has dramatically increased due to 1992. Precisely, therefore, the case-law of the EC Court (the so-called Cassis-de Dijon case and the mutual recognition of national technical regulation in fields other than health, safety, and environment, which has become legal practice since) has sweepingly liberalizing

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effects for third countries: it means that a third-country exporter, having entered one Member State's market (any Member State of his liking), will have free access throughout the EC. In products subject to safety requirements, the so-called new approach is applied more and more: the "essential" (safety) objectives will be ECdefined, technical specifications will follow European standards or any other standard, in which case it is combined with conformity assessment by "notified bodies". In health-related products (food, pharmaceuticals) complications do not allow elaboration here, but, in general, there is greater strictness if the health objectives are based on scientific grounds. In the area of environment the trend is to become more strict but this is an autonomous tendency, quite separate from 1992. Finally, since certification and testing will eventually be mutually recognized or (for some cases) fully identical throughout the Community, under the so-called global approach, and since the GATT Code provides for non-discriminatory access to certification and testing, the 1992 proposals on conformity assessment imply a unilateral and significant improvement of access to the Euromarket. Curiously enough, 1992 gives the code unexpected weight for obtaining access to the EC. However, enormous discrepancies between the two codes on the one hand and the relevant regulatory 1992 regimes simply do not allow automatic access. In both cases mild forms of reciprocity will apply where the GATT provides no access guarantees for EC firms elsewhere (see section 5.4). In the 1992 debate, especially in Asia, there is a recurring tendency to confuse prevailing trade policy instruments with the issue of 1992. This is especially so for anti-dumping and origin rules. It is controversial whether or not recent anti-dumping decisions and the so-called screwdriver factory directive adopted by the Community have protectionist intent, but the two issues bear no relation to 1992. EC antidumping rules are in conformity with GATT rules; the best solution is to tighten GATT prescriptions on cost calculations so as to take away any leeway EC protectionists might have. Origin rules are derived from the hopelessly general Kyoto Convention of 1968. They ought to be drawn into GATT, and again considerably tightened; also, multilateral consultations should be mandatory in difficult "origin" cases so as to avoid dubious unilateral decisions on individual products. Whatever the solution, it should not confuse the 1992 debate as such.

5.3. Quantitative Protection in Sensitive Sectors The key area in which 1992 is truly problematic is volume protection. The forms at issue are quotas, VERs, and the special case of "quotas" under the Multi-Fiber Arrangement (MFA). This issue deserves a separate indepth study. The present treatment will therefore concentrate, first, on an explanation of the problem and the options to solve it in the framework of 1992, and, second, on a list of sectors with an early and subjective assessment by the author of the expected outcome for third countries' access to the EC. For quotas, adherence to GATT rules would imply their substitution by tariffs, except for Article 12 (balance of payments difficulties) and Article 19 (safeguards in case of market disruption).

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Indeed, the Community has no quotas for non-agricultural imports. But individual Member States have. Usually these quotas can be formally maintained under "grandfather clauses" or general escape clauses. Ignoring for a moment the problematic case of planned economies - where a price-based trade policy instrument may have little economic meaning - this old stock of quotas violates the spirit of GATT. It is the domestic political economy in the various Member States which prevents these quotas from being substituted by tariffs, or alternatively, removed altogether while leaving the EC-wide MFN (most-favoured nation) tariff. The meaning of 1992 is that "national" quotas are inconsistent with a single market without internal frontiers. After all, in the EC of today, goods can already move freely, even though this is (still) subject to customs checks. This free movement will lead to trade deflection if Member State A has quotas and B has not, or if both have quotas but A's is filled and B's not yet. Under Article 115, EEC, the EC Commission authorizes Member States to apply intra-EC restrictions to prevent such trade deflection, for products for which national quotas still exist. It is those authorizations which will be stopped in the framework of 1992 - anyway, the customs needed to enforce the restrictions at intra-EC borders will have disappeared. Therefore, national quotas must disappear: in conformity with GATT, they may become EC quotas, some kind of tariff structure may be proposed (again, at the EC level) or they may be removed altogether. Only the latter solution is really in the spirit of GATT. In other words, 1992 presents a splendid opportunity to unsettle the national coalitions of vested interests keeping these quotas in place. For VERs the problem is rather different. Surely, they are not in conformity with the spirit of GATT VERs exist both at the Member State and the EC level. However, no customs checks (or authorizations) are involved. Since VERs are precisely targeted, trade deflection can be kept to a minimum by simply arranging an export cartel in the "restraining" country which ensures compliance. Thus, the VER between the U.K. car industry and Japanese car manufacturers to keep the latter's market share in the United Kingdom at 11 per cent has worked for thirteen years despite the fact that shipping Japanese cars from, say, the Benelux to the United Kingdom would meet no tariffs and no quantitative restrictions (and yield profits because U.K. prices for Japanese cars are higher due to VERs). It is the Japanese who make the VER work. It is precisely this property of a VER that makes it a politically attractive fourth option for national quotas besides the three that conform to GATT rules mentioned above. Where protectionist pressures are strong and persistent, other ways of circumventing GATT have been found, notably the MFA. Stripped of all complexities, the MFA employs something between quotas and VERs, namely, multilaterally agreed export restraints, usually refined on a bilateral basis. For the EC this boils down to EC quotas, whatever its label, broken down (for the very sensitive and, occasionally, for the sensitive products) into Member State quotas. The 1992 problem in textiles and clothing is therefore the same as that with other "national" quotas; complications arise, however, with the need to renegotiate or

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abolish the MFA at world level. The Community pursues a two-track approach with respect to national volume protection. On the one hand, it seeks to reduce the number of "hard" cases to only a few, and abolish all quotas on the rest. This unilateral removal is one of the options needed to make 1992 work, but, in GATT, it can justifiably be presented as (unilateral) "roll-back". In July 1989 ninety quotas kept by countries such as France, Italy, Spain, and Ireland were removed, and another thirty whose applications were made vis-a-vis Japan were scrapped. It is probable that another such tranche of removals will follow. The expected economic effect is not great because of shifts of comparative advantages or maturity in product life cycles. On the other hand, four industrial sectors with adjustment problems are selected: footwear, textiles and clothing, cars, and electronics (especially consumer electronics and chips). All four sectors are important for ASEAN, although cars is, of course, a Japanese problem. In agriculture there are problems with bananas from the African, Caribbean, and Pacific (ACP) countries; the solution here is likely to be a "deficiency payments" system for the relevant monoculture islands. The infamous VER on cassava from Thailand is EC-wide and hence not related to 1992. In footwear, quotas in leather footwear were almost all against Eastern Europe -they have been removed in 1990. This leaves VERs for South Korea and Taiwan for various types of footwear, pushed for especially by France, Italy, and Spain. Spain still has a number of quotas until 1992, when its pre-1985 arrangements run out. The penetration growth rates for both leather and non-leather footwear imported from the Asian countries are extremely high (for example, non-EC imports over 1985-88 shot up by 69 per cent; Taiwan and South Korea reached annual growth rates of exports to the EC in non-restrained segments above I 00 per cent during the same period). The imposition of EC quotas here would be a set-back. In textiles and quotas the matter is tied in with the (gradual?) abolition of the MFA. In this area the United States is more protectionist than the EC, where abolition is conditionally advocated. However, one condition for abolition is that the United States joins the GATT regime after MFA-IV. The technical discussion is given in Pangestu and Hasni, in this volume (see also Pelkmans 1990b). A likely solution is to let the so-called transfers between national MFA quotas within the EC grow further after 1991, until one reaches effective EC quotas. In 1991 these transfers will already be 16 per cent for non-sensitive products and 8 per cent for sensitive products. The probable result of the shift to the same EC quotas without national quotas is an increase of EC imports in the order of 3 to 5.2 per cent (Davenport and Page 1989). In cars, the final goal is free trade, according to the Council of Trade Ministers. But the question is when is this to happen. The debate no longer revolves around the method- a VER with the Japanese is not to be doubted. Unsolved are elements such as the following: For how long a period? How rapidly will Italy, France, and Spain open up? Should local EC production of Japanese cars be included in the VERs (which in effect means a much longer adjustment period)? The EC car

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industry has greatly improved productivity and quality; it is highly profitable at the moment. But Japanese labour productivity is even higher and EC suppliers' networks have not fully caught up with the quality and efficiency of their Japanese counterparts. More co-operation and some mergers in the car sector and frantic restructuring in the suppliers' sector show that adjustment processes have not yet fully run their course. Even if the VER takes ten years to free trade, it should not be forgotten that without 1992 Italy and France would surely not have been willing to relax their strict protectionism. The solution may be slow in coming and not in conformity with GATT rules, but it does open up markets which were tightly closed. In electronics, all sorts of measures are employed including R&D, subsidies, anti-dumping, and origin rules, besides VERs and (only) a few national quotas. The sector is definitely under great pressure to adjust but volume protection at the national level will not be defended as a necessary method. The reader is referred to the chapter by Wong Poh Kam, in this volume. All in all, access in areas where national volume protection was applied will improve in practically all cases.

5.4. Beyond GATT Issues 1992 is full of "beyond-GA TT" issues. This is true of the White Paper and a fortiori for the higher ambitions of 1992. Relevant to this chapter are the services (financial and non-financial), technical conformity assessment, public procurement in the "excluded" sectors, and exchange controls, thereby ignoring many other "beyond-GATT" problems such as intellectual property rights (the 1992 programme has consequences for patents, trade marks, and copyright), certain agricultural problems, and immigration questions. Services are being introduced into GATT in the Uruguay Round. The main point for financial services is "reciprocity". It should be realized that "national treatment" is not an adequate solution if access is (almost) impossible. The reciprocity approach sketched in section 5.1 would seem to be a reasonable compromise. However, one should not forget that in insurance practically all countries in the world are difficult to penetrate (including Europe today). Therefore, the starting position in insurance is totally different from that in banking and securities, which are internationalized sectors. The economic significance of reciprocity in insurance should not be assumed to be automatically comparable with that in other financial services. Transport services that are of importance to ASEAN are maritime and civil aviation (but note that 1992 also liberalizes road haulage, bus transport, inland shipping, and to some extent even rail). Neither maritime nor air transport are seriously addressed in the Uruguay Round. In the case of maritime transport, the liberal tradition of Community sea transport and the recognition of the U.N. Convention on a Code of Conduct for Liner Conferences means that reciprocity is only a problem in exceptional cases. In December 1986 four directives on maritime transport were adopted: one on the freedom to provide maritime transport services - it extends to services among Member States and third countries; one on the

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application of EC competition rules - here liner-conferences are brought under group-exemption (from the prohibition of interfirm concertation) as long as effective competition from non-conference lines remains possible- only if a third country would not allow such competition would reciprocity problems emerge, as the Council would then mandate the Commission to negotiate; one on anti-dumping in maritime shipping (which is "beyond GATT" as GATT applies dumping only to products) - for the first application of EC anti-dumping to a South Korean firm (see Langhammer in this volume); and one on free (services) trade in ocean shipping, with the possibility of EC sanctions taken selectively. Apart from possible sanctions, the EC does not apply any restrictions on external maritime transport. The one issue outstanding is cabotage, which is the right to provide maritime services between two points inside another Member State. The situation in air transport is completely different. There is an outright mercantilist tradition in the world of civil aviation, combining trade restrictions, the political use of sovereignty over air space and landing rights, bilateralism, and cartelization. The complexity of EC 1992 in civil aviation is too great for even a sketchy treatment in this chapter (see Pelkmans 1989; McGowan and Seabright 1989). The full intricacy of the external dimension only begins to be perceived today and no substantive proposals are being discussed, let alone officially tabled. Internally, the basic idea of 1992 in air transport- freedom to provide air transport services throughout the Community by any EC airline licensed as fit to fly - has been politically accepted by the Council. However, the so-called first package did little to move things closer to that idea, except for bringing civil aviation under EC competition rules. The second package, which is currently under discussion, will pursue the reduction of bilateral capacity limits and facilitate multiple designation on major routes, while (somewhat) liberalizing the fare-setting process and especially its approval by governments. Also, harmonization is pursued (diplomas, airworthiness standards, and so forth). The key issue increasingly becomes how the EC Commission - and to some extent, the Council - will apply EC competition rules to air transport. The external dimension will be entirely a matter of negotiations. Put differently, given the deeply engrained mercantilism in air transport, reciprocity is the central property of every bilateral Air Services Agreement of every aviation country in the world. This has a profound impact, among others, on intercontinental flights starting within the common market. Thus, a bilateral agreement between any ASEAN country X and a EC country A may grant landing rights of airlines from A in X, usually with prescribed routes, capacities, and frequencies. From a EC point of view this means that the bilateral agreement prevents intra-EC freedom to provide services, namely intercontinental flights to X by airlines from other Member States via A, or by airlines which are the property of EC citizens of more than one EC country, or simply Community airlines (as of 1993 or earlier). There are also questions with regard to the fifth and sixth freedoms, "freedoms" (based on the Chicago Convention) which must lose their significance inside the EC given the logic of 1992. The negotiations will start with EFTA as, first, the networks of EC and EFT A

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are interwoven; second, one airline (Scandinavian Airlines [SAS]) has ownership in both; and third, the EC and EFT A would like to bring air transport into their overall integrative framework, the so-called European Economic Area (EEA, see section 6.2). EFTA being a special instance, the real test case will be negotiations with the United States. The United States is liberal inside but mercantilist externally, just as everybody else. Key problems will include the designation of many more "gateways" (first, airports) for EC airlines in the United States, the realignment of existing fifth freedoms for the United States in Europe and the highly restrictive U.S. laws on foreign (co)ownership of U.S. airlines. On the EC side the most formidable problems will be who will negotiate (on this issue, which is procedural yet highly controversial, the Commission takes the line that air transport is "trade policy", hence the Commission should represent the EC externally) and how the EC will formulate one external position, given eleven existing bilateral agreements with individual Member States. The U.S. example will set the principles and the tone for later negotiations with Japan, Eastern Europe, and ASEAN. Not excluded is the fact that the EC may propose a (more liberal) revision of the hopelessly mercantilist and restrictive Chicago Convention as a way to facilitate the process. Telecom is another major non-financial service sector which is not seriously addressed in the Uruguay Round. The changes in the EC are fairly radical. The radicality of the regulatory reforms at Member State level is prompted by the interaction of two coinciding factors: fundamental changes operating in world markets (mainly, technological progress in network technologies, terminal equipment, and a range of "new" services as well as increasing globalization on the supply side of telecom hardware and selective globalization for especially new services in communications) and the creation of a single market in telecommunication hardware and services. Since national telecommunication administrations (TAs) used to be entrusted with "exclusive rights" for services and procurement (and setting the standards for equipment) with respect to the network monopoly they controlled, and since these "rights" were combined with (social) obligations of uniform pricing and uniform services, while permitting heavy cross-subsidization of local calls by long-distance calls, the regulatory reforms must be rather radical to generate price and non-price competition and a level of choice for business users and consumers across intra-EC frontiers. EC-1992 will not do away with the monopoly for voice telephony in Member States but almost everything else is in a state of flux (however, at the moment voice telephony still brings in about 85 per cent of all revenues in telecommunication). I shall provide a summing up of six major changes in telecommunication, with a word on the external dimension. First, a common market for terminal equipment will be introduced in 1990, which will be open for third countries; the new European telecommunication standards institute (ETSI) has launched a programme of European standards so that competition can in fact be made to work. Second, a common market for network equipment is agreed. Of course, here the buyers are the T As themselves - hence this is pursued via the opening up of public procurement.

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Since this is an excluded sector in the GATT code a 50 per cent local-content rule can legally be employed by purchasers. The EC has offered to waive this clause when some kind of reciprocity can be accomplished multilaterally or bilaterally. Third, a common market for services is agreed, except for voice telephony. For other (value-added and transmission) services, the networks must be accessible to service providers; a directive on "Open Network Provision" is adopted; network holders will be subject to supervision by competition authorities with respect to tariffs and access. Fourth, an EC-wide telecommunication network is built up, first digital (Integrated Systems Digital Network [ISDN]), then enlarged to broadband. Fifth, the STAR programme subsidizes the improvement of telecommunication infrastructures in poor EC regions. Six, competition policy will henceforth be applied to telecommunication, a significant step to safeguarding competition in a deregulated environment with strong network externalities and monopolistic power. With respect to technical conformity assessment, the beyond-GATT issue turns around something the GATT Code for Technical Barriers cannot deal with: mutual recognition of conformity assessment between code signatories. Leaving aside voluntary certification and testing, there are two types of cases for which mutual recognition between a third country X and an EC country A would amount to a substantial improvement of access to the EC: one is for products for which certification is mandatory, usually at prescribed technical specifications or for "new approach" products in case of a reference to a European standard; the other is for "new approach" products, if European standards are not (yet) available, or if the third-country exporter (or the EC producer) chooses to utilize his own specifications. The first type is relatively easy as a certification institute or testing laboratory in X should become recognized as a "notified body" by the EC. Some such arrangements do seem to exist already at Member State level. EC procedures have yet to be devised, and this has created some anxiety in the United States, for instance. More difficult is the mutual confidence-building as a prerequisite for such mutual recognition of tests and certificates - it is bound to take time for exchange of staff, checking of testing methods, ensuring full independence and sustained quality of the bodies to become recognized, and so forth. For the second type, matters are not fundamentally different except that the conformity assessment has to be executed with respect to the "essential requirements", yet without the guidance of a European standard. This is already problematic enough inside the EC and bound to take years to develop into a smoothly operating system based on the work of the new European Organization of Testing and Certification (EOTC) and the ensuing intensification of intra-EC co-operation among conformity assessment bodies. Note that the EOTC was only founded in 1990. It is not realistic to expect this process to be externalized rapidly; on the other hand, there is nothing preventing mutual recognition once the system is further developed. Observe that one condition will be the adherence to world standards for quality of testing bodies, the ISO 9000 series. With respect to public procurement in the so-called excluded sectors, namely, telecommunication hardware, supplies to utilities (water, gas, electricity), and supplies

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to public transport purchasers, the EC will adopt a 50 per cent local (EC) content rule. For a proper understanding of this three points should be noted. First, the starting position of third countries and EC Member States is equally miserable in these product markets: EC Member States have simply kept them sealed off, also from one another. Second, the local content rule is not compulsory and not discriminatory: it applies to all suppliers - EC and non-EC - and the formula is merely that purchasers are legally entitled to ignore bids (but they are free to include them) when local value added is less than 50 per cent. Third, the EC hopes for an extension of the GATT code, covering these sectors as well, or otherwise establish bilateral agreements, waiving this reciprocity clause. Finally, with respect to exchange controls, they have been abolished by Italy and France, to be followed soon by Spain, Portugal, Greece, and Ireland, without any regular provision for EC-wide controls on capital flows. In times of upheavals in the world capital markets, safeguard measures would be possible, however. Until the EMU arrives, Member States retain the option of a temporary resort to exchange controls, under Article 108, EEC; however, the conditions are strict and the Commission and the other Member States (via the Monetary Committee) supervise the process.

6. The Community in 1993: Some Conjectures The period between October 1989, when the workshop of this project organized by the Institute of Southeast Asian Studies (!SEAS) was held, and Spring 1990, when the revised papers had to be finished for publication in this volume, was one of unprecedented change in Europe. Eastern Europe went through an astounding series of peaceful revolutions, led by the peoples. The Berlin Wall was opened and subsequently broken down. East Germany unites with the Federal Republic. Even the very repressive Ceaucescu regime fell in less than ten days after the first hesitant demonstrations; in this sad case there is bloodshed, but no prolonged civil war. The Soviet Union pursues a conscious policy of non-intervention, which makes these breathtaking events possible. Totally unexpectedly, the Community emerges as the major player at the European continent, now that force has receded. In mid1989 it is charged with the co-ordination of aid of the Group of 24 to Hungary and Poland. The new governments of the Eastern European countries, all preparing free and democratic elections, turn to the EC for financial support, emergency aid, and new trade treaties as well as broad political and economic backing for a transition during which foreign direct investments - expected to come predominantly from the EC and EFTA countries - can confidently flow to their shattered economies. The EC plays a major role in the European Bank for Reconstruction and Development (EBRD), another instance of rapid change as the idea for it was only floated by Mr Herrhausen one week before the ISEAS workshop was held. Meanwhile, the EBRD is already functioning. Knock-on effects of these changes are further removed from the EC -the forceful quest for independence by the Baltic states, the revitalization of the Helsinki Agreements (especially the hitherto little-used second "economic" basket), the economic reform proposals of the Soviet Union to give concrete meaning

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to perestroika, the prudent opening up of Albania - yet the Community can no longer be indifferent. This fascinating transformation which is still open-ended shows two central propositions which underlie much of the following: Even conjectural positions or scenarios about the medium-run can be dramatically off-the-mark. No "expert" and no scenario-builder foresaw the recent transformations in Eastern Europe. The following conjectures should therefore be viewed merely as a help to the reader so as to enable him to arrive at a better-informed judgement. The external political context in which the Community operates has radically altered, while its external role has greatly increased in scope and importance. Even though this has not directly effected the (first two) core ambitions of 1992 nor the pursuit of the 1992 calendar, it has dramatically underlined that a successful completion of 1992 and its higher ambitions are major attractions for other European countries. Did the fortress Europe debate (see section 5.1) show the importance of 1992 for others? Did the recent transformations condemn the EC to succeed? The bold advances that a hitherto reticent EFfA suddenly discusses seriously with the EC (see section 6.2), the pole of attraction that the Community has become for Eastern Europe and the Soviet Union while finding itself as the anchor of economic and political stability in a Europe that is in a state of flux, simply leave no place for failure. The tremendous reform challenges and pent-up expectations have fundamentally changed the context of 1992. The Community embracing the 1992 White Paper in mid-1985 is a very different one from that pushing through the remaining dossiers two years before the deadline.

6.1. Living Up to Ambitions The year 1992 has proved to be a moving target. The highest ambitions have sprung from the process, no doubt, but are no longer necessarily bound by the 1992 deadline. By 1993 the White Paper will be more or less completed. A number of adoptions will be slowly implemented or only after numerous infringement procedures on Member States' interface, including hundreds of cases before the EC Court of Justice (see, for example, Pelkmans and Sutherland 1990). Other adoptions will (and do already) contain derogations for certain Member States beyond 1992 (and sometimes many years later) or will enter into force after the famous deadline. Others, again, will be formally in force but suffer from practical execution problems such as the lack of European standards, the lack of delegated power to the Commission (food additives) or (as in air transport and textiles and clothing) highly complex external negotiations. The indirect tax cases will probably be decided before the end of 1992; however, implementation will be carried out in two stages, with the first stage based on the destination principle and the second one on the origin principle. Finally, a few marginal dossiers might perhaps not be decided

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before the deadline, yet the question is whether that would imply a failure of 1992. Even the controls on persons may proceed in common now that "Schengen" might well be signed after all. In short, 1992 should not be pinned down as a date and to be merely ticked off as items on a list. The essential accomplishment is no longer in doubt, even though there are still a lot of devils in the details. The Single Act is a success, especially in view of its first being considered as a very modest rewrite of the treaties. The external dimension turns out to be more difficult than expected as it touches upon the hardest pockets of residual protection. In products one wonders about the outcomes for cars, textiles and clothing, footwear, and electronics. A best guess might be that, in cars, France, Italy, and Spain will open up slowly but free trade will not be achieved before the year 2000; in textiles and clothing, a gradual enlargement of intra-EC quota transfers will eventually obviate the strict 1992 issue, without, however, ensuring anything approaching free trade this decennium; in footwear, a few selective VERs will suffice to "buy off' the external problem while the EC will target intra-EC programmes to this highly splintered sector in great need of adjustment; in electronics, further market-led adjustment and globalization as well as major R&D efforts will reduce protectionist pressures to a vigilant anti-dumping policy combined with "origin rules", elements which will be procedurally tightened in the GATT. In services the greatest problems are in air transport and insurance, possibly also in telecommunication procurement. The EC being so far ahead of GATT (and, in civil aviation, of the Chicago Convention) makes conjectures difficult. Some degree of bilateral resolution of the reciprocity clauses is likely, however. The "social dimension" will consist primarily of the prevention of "social deregulation". Pressures from the European Parliament, the Economic and Social Committee of the EC, and some Member States will nevertheless lead to a creeping process of giving the EC concurrent regulatory powers in the social field. In the spirit of 1992, they will assume the form of "essential requirements", a kind of minimum social standards; in view of the great sensitivities in business circles and some Member States, there will be instances where different "options" are included (for example, the statute of the European Company), taking the political sting out of the issue. At the same time, social security will remain firmly national, without allowing eligibility and residence requirements to be (too) discriminatory. By 1993 the EMU will be essentially decided, but not yet introduced (that is, stage 1 will still apply). With British opposition melting away, and unanimity on central issues such as the independence of the new "Eurofed" and priority of price stability, it would appear to be possible to get agreement on the related budgetary issues and the management of exchange rate policy vis-a-vis the yen and the dollar. Apart from a growing consensus on macroeconomic policy-making in the EMS, what has facilitated progress on the EMU is the bold and speedy approach to German monetary union in early 1990. The proof that it can be done fast, if conditions are fulfilled, and the wish by Germany and others to firmly cement the

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larger Germany into a stronger EC with an EMU constitute the main reasons for this positive linkage. Between mid-1990 and 1993 we will have witnessed two inter-governmental conferences: one on the EMU and one on political union. The latter and the former are inextricably linked on issues such as "accountability" on monetary and exchange rate policies and the nature and degree of constraints on national budgetary policies imposed by EC-1evel decision-making. What is the role for the European Parliament, other than hearing quarterly statements by the president of Eurofed? What is the role for the Council of Ministers and the Monetary Committee, given the independence of the Eurofed? What is the role of the EC Commission, if any, squeezed as it might be among these three institutions? It is widely agreed that political union - though at present no more than a label - would also have to deal with two other key issues, namely, the overall institutional "balance" in the Community and the EC powers in foreign policy, possibly even in security and defence. This chapter is not the place to enter into these questions. One might generally conjecture that the medium-term institutional construction of the EC will be based on the twin concepts of (more) supranationality and (more explicit) subsidiarity. When delegating or fully transferring additional powers from Member State level to EC level, inevitably sensitivity to what ought to remain at national level will augment. The process of "communitarization" cannot be "open-ended", as were it a linear process of ever "more EC": not only would such a centralism invite political backlashes, undermining previous accomplishments, it is also not advisable on functional grounds. With respect to foreign policy, the straws in the wind point to a rapid strengthening of European Political Co-operation, with an increasing role for the EC Commission. These indications will be briefly touched upon in sections 6.3 and 6.4. Security issues have prudently been introduced into the Single European Act, in as far as "economic and industrial" aspects are concerned. However, as even a superficial reading of the present political landscape of the European continent shows (see section 6.3), the overall security context against which the origins of the Community of 1957 and also the Single Act of 1987 has to be judged has disappeared almost overnight. One of several, radically new security options would directly involve the Community. If this route were to be chosen, the EC would transform into a kind of United States of Europe, a prospect that is much easier accepted by non-Europeans than by countries constituting such a new "state". The first internal working papers of the Commission envisage the rather flexible notion of a political union of two separate Communities: one "economic" (the present EEC, amended) and one dealing with foreign policy and security. 6.2. EC-EFTA: A Very Special Relationship EFTA was founded in 1960 as a reaction to the signing of the EEC Treaty in 1957. The countries involved wanted not a customs union, but merely a free-trade area (and only in industrial, not agricultural, goods), and rejected the political, long-run objectives of European integration (summed up in the famous phrase from the

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preamble of the Treaty of Rome: "an ever closer union between the peoples of Europe"). The two trade blocs have never been adversary, however. Over time they have worked together towards more overall liberalization in non-socialist Europe, first in the OECD and GATT frameworks, later by means of the EC-EFTA (industrial) free-trade areas agreed in 1973 and implemented by 1980. However, the attraction of the EC has gradually eroded the significance of EFT A. In 1973, the United Kingdom and Denmark left EFTA for the EC, which more than halved EFT A in terms of GNP. In 1986 Portugal did the same. In 1988 Austria applied for EC membership and active debates on EC membership take place in Norway (which almost joined in 1973) and Sweden. This background is essential in order to appreciate the current, far-reaching form of economic integration under negotiation between the two blocs. Although EFTA consists of six countries scattered over Central and Northern Europe, their relationship with the EC resembles in several ways the U.S.-Canada ties. In both cases, population as well as GNP relate roughly I 0: 1. In both cases, they are one another's largest trading partners. In both cases the asymmetries are considerable: the El r,_ foreigners will not invest in this country's fixed interest securities. Investment is therefore constrained to level I,, by available domestic savings So and savings will be rationed at borrowing rate r8 • If foreigners can freely acquire equity or invest directly then investment will increase to 12 and foreigners will own the distance (!" - / 2 ). With free competition in capital markets, savings would increase to S 1 and foreigners would own only (S 1 -I). This example illustrates the possibility that domestic investment is either constrained by savings if DFI is controlled, or if not, partial controls give rise to excessive foreign indebtedness. Spreads in countries with capital controls are a multiple of spreads in countries with liberal capital transactions. Just to gain orders of magnitude, the following example may be useful. With Cobb-Douglas technology, the elasticity of the desired capital stock with respect to cost of capital is above unity. 0

200

w

c:

~ ~

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-200

1981

1982

1983

1984

Hypothetical Changes: Due to change in world trade

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Due to commodity composition Due to market distribution

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1985

1986 •

1987

1988

Factual Change

142

Gerhard Schmitt-Rink and Thomas Lilienbecker

1988; (3) "market distribution" was permanently positive; and (4) ''competitiveness" was positive in 1981, 1987, and 1988, and negative from 1982 to 1986. Figure V.9(b) shows that with respect to ASEAN exports of electronics to the EC the impact of (1) "world trade" was permanently positive; (2) "commodity composition" was negative in 1981, 1982, 1985, and 1986, and positive in 1984, 1987, and 1988; (3) "market distribution" was positive in 1981, 1982, 1983, 1984, 1987, 1988, and negative in 1985 and 1986; and (4) "competitiveness" was positive in 1981, 1982, 1983, 1984, 1987, and 1988, and negative in 1985 and 1986. If "competitiveness" can be taken as an indicator for the net effect of trade creation and trade diversion in the context of European economic integration in the FIGURE V.9(b) Constant-Market-Share Analysis of ASEAN Exports of Electronics to the EC 800 -.--------------------------------------------~

600 -

Cl)

::::> (.) w

400

c

~

~

200

~

1981

1982

1983

1984

Hypothetical Changes: Due to change in world trade

[J

[]

Due to commodity composition

1lm 11

Due to market distribution Due to competitiveness

1985

1986

•

1987

1988

Factual Change

143

An Analysis of ASEAN-EC Trade in Textiles and Electronics, 1980-88

1980s, then the data presented above do not support the view that market shares of ASEAN and the NICs have been or will be decreased by trade diversion rather than increased by trade creation. 3. Intra-Industry Trade Shares in ASEAN-EC Trade in Textiles and Electronics, 1980-88 An increasing share of world trade is exchange of differentiated products which belong to the same product group, that is, bilateral trade in the sense that each country exports and imports the same kind of products simultaneously. This twoway exchange of the same or similar products seems to contradict classical and neo-classical trade theory according to which international trade is predominantly one-way exchange in the sense that each country exports and imports goods which belong to entirely different product groups. Contrary to this unilateral, inter-industry trade, bilateral, intra-industry trade is based on specialization within the same spectrum of differentiated products, product versions, and production stages. In this analysis the share of intra-industry trade (q) is measured as net trade over gross trade within each single three-digit product group.

where VEx(i) V,M(i)

= Export value of commodity = Import value of commodity

i in 1,000 ECUs i in 1,000 ECUs

In order to avoid an over-estimation of the share of intra-industry trade, the computation is based on three-digit data, that is, on the lowest available level of aggregation. TABLE V.l(a) EC-ASEAN Intra-Industry Trade Shares: Textiles and Clothes Year

Yarns

Fabrics

Other Textiles

Clothes

Textiles and Clothes

1980 1981 1982 1983 1984 1985 1986 1987 1988

0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

0.04 0.04 0.03 0.03 0.02 0.03 0.03 0.03 0.02

0.04 0.05 0.05 0.04 0.03 0.02 0.03 0.03 0.04

0.04 0.03 0.04 0.04 0.04 0.03 0.03 0.02 0.02

0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.02 0.02

144

Gerhard Schmitt-Rink and Thomas Lilienbecker

TABLE V.l(b) EC-ASEAN Intra-Industry Trade Shares: Electronics Year

Computers

AudioNideo

Technical

Electronics

1980 1981 1982 1983 1984 1985 1986 1987 1988

0.09 0.12 0.14 0.25 0.21 0.23 0.19 0.17 0.16

0.14 0.11 0.12 0.12 0.13 0.11 0.10 0.10 0.12

0.29 0.32 0.39 0.38 0.41 0.40 0.41 0.44 0.43

0.22 0.23 0.28 0.29 0.32 0.30 0.29 0.29 0.28

-----·----

----

Obviously the share of intra-industry trade is much larger in the case of electronics than in that of textiles and clothes. This could lead to the impression that ASEAN-EC trade in textiles and clothes is dominated by vertical specialization, and ASEAN-EC trade in electronics by horizontal specialization. A comparison of export and import unit prices clarifies, however, that vertical specialization prevails in both fields.

4. Import-Export Price Differences in ASEAN-EC Trade in Textiles and Electronics, 1980-88 Relative differences between export and import prices within single product groups can be taken as indicators of the importance of particular types of vertical rather than horizontal specialization between ASEAN and the EC. In general, vertical specialization means an international division of labour ( 1) across particular product groups, namely, specialization in the production of specifically labour-, capital-, or research-intensive final products; and (2) within particular product groups, namely, specialization in labour-, capital-, or research-intensive single stages of the overall production process of particular products. Vertical specialization is partly product specialization, partly process specialization. This type of international division of labour corresponds to the classical and neo-classical theory of international trade. Vertical specialization in both senses implies large differences in relative factor endowments, preference patterns, product spectrum, and level of per-capita income between trading partners. Horizontal specialization, on the other hand, is based on the equality or similarity of relative factor endowment, preference pattern, product spectrum, and level of per-capita income. It would be misleading, however, to automatically identify vertical specialization with unilateral, interindustry trade and horizontal specialization with bilateral, intra-industry trade. Even at the lowest level of aggregation the exchange of "high-end" for "low-end" products or of products which represent different stages of completion of particular final goods are in many cases located in the same product group. Obviously, the

An Analysis of ASEAN-EC Trade in Textiles and Electronics, 1980-88

145

exchange of low-price for high-price textiles, of yams for fabrics, of fabrics for clothes, or of electronic components for computers are cases of vertical rather than horizontal specialization, even if imports and exports are reported in the same product group. Thus at least part of the intra-industry trade in textiles and electronics among ASEAN and the EC is probably not a reflection of horizontal but vertical specialization. One possible way to clarify the character of these cases of bilateral, of intraindustry trade is to determine the relation of the unit prices of particular exports and imports. Tables V.2(a) and V.2(b) show the relative export-import unit-price differences p(i) for textiles and electronics, where

and VEx(i) = Export value of commodity i in 1,000 ECUs WEx(i) = Export weight of commodity i in I ,000 kg.

.

PEx(z) .) P IM ( z

= Umt

.

. . . . ECU export pnce of commodity z m -kg.

= W-

= U mt.

. . f d. . . ECU Import pnce o commo 1ty z m -k-

V,M(i) = W-(.)-

g.

VEX(i) EX

(-:-)l

!M l

A positive (negative) sign of the relative unit export-import price difference p(i) indicates that the average unit price of EC exports is higher (lower) than the average unit price of EC imports. If, for example, electronic parts are exported,

assembled abroad, and re-imported, the unit price of the re-imports is normally higher than that of the exports, and the export-import unit-price difference is negative in the amount of the value added. Thus a negative p(i) indicates vertical process specialization in the sense explained above. If "high end" textiles and clothes are exported, "low end" textiles and clothes imported, the export-import unit-price difference is positive, and this indicates vertical product specialization. In ASEAN-EC trade in textiles and clothes, the export-import unit-price differences are without any exception positive for the EC, negative for ASEAN. This means that ASEAN exports primarily low-price textiles and clothes to the EC and imports high-price textiles and clothes from the EC. In ASEAN-EC trade in electronics the export-import unit-price differences are negative for the EC, positive for ASEAN in the cases of computers and technical electronics, positive for the EC, negative for ASEAN in the case of audio/video equipment. This indicates that ASEAN-EC trade in textiles, clothes, and audio/video equipment is dominated by vertical product specialization, whereas trade in computers and technical electronics is based on vertical process specialization. Tables V.5(a) and V.5(b) demonstrate similar results for NIC-EC and ECL-EC trade in textiles, clothes, and electronics.

Gerhard Schmitt-Rink and Thomas Lilienbecker

146

TABLE V.2(a) EC-ASEAN Relative Export-Import Unit-Price Differences: Textiles and Clothes

Year

Yarns _,

1980 1981 1982 1983 1984 1985 1986 1987 1988

Fabrics

Other Textiles

Clothes

Textiles and Clothes

0.41 0.41 0.47 0.49 0.37 0.36 0.47 0.47 0.22

0.53 0.42 0.30 0.12 0.35 0.40 0.42 0.32 0.18

0.61 0.54 0.58 0.57 0.59 0.63 0.69 0.64 0.62

0.24 0.14 0.19 0.21 0.14 0.17 0.24 0.16 0.08

____ 0.66 0.52 0.64 0.57 0.57 0.54 0.55 0.44 0.61

--------- ---------

TABLE V.2(b) EC-ASEAN Relative Export-Import Unit-Price Differences: Electronics Year Computers AudioNideo Technical Electronics ___ ____________________________ ,

1980 1981 1982 1983 1984 1985 1986 1987 1988

--0.12 --0.07 --0.11 --0.15 --0.14 --0.12 --0.10 --0.14 --0.10

0.32 0.48 0.53 0.50 0.48 0.57 0.61 0.70 0.67

--0.75 --0.61 --0.61 --0.62 --0.64 --0.66 --0.56 --0.47 --0.25

--0.34 --0.21 --0.24 --0.31 --0.36 --0.36 --0.26 --0.18 --0.05

5. Summary The data presented above clarify that ASEAN-EC trade in textiles and electronics is primarily based on vertical rather than horizontal specialization. The vertical division of labour in the fields of textiles and electronics is partly product and partly process specialization. Trade in textiles is predominantly exchange of lowprice for high-price textiles and of yarns and fabrics for finished textiles and clothes. Trade in electronics is primarily exchange of computers for audio/video equipment and of electronic components for finished electronic products. Obviously, this is exactly what one would and should expect according to the modem theory of international trade. In other words, the pattern of specialization between ASEAN and the EC - the same is true with regard to NIC-EC and ECL-EC trade -

TABLE V.3(a) Constant-Market-Share Analysis: Textiles and Clothes (Based on values)

1981

1982

1983

1984

90,015 34,270 5,130 -335 50,950 0.38 0.06 0.00 0.57

39,752 51,196 5,850 5,087 -22,381 1.29 0.15 0.13 -0.56

-841 49,369 --9,338 -671 -40,201 -58.70 11.10 0.80 47.80

613,806 180,400 46,227 67,418 319,762 0.29 0.08 0.11 0.52

94,056 280,936 -15,323 -46,243 -125,314 2.99 -0.16 -0.49 -1.33

132,523 122,209 33,527 14,681 -37,894 0.92 0.25 0.11 -0.29

325,753 167,166 -17,317 10,142 165,761 0.51 -0.05 0.03 0.51

1985

1986

1987

1988

102,993 105,515 3,020 7,309 -12,852 1.02 0.03 0.07 -0.12

50,327 71,945 7,123 3,737 -32,478 1.43 0.14 0.07 -0.65

61,077 46,999 16,106 -I, 139 -889 0.77 0.26 -0.02 -0.01

416,170 74,996 11,189 4,195 325,791 0.18 0.03 0.01 0.78

366,820 51,231 -200,955 22,334 494,210 0.14 -0.55 0.06 1.35

-39,723 261,719 -54,561 7,365 -254,247 -6.59 1.37 -0.19 6.40

579,248 553,772 19,218 80,271 -74,013 0.96 0.03 0.14 -0.13

-127,976 381,212 -12,117 -73,121 -423,951 -2.98 0.09 0.57 3.31

351,971 226,377 171,408 -81,242 35,428 0.64 0.49 -0.23 0.10

549,531 366,151 154,678 943 27,758 0.67 0.28 0.00 0.05

285,450 191,528 -777,653 112,845 758,730 0.67 -2.72 0.40 2.66

236,542 175,723 -4,398 !5,283 49,934 0.74 -0.02 0.06 0.21

486,631 413,550 1,365 11,247 60,469 0.85 0.00 0.02 0.12

314,349 289,746 -30,681 -11,292 66,577 0.92 -0.10 -0.04 0.21

233,618 195,690 26,071 -8,245 20,102 0.84 0.11 -0.04 0.09

330,560 310,496 65,079 16,214 -61,229 0.94 0.20 0.05 -0.19

-89,116 157,061 -485,216 -24,972 264,010 -1.76 5.44 0.28 -2.96

EC Imports from ASEAN

[0] I(t) -I(t- I) [1] Due to increase in world trade [2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [ 1]/[0] Share [2]/[0] Share [3]/[0] Share [4]/[0] EC Imports from the NICs

[0] I(t)- I(t- 1) [!]Due to increase in world trade [2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [ 1]/[0] Share [2]/[0] Share [3]/[0] Share [4]/[0] EC Imports from the ECL

[0] I(t)- I(t- I) [1] Due to increase in world trade [2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [ 1]/[0] Share [2]/[0] Share [3]/[0] Share [4]/[0]

TABLE V .3(b) Constant-Market-Share Analysis: Electronics (Based on values)

1981

1982

1983

1984

168,728 106,893 -46,083 14,701 93,217 0.63 -0.27 0.09 0.55

181,091 104,969 -36,832 11,407 101,547 0.58 -0.20 0.06 0.56

199,214 198,055 -41,323 7,744 34,738 0.99 -0.21 0.04 0.17

472,637 320,883 68,746 8,173 74,835 0.68 0.15 0.02 0.16

[0]/(t) -l(t- 1)

210,088

20,080

244,586

[I] Due to increase in world trade [2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [ 1]/[0] Share [2]/[0] Share [3]/[0] Share [4]/[0]

167,230 -12,019 32,131 22,746 0.80 -0.06 0.15 0.11

157,480 -101,295 11,596 -47,701 7.84 -5.04 0.58 -2.38

41,893 95,777 -20,040 -1,320 -32,523 2.29 -0.48 -0.03 -0.78

133,125 80,382 4,864 7,052 40,827 0.60 0.04 0.05 0.31

1985

1986

1987

1988

86,744 234,511 -47,510 -10,447 -89,811 2.70 -0.55 -0.12 -1.04

-148,659 35,336 -23,459 -28,598 -131,938 -0.24 0.16 0.19 0.89

402,307 153,861 9,604 16,499 222,343 0.38 0.02 0.04 0.55

723,828 344,432 82,317 25,113 271,965 0.48 0.11 0.03 0.38

946,777

87,467

685,345

1,535,294

1,625,588

248,291 -72,438 96,454 -27,721 1.02 -0.30 0.39 -0.11

400,917 -79,880 23,502 602,238 0.42 -0.08 0.02 0.64

342,377 1,148 -37,798 -218,259 3.91 0.01 -0.43 -2.50

50,811 36,756 -51,209 648,987 0.07 0.05 -0.07 0.95

306,102 37,146 4,708 I, 187,338 0.20 0.02 0.00 0.77

809,777 -82,957 21,606 877,162 0.50 -0.05 0.01 0.54

104,858 150,587 -31,919 -7,408 -6,402 1.44 -0.30 -0.07 -0.06

579,283 231,712 -19,953 -13,035 380,559 0.40 -0.03 -0.02 0.66

324,469 202,326 3,533 -4,230 122,840 0.62 0.01 -0.01 0.38

-59,080 35,445 28,007 20,899 -143,431 -0.60 -0.47 -0.35 2.43

60,853 162,834 2,741 11,345 -116,067 2.68 0.05 0.19 -1.91

184,628 302,679 9,820 -13,317 -114,554 1.64 0.05 -0.07 -0.62

-----·

EC Imports from ASEAN

[0] /(t) -l(t- 1) [ 1] Due to increase in world trade [2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [1]/[0] Share [2]/[0] Share [3]/[0] Share [4]/[0] EC Imports from the N!Cs

EC Imports from the ECL

[Oj l(t) -l(t- 1) [I] Due to increase in world trade (2] Due to commodity composition [3] Due to market distribution [4] Residual (due to competitiveness) Share [ 1]/[0] Share [2]/[0j Share [3]/[0] Share [4]/[0] ------

149

An Analysis of ASEAN-EC Trade in Textiles and Electronics, 1980-88 TABLE V.4(a) Intra-Industry Trade Shares: Textiles and Clothes Year

Fabrics

Other Textiles

Clothes

Textiles and Clothes

0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

0.04 0.04 0.03 0.03 0.02 0.03 0.03 0.03 0.02

0.04 0.05 0.05 0.04 0.03 0.02 0.03 0.03 0.04

0.03 0.03 0.04 0.04 0.04 0.03 0.03 0.02 0.02

0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.02 0.02

0.11 0.10 0.11 0.12 0.15 0.17 0.20 0.23 0.24

0.26 0.23 0.23 0.24 0.26 0.27 0.29 0.29 0.24

0.05 0.06 0.05 0.06 0.06 0.06 0.07 0.10 0.08

0.09 0.10 0.10 0.07 0.09 0.10 0.11 0.13 0.16

0.13 0.13 0.13 0.12 0.14 0.16 0.17 0.19 0.19

0.03 0.03 0.04 0.04 0.04 0.04 0.06 0.04 0.06

0.07 0.08 0.07 0.08 0.09 0.08 0.10 0.11 0.11

0.04 0.03 0.05 0.06 0.05 0.07 0.08 0.06 0.05

0.03 0.02 0.02 0.02 0.03 0.04 0.04 0.04 0.05

0.03 0.03 0.03 0.03 0.04 0.05 0.05 0.05 0.06

Yarns

EC-ASEAN 1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-NJCs 1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-ECL 1980 1981 1982 1983 1984 1985 1986 1987 1988

corresponding with relative factor endowments and per-capita incomes. The data do not indicate that in the context of European economic integration in the 1980s, trade diversion dominated trade creation. The shares of ASEAN in EC imports of textiles and electronics did not decrease, and a constant-market-share analysis does not reveal decreases in ASEAN's "competitiveness" on EC import markets for textiles and electronics.

150

Gerhard Schmitt-Rink and Thomas Lilienbecker

TABLE V.4(b) Intra-Industry Trade Shares: Electronics Year

Computers

AudioNideo

Technical

Electronics

0.09 0.12 0.14 0.25 0.21 0.23 0.19 0.17 0.16

0.14 0.11 0.12 0.12 0.13 0.11 0.10 0.10 0.12

0.29 0.32 0.39 0.38 0.41 0.40 0.41 0.44 0.43

0.22 0.23 0.28 0.29 0.32 0.30 0.29 0.29 0.28

0.26 0.25 0.23 0.22 0.19 0.20 0.14 0.13 0.11

0.08 0.08 0.08 0.09 0.12 0.13 0.10 0.07 0.07

0.29 0.30 0.31 0.34 0.35 0.34 0.33 0.33 0.27

0.17 0.17 0.19 0.21 0.22 0.23 0.20 0.18 0.15

0.37 0.40 0.38 0.39 0.37 0.48 0.50 0.51 0.40

0.20 0.17 0.18 0.20 0.20 0.19 0.24 0.23 0.23

0.36 0.33 0.33 0.39 0.37 0.38 0.38 0.38 0.35

0.33 0.31 0.31 0.35 0.34 0.39 0.40 0.40 0.35

EC-ASEAN

1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-N!Cs

1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-ECL

1980 1981 1982 1983 1984 1985 1986 1987 1988

151

An Analysis of ASEAN-EC Trade in Textiles and Electronics, /980-88

TABLE V.S(a) Export-Import Price Differences: Textiles and Clothes ------

Year

Yarns

Fabrics

Other Textiles

Clothes

Textiles and Clothes

0.66 0.52 0.64 0.57 0.57 0.54 0.55 0.44 0.61

0.41 0.41 0.47 0.49 0.37 0.36 0.47 0.47 0.22

0.53 0.42 0.30 0.12 0.35 0.40 0.42 0.32 0.18

0.61 0.54 0.58 0.57 0.59 0.63 0.69 0.64 0.62

0.24 0.14 0.19 0.21 0.14 0.17 0.24 0.16 0.08

0.42 0.36 0.45 0.53 0.49 0.51 0.49 0.51 0.45

0.39 0.40 0.41 0.42 0.46 0.44 0.47 0.41 0.38

0.14 0.04 0.08 --0.04 --0.11 --0.13 --0.22 --0.14 --0.36

0.61 0.59 0.60 0.62 0.59 0.62 0.68 0.65 0.67

0.13 0.09 0.10 0.12 0.06 0.11 0.15 0.08 0.07

0.12 0.13 0.16 0.12 0.07 0.07 0.07 0.07 0.10

0.35 0.36 0.35 0.33 0.32 0.32 0.34 0.37 0.36

--0.09 --0.23 --0.16 --0.26 --0.20 --0.22 --0.26 --0.21 --0.17

0.01 --0.08 0.03 0.04 0.07 0.09 0.11 0.12 0.17

0.00 0.00 0.04 0.01 0.00 0.00 --0.02 --0.04 0.00

EC-ASEAN

1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-N!Cs

1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-ECL

1980 1981 1982 1983 1984 1985 1986 1987 1988

Gerhard Schmitt-Rink and Thomas Lilienbecker

152

TABLE V.S(b) Export-Import Price Differences: Electronics

Year

Computers

AudioNideo

Technical

Electronics

-0.12 -0.07 -0.11 -0.15 -0.14 -0.12 -0.10 -0.14 -0.10

0.32 0.48 0.53 0.50 0.48 0.57 0.61 0.70 0.67

-0.75 -0.61 -0.61 -0.62 -0.64 -0.66 -0.56 -0.47 -0.25

-0.34 -0.21 -0.24 -0.31 -0.36 -0.36 -0.26 -0.18 -0.05

0.04 -0.06 0.18 0.21 0.31 0.36 0.44 0.42 0.39

0.52 0.49 0.56 0.60 0.51 0.51 0.63 0.58 0.72

-0.04 -0.12 -0.11 -0.04 -0.17 -0.24 -0.05 0.06 0.06

0.16 0.04 0.09 -0.03 -0.10 -0.01 0.05 0.11

0.26 0.16 0.00 0.17 -0.02 -0.08 -0.08 -0.07 -0.04

0.25 0.31 0.15 0.23 0.27 0.19 0.16 0.14 0.23

0.08 0.12 0.17 0.15 0.14 0.12 0.13 0.14 0.12

0.16 0.22 0.20 0.23 0.19 0.16 0.20 0.21 0.21

EC-ASEAN

1980 1981 1982 1983 1984 1985 1986 1987 1988 EC-N/Cs

1980 1981 1982 1983 1984 1985 1986 1987 1988

O.Q7

EC-ECL

1980 1981 1982 1983 1984 1985 1986 1987 1988

VI. The EC Internal Market and the ASEAN Electronics Industry WONG POH KAM

1. Introduction Among the factors leading to the creation of an European internal market the most important is probably the growing perception that Europe was lagging behind the United States and Japan in terms of technological development and world market shares for high-tech products (Wagner 1989, p. 5). Nowhere is this European 1 concern for being left behind more powerfully manifested than in the electronics industry. Throughout Europe, there is a growing consensus that the electronics industry in general and more particularly the information technology (IT) industry that it encompasses is fundamental to the industrial survival of Europe for the next century. Widespread fear has been expressed in many quarters that Europe is losing the IT race to the United States and Japan, and that this necessitates nothing short of a concerted pan-European response involving a major restructuring of existing firms and massive co-ordinated government-supported programmes to enable Europe to catch up (see, for example, MacKintosh 1986 and V on Gizycki and Schubert 1984 ). The creation of a single internal EC 2 market thus represents a major - though not the only - element of this pan-European strategy to revive Europe's competitiveness in the electronics industry. Indeed, the EC electronics industry has been leading the overall EC private sector in its campaign for the completion of the internal market, and has been largely instrumental in the creation of the various major pan-European co-operative projects in research and development (R&D) in the electronics-related technology (such as the European Strategic Programme of Research in Information Technology [ESPRIT], Research in Advanced Communication Technologies for Europe [RACE], European Research Co-ordination Agency [EUREKA], Basic Research in Industrial Technologies for Europe [BRITE], and Joint European Submicron Silicon [JESSI]). While the impending creation of a single, unified EC market after 1992 provides a very important framework that guides and influences the future restructuring strategy of the European electronics industry, it must be recognized that significant restructuring and transformation of the industry has in fact been taking place over the last few years, and that various major EC-wide and individual Member State

154

Wong PohKam

government policies related to the industry have been put in place prior to, and in some cases, independent of, the Single Market Act. As such, present and future EC firm strategies and EC government policy responses towards the electronics industry cannot be seen as reactions to the Single Market Act alone, but rather must be analysed within the larger context of European responses to the global competitive challenge for markets and technologies in electronics-related industries. In the light of the above, any attempt to assess the likely impacts of the creation of an internal market on the ASEAN electronics industry must take into account this larger context of European responses, as well as other major national firm responses as we move towards 1992 and beyond. Moreover, while the general directions of EC policy change to the implementation of the Single Market Act are clear from the 300 proposals contained in the original White Paper, the outcome of the final implementation is as yet undetermined at the time of this writing, with several major proposals related to the external policies of the EC still pending translation into directives and regulations for enforcement. 3 The recent events in Eastern Europe and Russia, particularly the creation of a united Germany, has further complicated the picture of what the EC Single Market would be like after 1992. Consequently, this analysis has to take account of this factor of uncertainty and its likely effects on the expectation of the business communities within and outside the EC in the run-up towards 1992. Indeed, it is my contention that, in certain cases, the expectation of the private sector may play a more important role in shaping the strategies of firms than the intention of government planners and policy-makers. The organization of this chapter is as follows. Section 2 presents first a broad overview of the salient market and technological trends of the world electronics industry and the declining position of Europe over the last two decades. The recent responses of European electronics firms and government institutions to arrest this decline and to bring about a "renaissance" of the industry are analysed in section 3. Section 4 analyses how the movement towards an internal market after 1992 may influence the pattern of restructuring of the electronics industry in Europe, and the broad implications that this would have on the structure of world trade and investments in electronics in general. Section 5 reviews the structural characteristics and development trends of the electronics industry in the ASEAN countries, highlighting in particular the salient trends in trade and investment flows between the EC and ASEAN in the electronics sector in recent years. Section 6 then draws upon the findings in the earlier sections to identify the specific implications that future internal market scenarios would have on the electronics industry in ASEAN. A summary of the main conclusions of the paper is given in section 7.

2. Global Market and Technological Trends of the Electronics Industry 2.1. Economic Consequences of TechnoloRical ChanRes Historically, the electronics industry has evolved as quite separate branches consumer electronics, electronic components, computers and office equipment,

The EC Internal Market and the ASEAN Electronics Industry

!55

industrial electronics, telecommunication- involving different firms with different specialization. Although a number of large, integrated electronics firms (for example, Philips and Siemens) have emerged in Europe quite early on, the industry as a whole remained fragmented until the emergence of a common core cluster of underlying digital technologies based on microelectronics in the early 1970s. The resulting increase in the economies of scope for producing related electronic products has led to a rapid pace of convergence and integration of the separate electronics manufacturing branches. Increasingly, most electronic products, whether consumer products, office equipment, computers, or telecommunication equipment, are based on the use of standard printed circuit boards (PCBs), integrated circuit (IC) chips, and opto-electronic devices, reducing the rest of the hardware to simple parts and modular components that can be easily assembled using mass assembly process. Moreover, the assembly process is becoming increasingly automated to increase production speed and to ensure the achievement of consistent precision. Finally, the development of group technology (GT) and flexible manufacturing systems (FMS) allows an increasingly wider range of products to be manufactured using the same production plant. Another technological trend with the rise of microelectronics is the increasing incorporation of "intelligence" (microprocessors) into the end products. This gives rise to virtually limitless scope for increasing the information-processing capability of products, and results in a new form of competition in product quality through squeezing more and more information-processing power into increasingly smaller physical media. The resulting escalation in the complexity of product design thus greatly increases the need for R&D. Increasingly, software and system design become the critical skills and they take on larger shares of the total production cost as compared with the cost of hardware materials. Although there is a trend towards standardization, much software remains specific and proprietary to the hardware (for example, operating systems for computers and control programs for telecommunication switching systems), thus further raising the cost of R&D to provide integrated solutions. A major consequence of this competition through increasing informationprocessing power is the shortening of the product life-cycle of technology-based microelectronic products. The escalating pace at which dynamic random access memory (DRAM) chips of increasing capacity (from 4 kilobytes [KB] to 4 megabyte [MB]) and microprocessors of increasing power (for example, 8086 to 80486) are being introduced serves as a good illustration of this process. Another example is the rapid advance in opto-electronics technology which drives the constant stream of product improvements in laser printers, fax machines, and liquid crystal display (LCD) devices. Indeed, in these and many other cases, improvement in the underlying technologies is the driving force for changes in the final electronic product. The above-mentioned process innovation and product innovation possibilities created by the use of microelectronics technologies has given rise to significant economies of scale in many branches of electronic product manufacturing, notably in merchant IC chips-making, telecommunication switching systems, industrial

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electronic equipment, and computers. Consequently, the minimum economic size (MES) of production of many of the electronic products mentioned above has escalated many times in recent years. For example, the cost of developing the most recent generation of system program-controlled (SPC) digital switching system for public telecommunication network by various manufacturers ranges from US$0.5 billion (Ericsson's AXE) to US$1.4 billion (GEC/Plessey/BT's System X) (Hobday 1987, p. 5). In mainframe computers, Amdahl spent US$50 million to produce a plug compatible machine (PCM) of an IBM mainframe in the 1970s; US$200 million was needed for a new PCM in the early 1980s, and at least US$500 million is required for one of the next generation. In semiconductor manufacturing, the cost of establishing even a l ,500-wafer start plant at close to !-micron level will be well over US$200 million (Wheeler and Mody 1986). With such escalating pre-commitment costs in R&D and ever shorter recoupment time, increasingly large market sales are required for firms to remain viable. In digital switching system, the estimate is that market sales of US$16 billion would probably be needed to justify the investment in R&D required; this is well above the size of the largest EC national market. For this reason, many of the R&D-intensive electronic products have to be globalized to become viable. Besides technical scale economy, another source of economy of scale in the electronics industry is that of marketing. As more and more consumer electronic products reach the mature phase of their product life-cycle and become in effect mass-produced merchandise goods, economies of scale in marketing, advertising, and brand-name promotion become increasingly important. Here, the globalization of competition mainly takes the form of brand name and market channel competition, while production may be largely sub-contracted out to OEM (original equipment manufacturer) contractors in whole or in parts. While the above economies of scope and scale trend thus constitute a significant barrier to entry and favour the growth of large global conglomerates, additional factors in the form of steep learning curve, economy of standardization, and network externality further complicate the competitive dynamics of major segments of the industry. The steepness of the experience curves that are found to exist for a wide range of electronics technologies means that firms that are the first to break into the market with a new technology enjoy considerable cost advantage compared with late-comers. Moreover, for many IT-intensive products, the value of the products to the users depends on the extent of inter-operability and compatibility of the products of a particular brand with the products of other users. Firms that have big market shares (such as IBM in mainframe computers) or are the first to enter the market (for example, Canon with their optical disk drive and Sun with their reduced instruction-set computer [RISC] microprocessor for workstations) therefore stand a greater chance of having their own proprietary standards being established as the de facto market standards, while firms with small market shares and late-comers are disadvantaged. Similarly, firms that are able to co-operate on the early joint adoption of a common standard (for example, Japanese firms developing a common high-definition television [HDTV] standard) are in a more advantageous position

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compared with fmns that are unable to come to such agreements. Indeed, competitive rivalry among firms in the IT sector often manifests itself through competition over technical standards. In highlighting the trend towards increasing concentration and globalization of the industry, we do not deny the fact that market niches will continue to exist for small enterprises. Indeed, small innovative firms will continue to represent a major source of new technology and new product ideas at the initial phase of product lifecycles, especially for knowledge-intensive products for which economies of scale are not evident. Small, specialist firms will also continue to play a significant role as standardized component/service sub-contractors and OEM manufacturers for the larger players where the end products have reached the mature phase and the technology has stabilized. Small, nimble players will also continue to be viable against their larger competitors in "fad" products and market niches that are too small to take advantage of economies of scale. Nevertheless, the fact remains that a large and increasing proportion of the electronic product market in recent years has been characterized by increasingly oligopolistic competition on a global scale. The economic consequences of the technological changes mentioned above are profound indeed. Among other things, they have drastically altered the comparative advantages of nations and firms. For example, the high degree of economies of scale in the technology of production of microelectronic components has resulted in the development of a highly oligopolistic market structure for commodity ICs, which in turn gives rise to significant advantages in downstream integration by these relatively large IC manufacturers. Innovations in electronic component technology get translated into cheaper or superior final products faster for integrated firms than for firms that rely on third-party supplies. In addition, integrated firms can strategically withhold the technology of certain components from their competitors. All the major Japanese electronics firms have successfully turned these vertical integration economies to their competitive advantage and have used them to gain sizeable market shares and eventually technological leadership in key sectors of the electronics industry at the expense of firms that specialize in only parts of the value-chain activities. American firms which previously dominated most sectors world-wide have suffered major set-backs in many sectors (notably consumer electronics, merchant ICs, machine tools, and office equipment) although they still manage to retain technological leadership in several sectors that are highly knowledge-intensive (notably computers, software, magnetic storage, and microprocessor design). In contrast, European firms have lost out badly on nearly all fronts.

2.2. Global Retreat of the European Electronics Industry The steady decline of European competitiveness in a wide range of electronics industries over the 1970s until the mid-1980s has been well documented by a number of European .and American studies (see, for example, English 1984; MacKintosh 1986; Van Tulder and Junne 1988; Malerba 1985; OECD 1984; Borrus 1988; Langlois et al. 1988; James 1989). These findings will be summarized here.

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2.2 .1. Semiconductors and components: The European share of world semiconductor production declined from 14 per cent in 1978 to 8.6 per cent by 1984, and has further eroded since. Even within the European market itself, production by European-owned firms accounted for only 35 per cent in 1986, down from 45 per cent in 1978. Over 1982-86, Europe's average share of the U.S. market was only 2 per cent, negligible in Japan, and only 14 per cent in the rest of the world. Furthermore, many of the semiconductors and components manufactured by European firms are not products based on leading-edge technology. Among the top ten merchant IC manufacturers in the world, Philips is the only European firm represented, and its position has slipped from sixth place in 1987 to tenth place in 1989. In the application-specific integrated circuit (ASIC) sector, the fastest-growing segment of semiconductor products, Europe has only one firm ranked among the top ten producers in the world (Plessey/Ferranti being in ninth place). 2.2.2. Consumer electronics: The European share in the global consumer electronics industry has declined drastically over the last two decades, the result of a steady decline in cost and quality competitiveness against the Japanese and, more recently, the Asian newly industrializing countries (NICs). The decline of the European consumer electronics industry has been so rapid that, even within their own EC market, European firms have become minority players. For example, in the case of video-cassette recorders, Japan's top ten exporters have captured over 90 per cent of the EC domestic market, while in hi-fi equipment, Japan's share is over 75 per cent. (The colour TV market had already become an importers' market by the early 1980s.) Japanese firms also dominate in the videotape, compact disc, and videocamera markets.

2.2.3. Computers and office equipment: The European share of the world market for computers has similarly declined over the last two decades. International Data Corporation (IDC) (1989) estimated that by 1988, European-owned computer vendors accounted for only 15 per cent of total computer shipments, even though Europe purchased 31 per cent of the world's computer output for that year. Of the top ten computer vendors in Europe, five were U.S. firms, and they captured two-thirds of the domestic European market (IBM alone accounted for 42 per cent). In the mainframe market, none of the European firms are able to produce any system on their own, and have to depend on Japanese (NEC, Fujitsu, Hitachi) and American (Amdahl) PCM manufacturers. In the office equipment market, foreign imports have dominated the European market for a wide range of products ranging from calculators, photocopiers, typewriters, to fax machines. Overall, Europe is estimated to have less than 15 per cent of the world production of electronic office equipment. 2.2.4. industrial equipment: The European share of the world robotics market has steadily declined over the years relative to those of the United States and Japan. European production accounted for only 38 per cent of the European market in

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1986, down from 65 per cent in 1981. Moreover, the major European producers (apart from Volkswagen and Renault's in-house production) are from non-EC countries (ASEA from Sweden and Trailta from Norway). In machine tools, an industry that Europe historically dominated, significant erosion of the European position has also occurred especially in the technologically more sophisticated numerical control (NC) and computer numerical control (CNC) machine tools which are now dominated by Japan and the Asian NICs. In 1980 the Japanese had already gained a 36 per cent share of the European NC machine centre market and 30 per cent of the European NC lathe market. Japanese penetration has increased significantly since.

2.2.5. Telecommunication: Due to a policy of protecting "national champions" by the respective Member State governments, the telecommunication equipment and services market in each Member State has until very recently been monopolized by the respective national post, telephone, and telegraph (PTT) with one to at most three national suppliers of switching and transmission equipment and tight control over terminal equipment supply. This quasi-vertical market integration by national firms has prevented non-European firms from gaining any major share of the European market, but outside Europe, European firms have lost market share at the rate of l per cent every year for the last fifteen years. 2.3. Causes for the Decline of the EC Electronics Industry Many factors have been put forward to explain the decline of the European electronics industry (see, for example, English 1984; MacKintosh 1986, pp. 70-87). While fragmented national markets, the policy of promoting highly protected national champions (resulting in high X-inefficiency, management failures, and a slow reponse to market and technical changes), high labour cost and strong labour union pressures, the lack of venture capitals, and inability to commercialize technical innovations have often been cited, these have to be understood within the context of the extremely rapid pace of technological change taking place in the industry as mentioned in section 2.1. In particular, the significantly higher rate of investments in R&D by Japanese electronics fmns as compared with European firms has contributed crucially to the increasing technological superiority of the Japanese electronics industry; by one estimate (OECD 1988), Japan's R&D spending in the electrical/electronics industry over 1979-83 increased at a rate of four times that of the EC and more than twice that of the United States. As a consequence, Japan's share of the OECD market for high R&D-intensive industries has risen from 15 per cent in 1970 to 28.8 per cent in 1984, while the EC share has declined from 33 to 26 per cent in the same period. In addition to this differential intensity in R&D investment, there is also a growing perception that much of the Japanese success in the electronics industry has been due to the important role played by the Japanese Government (through agencies such as the Ministry of International Trade and Industry [MITI] and Nippon Telephone and Telegraph [NTT]) in "guiding" and co-ordinating longterm R&D by private firms (see, for example, Borrus 1988 and Howell et al. 1988).

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3. Recent Responses of EC Electronics Firms and Government Policies The rapid erosion of EC market shares and technological competence vis-a-vis Japan and and the United States as documented above has been perceived by many European academics, businessmen, and state economic planners as reaching crisis proportion by the early 1980s. The announcement by the Japanese Government in 1981 that it is funding an ambitious "fifth-generation" computer R&D project to overtake American and European supremacy in computer technology probably added another push that helped galvanize the need for state government intervention in the major EC Member States.

3 .1. Government Responses The responses of EC Member States to halt the deterioration of the European position in the global electronics competition and to bring about a "renaissance" of the industry can be categorized as follows: 1. 2. 3. 4. 5.

EC-subsidized pan-European co-operative R&D support programmes; the liberalization of public procurement and state regulatory controls; the intensification in the use of various indirect "protectionist" measures against non-European imports and investments; the harmonization of technical standards; and the creation of a unified internal market through the removal of physical, technical, and fiscal barriers.

Except for item (3), all the other areas are closely linked to the single market concept as proposed in the Single European Act.

3.1.1. EC R&D support programmes: While several Member State governments had already launched their own national strategic IT R&D support programmes (for example, the Alvey programme in the United Kingdom, the PAFE programme in France, and the lnformationstechnik programme in Germany) in the early 1980s in response to perceived advantages that the electronics industry in the United States and Japan had received from their own government-supported programmes (for example, DARPA's Strategic Computing Programme [SCP], the VHSIC and STARS programmes launched in the United States, and the various MITI-funded programmes in Japan such as the VLSI, PIPS, supercomputer, fifth-generation computer, INS, and SIGMA), major EC-level co-operative R&D support programmes were instituted only in the mid-1980s with the successful launching of ESPRIT. Funded by the EC and private firms, the programme has expanded in scope considerably since its launch in 1984 (Sharp 1989). Following ESPRIT, a number of other co-operative R&D programmes have been launched at the EC level, including the following: RACE (Research in Advanced Communication Technologies for Europe)to promote research into advanced communication technologies, including the development of a new European Integrated Broadband Communication

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Network. Revitalization of the EUREKA programme, with more focus on IT -related technologies such as supercomputers, lasers, and opto-electronics. With a funding of US$1.7 billion per year, the programme now claims to have 297 projects involving over 1,000 firms and 500 research laboratories (ETU 1989). ETSI (European Telecommunication Standards Institute) to formulate European technical standards and to harmonize their adoption across Europe. BRITE (Basic Research in Industrial Technologies for Europe)- to stimulate the use of new technologies in the older industries of Europe. COMETT (Community in Education and Training for Technologies) - to foster co-operation between industries and universities in training in new technology. SPRINT (Strategic Programme for Innovation and Technology Transfer) - to promote technology transfer to small and medium-sized enterprises (SMEs). While the effectiveness and welfare implications of much of these governmentsupported programmes in R&D are debatable, the political imperative appears to be such that these kinds of EC-wide government interventions are likely to continue, if not intensify, over the 1990s.

3.1.2. Liberalization and privatization: As part of their strategy to increase the competitiveness of national firms in an increasingly globalized market context, many EC Member State governments have abandoned (or at least modified) their previous "national champions" policies. While the pace of progress is highly uneven across countries and sectors, a general trend towards greater liberalization of state regulation over the electronics industry can be discerned. The United Kingdom, for example. has privatized its public telecommunication network services and has allowed more than one player into a previously monopolistic market. Public procurement of telecommunication terminal equipment has also been liberalized somewhat in some EC Member States. The move towards market liberalization has been most evident in the telecommunication sector. Indeed, the Single Market Act has clearly identified the liberalization of the telecommunication market as a key part of the creation of an internal market in Europe. In its Green Paper, '"Development of the Common Market for Telecommunication Services and Equipment" (June 1987), the Commission has put forth the "proposed Community positions" that the exclusive provision or special rights of national telecommunication authorities (PTTs) should be confined only to provision and operation of the public network infrastructure and a limited number of basic services, while the subscriber equipment or customer premises equipment (CPE) markets and the various value-added services (V AS) markets should be liberalized (Small 1989). In addition, strict standards are to be maintained for network infrastructure and services to ensure the creation of Community-wide inter-operability. In particular, this means the need for harmonized standards and type-approval policy for CPEs and common definition of conditions

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for network access by service providers through an Open Network Provision (ONP) policy. Finally, to ensure that there is a level playing field between private firms and public telecommunication operators (PTOs), the regulatory and operational activities of the Telecommunication Administrations ought to be separated. Some of these key proposals have since been translated into Commission Directives.

3.1.3./ntensification in the use of various indirect "protectionist" measures against non-European imports and investments: Probably the most controversial of the measures adopted by various EC Member State governments to defend European industrial position in Europe's own domestic market is the notable increase in the use of various indirect "protectionist" measures against non-European imports and investments (see, for example, Far Eastern Economic Review, 30 November 1989; Asian Business, June 1989, pp. 34-41 ). While tariff measures are of some importance (electronic goods generally have higher tariff protection rates than other manufactured goods 4 in the EC), these are not as significant (and have not been increased in recent years except for compact discs [CDs]) as non-tariff measures in many cases. Such non-tariff measures include the use of anti-dumping charges, 5 countervailing duties, stringent and "case-by-case" interpretation of rules of origins, local-content requirement, quantitative restrictions (QRs), and voluntary export restraints (VERs). Although goods from third countries that are in free circulation within one Member State are supposed to be able to move to other states without prohibition, Article 115 of the existing EC Treaty effectively provides an escape clause for protecting national manufacturing interests. Between 1977 and 1985, this provision was invoked l ,451 times to curtail roundabout imports. France and Italy have imposed quotas on Japanese radios, TVs, and communication equipment, while the United Kingdom has VERs against selected electronic products from Taiwan and Korea. A total of sixteen VER arrangements by the EC was enumerated for electronic products up to mid-1988 (Hermann 1990, p. 252). EC-wide QRs against Japanese colour television sets, video-tape recorders, and colour television tubes were also instituted in 1983. Besides cars (the infamous Nissan case), consumer and industrial electronics are probably the most seriously affected by all these different forms of protectionist measures. For example, anti-dumping charges have been levied on Japanese electronic typewriters, electronic scales, video-cassete recorders (VCRs), cellular phones, printers, and photocopiers. About US$1 billion worth of Japanese photocopiers and US$1.3 billion worth of Japanese printers were affected by EC anti-dumping charges, and Japanese and Korean VCR imports have been slapped an anti-dumping duty of 30 per cent. To circumvent these levies, the Japanese firms affected have resorted to investing in assembly plants within the EC itself or redirecting their export to the EC from U.S.-based plants. To combat such alleged moves towards "screwdriver" operations by foreign firms in the EC to get around anti-dumping levies, the Commission made use of rules of origin interpretation to disqualify such circumvention attempts (for example, Ricoh's export of Califomiamade photocopiers to Europe). Rules of origin have also been used to block

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semiconductors assembled within the EC from qualifying as EC-made (even though the percentage value added exceeds EC requirement) on the ground that the "diffusion" stage of production constitutes "significant" processing and hence must be located within the EC.

3.1.4. Harmonization of technical standards: Given the economics of standards and nern,ork externalities affecting many IT products as discussed earlier, the fragmentation of European markets and products into many disparate, incompatible, non-interoperable systems has been clearly disadvantageous to both European producers and consumers alike. For example, in the private branch exchange (PBX) market, the major European players (Ericsson, Philips, Siemens, GPT) all have incompatible standards. In response to this, EC governments and firms have recently launched several initiatives to harmonize technical standards in general and in key IT products in particular. The setting up of the ETSI, as mentioned earlier, is a major move in this direction for the telecommunication sector. Under ETSI, among other things, the U.N. standard for EDI, EDIFACT, is being further developed and promoted throughout Europe, while in the longer term, a new standard for broadband ISDN and a cellular-based personal communications networks (PCNs) standard will be established. The proposal to develop a European HDTV standard in opposition to the existing Japanese standard represents another strategic move in this direction (Carpentier 1989). 3.1.5. Removal of physical, technical, and fiscal barriers: Besides the removal of technical barriers through standards harmonization as discussed earlier, the removal of physical barriers (such as border controls), the harmonization of value-added tax (V AT) rates, and the freeing of the movement of capital and other factors of production will reduce market transaction costs and market distortions within the EC in general. Although not aimed at electronic goods in particular, such measures, when implemented, will definitely contribute towards a more competitive domestic market for electronic goods and information technology products. However, the progress towards achieving VAT harmonization and the abolishment of border controls appears to be rather slow to date, and there are serious doubts as to whether the 1992 deadline could be met on these sensitive issues. 3.2. Private-Sector Responses In addition to the above changes in the EC and state government policies towards the electronics industry, the European electronics industry itself has been undergoing rather drastic restructuring, sometimes in line with national government policies but more often than not dictated by strategic competitive considerations of the individual firms concerned. Expectation of likely actions by the Commission and Member State governments also influence the kind of strategic moves made by certain major players. Generally, European electronics firms have strongly supported the move towards greater technical harmonization and co-operative R&D efforts. Besides initiatives

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in technical harmonization at the official EC level discussed earlier, private-sector initiatives among the big European IT firms have also been significant, for example, the setting up of the X-Open Group to promote the standardization of Unix as an operating system (OS) standard to enhance inter-operability between computers manufactured by different computer makers, and the promotion of open system interconnect (OSI) in opposition to IBM's systems network architecture (SNA). Private-sector participation in pre-competitive co-operative R&D programmes such as ESPRIT, EUREKA, and RACE has also been quite significant. In addition, purely private R&D co-operative efforts have also emerged. Included in the strategic alliances in R&D forged among EC firms in recent years are the mega-chips project (between Siemens and Philips), the JESSI programme, and European Silicon Structures (ES2). The visible increase in standards and R&D co-operation among the bigger electronics firms represents one trend in the industrial restructuring of the industry in Europe. Another clear trend in this dynamics of industrial restructuring is the growth towards vertical integration and strategic market consolidation through mergers, sell-offs, and takeovers. Moreover, much of this integration and consolidation process is increasingly inter-country rather than intra-country. One result is the emergence of a number of large, pan-European conglomerates with strategic investments throughout the EC and, increasingly, extending globally to the United States and other parts of the world as well. Another is the dramatic increase in technical alliances and strategic joint-ventures in R&D, production, and marketing not only among EC firms, but also between EC firms and Japanese and American firms as well. A third consequence is the significant increase in foreign investments, especially American and Japanese, within all spheres of EC electronics industry. After a wave of mergers and acquisitions, Siemens, Philips, and Thomson emerge as the three largest and technically strongest EC electronics firms with strategic presence in practically all key technology sectors and product markets. The second-tier firms which are traditionally strong in specialized market segments (for example, ICL in computers, Thorn-EMI in consumer electronics, Olivetti in office equipment, CGE in telecommunication equipment) have either consolidated their niche competitive advantage through mergers, acquisitions, and technical alliances, or have since been acquired by others (for example, INMOS by ThornEM!, Plessey by Siemens-GEC, Nixdorf by Siemens). The restructuring often involved takeovers of firms offering similar products in different geographic markets or products that fill a gap in one's product scope, buying up strategic stake in firms with technologies that complement one's own, and selling off segments that are not central to one's core business. For example, by buying up ITT's entire telecommunication division, CGE has emerged as the second largest telecommunication equipment manufacturer in the world after AT&T. Similarly, Thomson gained strategic access to semiconductor IC technology by buying up Mostek, while Siemens expanded its strength in the American telecommunication market by buying up IBM's stake in Rolms, in the European telecommunication market by buying up GTE's European telecommunication operation, and extended its product range into

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minicomputer world-wide by acquiring Nixdorf. In addition to mergers and acquisitions, there has also been a dramatic increase in technical alliances and strategic marketing arrangements among European firms and between European and non-European firms (see, for example, Van Tulder and Junne 1988 for details). For instance, in mainframe computer, Siemens and ICL have teamed up with Fujitzu and Amdahl, Comparex/Olivetti with Hitachi/NAS, and Bull with NEC to market PCM mainframes (manufactured by the Japanese partners) in Europe, while in minicomputers, all European manufacturers have joined the X-Open Group to promote a new Unix standard. In telecommunication, Philips, Siemens, and Olivetti have significant technical co-operation agreements with Japanese and American firms; among European firms, Siemens, Alcatel, and Nokia, for example, have formed a consortium to develop a common digital cellular mobile communication system for Europe. In semiconductors, Siemens and IBM have started a co-operative programme to develop 64-MB chips, while in industrial electronics, Siemens has technical co-operation with Fujitsu Fanuc in robotics, and Thomson with Dainichi in industrial automation, among others.

4. Implications of an Internal EC Market after 1992 on the Restructuring of EC Electronics Industry 4.1. Overall Perspective In the context of the massive restructuring that the European electronics industry is currently undergoing as outlined above, the impending completion of a single unified, internal market is of great importance in the following aspects: It reduces the cost of market transactions among EC Member States and between EC countries and third countries. It makes possible the exploitation of economies of scale and economies of scope through the creation of a much bigger market previously fragmented into many small market segments. It reduces market distortions due to differential VAT rates, restricted mobility of factors of production and other market entry barriers. It facilitates the creation of harmonized technical standards, thereby reducing the cost of interfacing and problems of non-interoperability. In particular, in the case of telecommunication, it makes possible the creation of pan-European IT infrastructures in the form of EC-wide communication network(s) for telephones, data communication, broadcasting, and other value-added services. The reduced cost of goods and services and the resulting network externality effects will stimulate an expansion of market demand, thereby increasing the absolute social surplus, while the expected increase in producer competition is likely to increase the consumer surplus share in the total social surplus.

While all these factors apply to all industries (Cecchini 1988), the last three are particularly important for the electronics industry. The EC Commission's estimate of a 2 per cent gain in gross domestic product (GDP) as a result of economies of

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scale created by the internal market (Commission of EC 1988) is likely to be underestimated as far as the electronics industry is concerned. This is because electronics technology increasingly forms the underlying technological base for the modernization of many other industries (for example, the diffusion of CNC has revolutionized the precision engineering industry while the spread of CAD/CAM has transformed product design in practically every manufacturing sector). A faster pace of diffusion of electronics applications facilitated by the development of an internal market will thus have much larger dynamic multiplier effects in the longer term. While there is little doubt that a unified internal market will have significant long-term beneficial effects (even though the exact magnitude of the benefits may be difficult to quantify), the distribution effects in the long run may depend strongly on the specific external policies adopted towards the participation of non-EC firms within this internal market. At one extreme, a "fortress Europe" scenario may imply that much of this increased benefits may be largely confined to European players (even though this may mean a much smaller total potential pie to be shared among Europeans, and consumer surplus accruing to European consumers will be reduced), while at the other extreme, a completely open internal market may result in much of the gains in producers' surplus being appropriated by non-European firms (even though European consumer surplus gains will be much higher). Whether the actual completion of the internal market will lean more towards the "protectionist" model or the "perfectly open" model will depend on many political and economic factors which are difficult to predict at this point of writing, even though the internal market is supposedly already close to "three-quarters designed and half-built" in terms of the White Paper's original 300 directives (Economist 1989, p. 12). For example, Pelkmans (1983) and Hiemenz and Langhammer ( 1988), among others, have analysed how political forces in the past may have determined whet.her the jurisdiction power of particular policies was institutionalized at the Member State level or pushed to the EC level, and how the outcome of policy-making at the latter level may be influenced by the balance of political power of Member State representatives. Although the Single European Act will effectively transfer more jurisdiction power from the national government level to the EC level, it remains to be seen how much "free-traders" will triumph over the "fortress Europe" lobbies at the EC level. More recently, Hermann (1990) has analysed the various political and economic factors that may increase or reduce the threat of increased EC protectionism after 1992, and concluded with an optimal appraisal that EC protectionism will diminish after 1992, provided that the United States and Japan do not become more so, and that the current Uruguay Round of GATT (General Agreement on Tariffs and Trade) negotiations yield positive conclusions. To be realistic, not all the key issues are likely to be resolved by the end of 1992, and various compromised positions are likely to emerge in the interim while more sensitive issues are being delayed for later resolution. Thus, while the Commission repeatedly stresses that the completion of the internal market will be

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in conformity with GATT, and thus any Community-wide import quotas would have to be negotiated with GATT, in practice, various indirect protectionist measures can still be implemented around GATT by, for example, "stretching" the use of rules of origins and anti-dumping charges (which are permitted under GATT). In any case, the outcome of the Uruguay Round of GATT negotiations remains uncertain at the time of writing.

4.2. Likely EC Responses with Respect to the Electronics Industry after 1992 As far as the electronics industry is concerned, it is surmised that, in the short run, the actual external policies that will be adopted in the run-up to 1992 are likely to vary for different sub-sectors according to the relative existing strength of Europe's firms. Thus, protectionist pressures are expected to be strongest in the consumer electronics and selected industrial electronics fields where European firms are still far from being competitive with non-European firms (and hence needing protection to "buy time"), while in sectors like telecommunication where European strength is quite considerable, such pressures will be much less evident. The recent conclusion of a five-year semiconductor pact between the EC and eleven Japanese firms to set a floor price for Japanese DRAMs (9.5 per cent above production cost), together with the imposition of anti-dumping duties (ranging from 8.5 to 32 per cent) on compact discs exported to the EC by eleven Japanese and four Korean firms, are symptomatic of this continuing protectionist pressures in sectors where EC firms are still relatively weak. ln the long-run, the eventual external policies related to electronic goods that will be incorporated as part of the internal market framework are expected to be influenced by how well the current strategic restructuring of the European industries is proceeding. At the risk of over-simplification, it is suspected that the stronger that European firms emerge from the restructuring and the faster they attain improvement in technological competitiveness and global market share recovery, the less political pressure there would be for the adoption of stringent "protectionist" measures to ensure the survival of (at least some major segments of) the European electronics industry. The recent policy shift towards EC-wide governmental subsidization and promotion of co-operative R&D programmes in high-tech sectors in general and electronics technology in particular is likely to continue in the foreseeable future irrespective of the external trade policies being adopted. Similarly, the move towards technical standards harmonization will gather increasing momentum in the coming years and the development of pan-European systems, especially in telecommunication, will become increasingly important after 1992 (for example, a common digital cellular telephone service system, EDI system, broadband ISDN system). 4.3. Responses of Non-European Firms While the specific forms of EC external policies after 1992 thus remain somewhat uncertain and contingent upon the dynamics of change of the European electronics

168

Wong PohKam

industry itself, it is clear that the major non-European firms in the industry are not taking any chances. In a sense, the question of whether there will or will not be a "fortress Europe" after 1992 has been rendered somewhat irrelevant by the fact that sufficient cases of persistence of protectionist pressures against certain electronic products have been observed since the first announcement of the internal market plan to convince many major non-European firms that the risk of such protection after 1992 will be significant. Consequently, many of these firms, particularly the Japanese and Korean firms which have been adversely affected by past or ongoing protectionist measures, have stepped up direct investment in production facilities within the EC ahead of the 1992 deadline. While comprehensive and up-to-date statistics are hard to come by, various indicators suggest that the level of direct foreign investment (DFI) in the electronicsrelated sectors within the EC has gone up considerably over the last three years (see, for example, Euromonitor 1988, Far Eastern Economic Review, 18 May 1989). The number of Japanese electronics production plants in the EC reached 120 by early 1989, while Korean firms numbered close to sixty by the same time. It is clear that many of these investments in direct production within the EC are prompted by actual or pending anti-dumping charges and other protectionist measures imposed by the EC in recent years. In addition, there has been a notable increase in the number of mergers and acquisitions of European electronics firms by non-European firms. Among the more prominent examples are the recent acquisition of Istel (United Kingdom) by AT&T (United States), and Apricot Computer (United Kingdom) by Mitsubishi Electric Corporation (Japan). The number of new jointventure plants between European firms and non-European firms to manufacture within the EC to supply the European market has also increased in recent years (for example, Sanyo-Olivetti to produce fax machines in Italy, AT &T -STET to make telecommunication equipment in Italy, and Matsushita-Siemens to produce passive components in Europe).

5. Structural Characteristics and Growth Trends of ASEAN Electronics lndustry6 5.1. Recent Development Trends of the ASEAN Electronics Industry The electronics industry has expanded extremely rapidly in all the ASEAN countries over the last two decades. With the exception of Indonesia, electronic products now represent the most important manufactured exports for all the ASEAN countries. The growing importance of electronics in the industrialization of the ASEAN countries can be seen from Table Vl.l. With the possible exception of Indones'ia, electronics manufacturing and export in ASEAN has experienced double-digit growth over the last decade and currently represents the most dynamic industrial growth sector in every ASEAN country. The sector is most advanced in Singapore, where it now accounts for about 40 per cent of all manufacturing value added (V A) and over 60 per cent of manufactured exports. Next is Malaysia, with electronics accounting for 18 per cent of manufacturing value added and 54 per cent of

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169

TABLE Vl.l Importance of the Electronics Sector in the Manufacturing Industry of the ASEAN Countries, 1981-87 Electronics V A as% of Manufacturing VA

Electronics Export as% of Manufacturing Export

Country

1981

1984

1987

1980

1985

1987

Singapore Malaysia Philippines Thailand Indonesia

20.6 13.9 4.1 2.4 4.6

31.0 16.4 n.a. n.a. 2.8

39.7 18.0 8.7 n.a. n.a.

47.9 38.0 28.9 5.4 3.3

58.4 51.7 38.2 6.6 3.5

62.1 54.1 31.9 14.0 2.2

Nom: VA= value added. SouRcE: Malaysia: Department of Statistics; Singapore: Department of Statistics and Economic Survey (various years); Indonesia: United Nations Centre on Transnational Corporations (UNCTC) (1987) and Unido (1987); Philippines: UNCTC ( 1986) and Unido (1988); Thailand: UNCTC ( 1987) and Department of Statistics.

manufactured exports. The Philippines ranks third (8.7 per cent of manufacturing VA and 31 per cent of manufactured exports). For Thailand, the electronics industry has been relatively small compared with its ASEAN neighbours up to the mid1980s, but the sector has experienced explosive growth over the last three years and is now the fastest-growing industry in Thailand. The share of the electrical and electronics sector in total direct foreign investment (DFI) in Thailand exceeded one-third for 1987-88. Indonesia is the only possible exception, with electronics still playing a relatively minor role in the country's manufacturing sector; moreover, most production remains oriented for domestic consumption rather than for export. Table Vl.2 shows the relative size of electronics export from ASEAN to countries of the Organization for Economic Co-operation and Development (OECD) in 1987. Out of an estimated US$7.7 billion worth of electronic goods exported, Singapore accounted for 45 per cent, followed by Malaysia (35 per cent), the Philippines (12 per cent), Thailand (7 per cent), and Indonesia (0.3 per cent). The total value of ASEAN electronics export probably accounted for about 5 per cent of total electronics import by the OECD countries in 1987, and seemed likely to have further increased over the last two years. In addition, a sizeable proportion of electronic goods are exported from ASEAN to the other three Asian NICs. Although foreign investment in the production of import-substituting consumer electronics in ASEAN began as early as the 1960s by companies like the GE, Philips, and Matsushita, growth was moderate due to the limited size of the domestic market. The rapid growth of the electronics industry in ASEAN in the 1970s has been based largely on the expansion of offshore assembly activities of American semiconductor multinational corporations (MNCs). The initial impetus for growth

170

Wong Poh Kam TABLE VI.2 Estimated Total ASEAN Electronics Export to the OECD Countries, 1987 Export of Electronics (US$ million)

Percentage

Singapore Malaysia Philippines Thailand Indonesia

3,490 2,732 936 549 26

45.1 35.3 12.1 7.1 0.3

Total

7,733

100.0

Country

For comparison: Japan South Korea Hong Kong

25,186 5,984 3,263

SouRcE: Calculated from World Bank (1988).

in the region is the relatively low labour cost, coupled with relatively good infrastructure (in the form of free trade zones IFfZs l in Malaysia and the Philippines) and generous investment incentives that the region offers. Practically all the production was export-oriented and involved largely labour-intensive assembly of imported parts and components within the FTZs. Over time, the production process became upgraded and more automation was introduced, but the product range remained largely limited to semiconductors. Singapore is the exception in that it has successfully attracted a more diversified group of MNCs from Japan, the EC, as well as the United States by the late 1970s, and consequently, its electronics industrial base has been greatly diversified into a wide range of consumer and industrial electronic products and significantly deepened into the more capital- and skill-intensive and technically advanced stages of production (see Table VI.3). In the process, some of the more labour-intensive activities have been shifted to its ASEAN neighbours, especially Malaysia. In the late 1970s and early 1980s, the presence of Japanese MNCs began to expand significantly in ASEAN, and with the appreciation of the yen since the mid1980s, the influx of Japanese investment escalated especially in Singapore, Malaysia, and more lately, Thailand. In contrast to the earlier wave of investment, later waves involved greater diversification of activities into a wider range of components as well as consumer and industrial electronic products. Although still important as a manufacturing base for the more technically sophisticated products, Singapore increasingly plays the role of a regional international procurement office (IPO) and international logistics centre (ILC), a centre for marketing, technical services, and R&D to Japanese electronics manufacturing activities located in other parts of the

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171

TABLEVI.3 Structure of Singapore's Electronics Industry, 1980 and 1987 Percentage of Sales Value Sector

1980

------

Computer, office equipment Communication equipment TV, video/audio equipment Semiconductor devices PCBs and other electronic components Total electronics (SSIC 384) Average value added per worker (S$ thousand) ---

1987 -----

5.6 1.2 39.5 37.4 16.4

41.3 4.1 17.3 17.3 20.1

100.0

100.0

23.4

58.8

------·-

SouRcE: Calculated from Department of Statistics, Singapore ( 1980, 1987).

ASEAN region as well as in the other Asian NICs. Classic examples of this are Sony, Hitachi, and Matsushita, which have made Singapore their regional headquarters for the Asian region. While both American and EC MNCs have also expanded their manufacturing presence in ASEAN, their growths have been considerably slower than those of the Japanese, and there has been less diversification of activities. In Malaysia, for example, major growth of American investment in the electronics sector has been in the form of re-investments to upgrade production technologies and expansion of existing semiconductor manufacturing activities through forward (testing, technical support) and backward (wafer fabrication) linkages and vertical integration, as well as the production of new generation semiconductor products (for example, Intel's 80386 and 80486 chips). Over the last two years there has been a great expansion of investment in ASEAN by electronics firms from the Asian NICs, especially Taiwan and South Korea. Indeed, Taiwan has overtaken Japan as the biggest foreign investor in Malaysia in 1989, while Korean investments in Indonesia ranked second to the Japanese. Besides the significant rise in the Taiwanese dollar and the Korean won relative to the U.S. dollar, thus making their domestic production costs prohibitively high, another significant impetus to this major relocation of production activities is the loss of U.S. GSP privileges for export from the Asian NICs from January 1989. In spite of the above trend in diversification in recent years, the electronics industry in ASEAN, with the exception of Singapore, still remains largely dominated by export-oriented, MNC-controlled semiconductor assembly activities, as can be seen from Tables VI.4 to VI.7. In 1986, 85 per cent of Malaysia's electronics exports and 78 per cent of the Philippines' were in SITC group 77 (which largely comprises semiconductor ICs and components), while for Thailand, the share was as high as 98 per cent in 1984. Singapore has achieved a more balanced structure,

Wong PohKam

172

with only 32 per cent of its electronics export in SITC group 77 in 1988; instead, SITC group 75 (computers and office equipment) represents a bigger share (42 per cent), and SITC group 76 (mainly telecommunication equipment, audio, and video electronics) is also sizeable (26 per cent). Because of the "enclave" nature of semiconductor assembly activities, such industries have historically not generated much spin-off and linkage multipliers on the domestic economies of the respective countries. Consequently, few indigenous electronics firms had developed in the ASEAN countries, except for Singapore. The situation has changed rapidly over the last few years, however, with an increasing shift towards process automation by all major semiconductor firms. Thus, in the Penang FTZ of Malaysia, where most of these semiconductor firms are located, the push towards process automation has generated an increasing demand for local precision engineering and moulds and dies supporting industries. As a result, several local firms with high technical capabilities have emerged. Some of these firms (for example, Eng Hardware Engineering) are capable of exporting their automation equipment world-wide as well as taking on engineering design subcontract orders from electronics firms overseas. Coupled with the increasing influx of foreign investments into consumer electronics and industrial electronics which are capable of creating much more linkage multipliers effect, the number of technically competent indigenous firms can be expected to rise rapidly over the next few years, and an

TABLE V1.4 Direction and Composition of Singapore's Electronics Export, 1988

Domestic Export (S$ million) to Product Group (SITC Code) --

---

---- --

----

USA --

Data processing/office machines (75) Telecommunication equipment (76) Electrical appliances (77) Total (75 + 76 + 77)

------

Japan -- --

--

EC --

--

Total - - -

6,125 2,838 2,602

82 251 429

2,145 1,324 1,456

9,719 6,209 7,514

11,565

762

4,925

23,442

Composition in each region(%) Data processing/office machines (75) Telecommunication equipment (76) Electrical appliances (77) Total (75 + 76 + 77)

53.0 24.5 22.5 100.0

10.8 32.9 56.3 100.0

43.6 26.9 29.6 100.0

41.5 26.5 32.1 100.0

Regional share(%) Data processing/office machines (75) Telecommunication equipment (76) Electrical appliances (77) Total (75 + 76 + 77)

63.0 45.7 34.6 49.3

0.8 4.0 5.7 3.3

22.1 21.3 19.4 21.0

100.0 100.0 100.0 100.0

---------------------------------------------

SouRcE: Department of Statistics, Singapore ( 1988).

The EC Internal Market and the ASEAN Electronics Industry

173

TABLE VI.S Direction and Composition of Malaysia's Electronics Export, 1988 - - ·---··---· ---·

·----·---· ·---·

Electronics Export (M$ mil.) to ---··---·----··----··--

SITC Group

USA

EC-4

Japan

·----··---·

·---·

Total ----··

75 (computer/office equipment) 76 (audio/video electronics) 77 (semiconductors and components)

127.2 I ,021.4 4,494.8

13.2 65.8 721.7

29.5 710.1 1,179.0

316.9 3,525.6 9,746.9

Total (75 + 76 + 77)

5,643.4

800.7

1,918.6

13,589.4

Composition for each region (%) 75 (computer/office equipment) 76 (audio/video electronics) 77 (semiconductors and components) Total (75 + 76 + 77)

2.3 18.1 79.6 100.0

1.6 8.2 90.1 100.0

1.5 37.0 61.5 100.0

2.3 25.9 71.7 100.0

Share of each region (%) 75 (computer/office equipment) 76 (audio/video electronics) 77 (semiconductors and components) Total (75 + 76 + 77)

40.1 29.0 46.1 41.5

4.2 1.9 7.4 5.9

9.3 20.1 12.1 14.1

100.0 100.0 100.0 100.0

-··---···

··---··

NoTE: EC-4 =France, Germany, Italy, and the United Kingdom. SouRcE: Calculated from Department of Statistics, Malaysia ( 1988, vol. I).

TABLE VI.6 Direction and Composition of Philippine Electronics Export, 1985

Percentage Value Electrical/electronic equipment and components Telecommunication and audio/video equipment Electrical machinery and appliances Semiconductors and other micro-components Total of which To the EC To Japan To the United States To other countries SouRcE: Calculated from Unido (1988).

48.4 0.5 13.2 37.9 100.0

20.5 6.2 46.5 26.8

174

Wong Poh Kam TABLE Vl.7 Structure of Thailand's Electronics Export, 1984 Export Value (million baht)

Percentage

Finished products General parts Semiconductor parts Telecommunication equipment

53.4 100.3 7,353.7 2.9

0.7 1.3 97.9 0.0

Total

7,510.4

100.0

Type of Product ------

----------

SouRcE: Asian Electronics Union (1986, p. 94 ).

increasing number of these will be in a position to enter the export market (as OEM manufacturers, second source suppliers, and so forth). By being further up the technological ladder, Singapore has achieved this diversification into consumer and industrial electronics much earlier, and as a result, a greater number of technically advanced indigenous firms have emerged. Notable examples are Weames Technologies and Essex Computers with their successful lines of personal computers (PCs), which are exported world-wide. The stronger presence of local firms in Singapore is also due to a conscious and well-focused strategy on the part of the government to promote high-tech industries, including information technology and automation technology. National master plans have been formulated for both these two technology areas, high-powered policyimplementing agencies, and public R&D institutions have been set up, and various incentives, infrastructural suports (Science Park, venture capital funds, standards certification services, technical manpower training institutions, and so forth) and special subsidies for local SMEs have been provided to promote the development of the industry. Belatedly, the other ASEAN countries are becoming more aware of the need for conscious national strategic plans to promote the electronics industry in general and the IT industry in particular. Thus, both Malaysia and the Philippines have announced their intention to formulate national IT plans (Malaysia already has an industrial master plan that covers the electronics industry, but the plan was deemed too broad and enabling institutions are lacking). It is clear that in the coming years all the ASEAN countries will be targeting the electronics industry in general and the IT industry in particular as a key industrial and technological growth sector along lines somewhat similar to the Asian NICs. Invariably, this means an increasing expectation of achieving a larger share of the higher-tech global electronics market. In summary, electronics industries of the ASEAN countries are at different stages of development, although they all share the common characteristics of being dominated mainly by foreign MNCs and dependent on eventual export to the OECD market. Singapore is the most different from the rest in that it has a much higher level of technical sophistication in its manufacturing activities; it plays an increasingly

The EC Internal Market and the ASEAN Electronics Industry

175

growing role as a regional IPO; it is a technical support/marketing/R&D centre; it has a larger number of domestic firms with capabilities and potentials for export; and it has a much clearer focus of government policies to promote the "high-tech" electronics industry in general and leading-edge IT products and services in particular. Malaysia is next in terms of potential, followed closely by Thailand. The Philippines has lagged behind somewhat over the last few years due to political uncertainties, while Indonesia is the least advanced of ASEAN in terms of electronics production and export; however, both may catch up very fast especially at the lower, labourintensive assembly end given their great advantage in labour cost.

5.2. EC Investment in and Import of ASEAN Electronics Overall, due to the skewed output structure of ASEAN's electronics industry and the larger size of the U.S. market, a larger proportion of ASEAN electronics export goes to the United States than to Japan or Europe. While detailed ASEAN-wide statistics are not available, the data for three countries (Singapore, Malaysia, and the Philippines) do bear this out (see Tables VI.4 to VI.6). For Malaysia, out of M$13.6 billion worth of total direct export of electronic goods in 1988, the United States accounted for 42 per cent, Japan 6 per cent, and the EC-4 14 per cent. Of the remainder, a large percentage went to the Asian NIEs. For Singapore, the United States accounted for half of its total direct electronics export in 1988, with the EC absorbing only 21 per cent. Significantly, Japan accounted for only 3.3 per cent of Singapore's direct export of electronics, a share that is lower than the export to the other Asian NICs. For the Philippines, in 1985 the United States similarly accounted for close to half of its electronics export, with the EC again accounting for only 21 per cent. It is likely that the above export market share figures may have been underestimated in that much of the direct export of electronics from ASEAN to the Asian NICs of Taiwan, South Korea, and Hong Kong are in fact intermediate products that are subsequently incorporated into final products for export to the United States, Japan, and the EC. None the less, the low proportion of direct export to Japan from ASEAN is striking, and suggests that the major bulk of Japanese electronics manufacturing in ASEAN is still geared for the U.S. and EC markets. Consequently, an increase in protectionist sentiments in these two markets is likely to have severe impacts on Japanese electronics manufacturing activities in ASEAN. Another striking feature of ASEAN electronics export is the significantly lower share of Europe as a destination market for ASEAN's electronics export as compared with that of the United States. This is due not only to the smaller consumption market (30 per cent versus the U.S. share of 38 per cent of the world market), but more importantly, to the fact that electronics export represents a lower proportion of ASEAN's manufactured export to the EC. As Table VI.8 shows, electronics represented only 35-46 per cent of ASEAN' s export to the EC-1 0 over 1980--86 versus 58-67 per cent in the case of the United States. Overall, the penetration of ASEAN electronics export as a percentage of total EC import of electronics remains rather low (about 2-3 per cent), even though significant improvement has been

176

Wong Poh Kam TABLE Vl.8 Electronics Export as a Percentage of Total ASEAN Manufactured Exports by Market Destination, 1970--86

Year

USA

Japan

EC-10

1970 1980 1985 1986

22.7 64.8 58.3 n.a.

0.6 17.9 15.9 n.a.

18.7 35.0 46.6 41.5

NoTE: EC-1 0 == EC excluding Spain and Portugal. SouRCE: Calculated from Hiemenz (1988, table 3).

TABLE VI.9 Share of EC Electronics Import from ASEAN, 1970--86 (In percentages)

ASEAN Share of EC-10 Electronics Import SITC Group

1970

1980

1984

1986

Office machines/adp* equipment (75) Telecommunications/audio equipment (76) Electrical machines and appliances (77)

0.0 0.2 0.2

0.3 3.7 2.3

1.2 3.8 4.0

1.3 3.1 2.2

All manufactured goods (5 + 6 + 7 + 8- 67- 68)

0.1

0.8

1.1

0.8

* adp == automatic data processing. SouRcE: Hiemenz (1988, tables 2 and A2).

TABLE VI.lO Composition of ASEAN Electronics Export to the EC-8, 1980--88 ----~~----~--~---~-

-~-

-~-~---·-

Percentage Share ---------~--~--~---·--

Year

SITC 75 Computer and Office Equipment

1980 1984 1988

4 18 33

SITC 76 AudioNideo Electronics

SITC 77 Semi-Conductors and Others

·---------·~-----

42 27 30

NoTE: EC-9 == EC-12 excluding Greece, Spain, and Portugal. SouRCE: Estimated from Eurostat data.

54 55 37

The EC Internal Market and the ASEAN Electronics Industry

177

observed over the last fifteen years (see Table VI.9). In addition, there has also been a visible shift from semiconductor and electronic components towards computers and office equipment in the structure of ASEAN export to the EC in recent years (see Table Vl.lO). A recent analysis of the trade pattern of electronic goods between the EC and ASEAN (Schmitt-Rink and Lilienbecker 1990) over the period 1980-88 suggests that trade in consumer electronics (mainly audio/video equipment) is dominated by vertical product specialization (that is, the EC imports primarily low-value items from ASEAN and exports high-value items to the latter), whereas the trade in "technical" electronics (mainly computer and semiconductors) is dominated by vertical process specialization (that is, the EC as well as other countries sends mainly parts and components to ASEAN to be assembled into higher-value products for export to the EC). As far as European investment in electronics manufacturing in the ASEAN region is concerned, the foregoing analysis in section 5.1 clearly suggests that the EC has lagged behind Japan and the United States (and more lately, Korea and Taiwan). Thus, even in Singapore where the European presence is supposedly the strongest, European majority-controlled firms represent only 12 per cent of the total number of electronics manufacturing firms in operation at the end of 1987, compared with 20.5 per cent for Japanese firms and 17.6 per cent for American firms (see Table Vl.l1). Moreover, electronics manufacturing constituted only 23.4 per cent of all European manufacturing firms operating in Singapore in 1987, a proportion lower than that of the Japanese (32.6 per cent) and the Americans (36.6 per cent). Similarly, a study by Hiemenz and Langhammer (1987) has shown that up to 1984 the performance of European electronics export to the ASEAN region has lagged behind those of the Japanese and American.

TABLE VI.ll Major Source of Capital Investment in Singapore's Electronics Industry, 1987 -

---

---

-----

--

--------

No. of Establishments by Source of Majority Capital Investment SIC* Group

Singapore

Japan

USA

Europe

Others

Total

----------

SIC 383 SIC 384 Total Percentage All manufacturing Electrical as a % of all

51 99

19 51

8 52

19 22

8 12

105 236

150 44.0

70 20.5

60 17.6

41 12.0

20 5.9

341 100

2,727 5.5

215 32.6

164 36.6

175 23.4

232 8.6

3,513 9.7

* Singapore Industrial Classification. SouRcE: Compiled from Department of Statistics, Singapore ( 1987).

WongPohKam

178

It is likely, however, that over the last 2-3 years, European electronics firms have become more aware of the growth potential of the ASEAN domestic market, and some of the larger firms, such as Siemens, Thomson, and Philips, have become more aggressive global players and hence begin to see the ASEAN region as an increasingly important offshore production platform. Thus, Philips has greatly expanded its audio products manufacturing activities in Malaysia; Thomson has started production of colour monitors in Malaysia, while Siemens has beefed up its technical services and support in the region.

6. Implications of the Internal Market for the Electronics Industry in ASEAN 6.1. Overall Perspective The foregoing analysis suggests that the external policy of the EC internal market after 1992 has yet to be finalized, although major non-European firms have stepped up investments within the EC in anticipation of likely continuation or intensification of current protectionist measures against selected electronic products. Given this uncertainty in the future external policy of the EC, the implications for the electronics industry in ASEAN are therefore partly contingent upon the final policy outcome as 1992 draws nearer. Before embarking on a more detailed discussion of the specific implications that different external policy scenarios would have on the electronics industry in ASEAN, it is appropriate to first pose two opposing, extreme scenarios that have been variously postulated by writers in the popular press: 1.

2.

a relatively "protectionist" or "fortress Europe" scenario, whereby existing non-tariff barriers (NTBs) such as anti-dumping practices, rules of origins, and local content would continue to be used, perhaps with the addition of newer measures such as the demand for "reciprocity", to protect a fairly wide range of strategic electronic products that are seen as vital to the long-tem1 survival of European electronics firms. Under this scenario, EC-wide quotas are likely to be set at close to the most restrictive level currently imposed by Member States; technical standards are likely to be used as a strategic tool for advancing European technological leadership; public procurement would remain basically closed to non-European products; and many European firms are likely to become more inward-looking as a consequence, at least in the medium term. a relatively "open" scenario, by which the use of NTBs will be greatly reduced in practice, in line with a relatively successful conclusion of the current round of GATT negotiation, which will in addition cover trade in many important services, including telecommunication services and electronics information services. EC-wide quotas will be set at relatively low levels and perhaps even gradually phased out for a wide range of electronic products.

While the postulations of such extreme scenarios serve to dramatize opposing views on the matter, in reality the situation that will prevail is likely to fall somewhere

The EC Internal Market and the ASEAN Electronics Industry

179

in between. As such, it is more useful to characterize the move towards a single European market as one involving a set of related changes which will entail both positive as well as negative impacts. In addition to the uncertainty surrounding the external policy of the EC, other dimensions of change associated with the development of the internal market are also difficult to project with certainty. In particular, as pointed out in section 4 earlier, the extent to which EC electronics are able to regain competitiveness through the recent restructuring and acceleration of R&D efforts is as yet undetermined. Finally, it should be kept in mind in the discussion below that the implications of the various changes identified above are likely to be different for different countries in the region, given the disparities in their stages of development, their differing comparative advantages, and their different development strategies. 6.2. Likely Positive Impacts For convenience, we have grouped the likely positive impacts of the EC internal market on the ASEAN electronics industry into four areas: 6.2 .I. Expanded market demand, lower market access, and distribution cost: The most obvious benefit of a unified EC market after 1992 - expected expansion in market demand and lower market access and distribution costs due to the removal of various internal market entry barriers - will in principle be reaped by all producers alike, ASEAN included, provided that external barriers are similarly removed, or at least not substantially raised from the present situation. Small firms from the ASEAN region that previously were deterred from learning to export to the highly fragmented EC market may now have the incentive to do so when the market is unified. 6.2.2. Emergence of a stronger EC electronics industry: The possible emergence of a stronger and more competitive EC electronics industry as a result of industrial restructuring and accelerated investment in R&D induced by the move towards an internal market is likely to reduce the political pressure for protectionism after 1992. To the extent that this gets translated into lower external barriers against electronics imports from the ASEAN countries, this will be perceived as a welcome development by the ASEAN countries. Furthermore, a European revival will also mean a likely increase in technological prowess and market share of European players outside Europe. This should translate into a higher flow of technology and investments into the ASEAN region, which again augurs well for the ASEAN countries as they would not like to see themselves being overly dependent on Japanese and American MNCs for technology and investment.

6.2.3. Increased scope for OEM subcontracting and partnership with specific MNCs from the EC: To the extent that the internal market has induced a trend towards increasing concentration of ownership in the EC electronics industry, this may give rise to a greater propensity in the use of OEM subcontractors by the large MNCs

180

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that are emerging. The increased scope for OEM subcontracting work with these MNCs may thus benefit some of the ASEAN producers of electronic parts and components. Similarly, there may be greater scope for other forms of partnerships between ASEAN manufacturers and EC MNCs to emerge, such as the increasing use of Singapore as a regional IPO/distribution centre, a regional R&D/technical support centre, and a regional operational headquarters by these MNCs as part of their global business strategies. There is also likely to be an increase in the use of selected regional centres outside Europe as "world product centres" by large EC MNCs, whereby the entire value-chain activity for certain lower-tech product lines are transferred to certain regional centres on a focused basis (McGrath and Bequillard 1989).

6.2.4. Increased standardization and open systems also expand market demand: EC efforts towards technical harmonization as part of the internal market plan will not only result in lower technical barriers within the EC, but is likely to facilitate the pace of adoption of world-wide technical standards as well. In particular, this should lead to the adoption of more open standards that promote inter-operability and network externality, thereby increasing the speed of expansion of market demands for a wide range of IT-intensive electronic products. The ASEAN countries would stand to benefit from this trend towards global technical standards harmonization and openness. 6.3. Likely Negative Impacts In contrast to the positive impacts identified above, the move towards an EC internal market may also give rise to several negative consequences for ASEAN: 6.3 .1. Continuation or even intensification of the various existing EC protectionist measures against targeted electronic goods after /992: To the extent that the external trade policy of the EC after 1992 becomes relatively more protectionistic instead of more open, the ASEAN electronics industry may be adversely affected in the following ways: A larger proportion of the investment in electronics manufacturing of the United States, Japan, and the Asian NICs will be diverted towards the EC to "get into the fortress". This would imply that some of these investments, which might otherwise have chosen to locate in ASEAN, would instead bypass ASEAN (see also the chapter by Chia, in this volume). Moreover, some of the existing investments in ASEAN may also relocate within the EC if their export to the EC is blocked by protectionist measures. As pointed out earlier, such direct investments within the EC by U.S., Japanese, and Korean firms have in recent years increased substantially. With a larger share of European domestic demand being met by production within the EC itself, the demand for import from outside the EC will be correspondingly reduced. Thus, despite the expected increase in absolute demand for electronic products by the EC after 1992,

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import demand may actually decline absolutely. To compound the problem, the diversion of trade effect may affect smaller firms from less-developed countries more severely. Since most of the smaller firms lack sufficient resources to tackle a protected market or to invest directly in the EC itself, they would tend to lose out to larger, better-financed firms, which have already established trade links with, or direct manufacturing presence in, the EC. Similarly, ftrms from countries with better trade promotion and other support programmes from their governments are likely to fare better. In this regard, many of the newly emerging local firms in the ASEAN countries which are just reaching the technical threshold of being able to export overseas may find their aspirations frustrated by a protectionist EC. The negative effects of greater protectionism over consumer electronic products are likely to be particularly severe for the ASEAN countries since many of them are looking forward to diversifying into consumer electronics export in the next phase of their growth. The classic strategy of moving up the product ladder by taking over mature consumer products that are no longer deemed competitive by large Japanese and American firms would be severely affected by a protectionist EC. Being able to develop their market presence in the EC faster and more aggressively than firms from ASEAN, the more established firms from Japan, the United States, Korea, and Taiwan may establish a significant "first-mover advantage", and may effectively pre-empt the later entry of ASEAN firms. For example, the most lucrative joint ventures and marketing tie-up opportunities between EC and non-EC firms may have been pre-empted by these early entrants from the more-developed countries. Although existing EC protectionist measures have been applied mainly against Japanese and Korean imports, they can conceivably be extended to Singaporean and other ASEAN countries as well, especially if the latter begin to move into higher-end products in a significant way. For example, the significant increase in EC imports expected of Singapore-produced personal computers, computer peripherals, and softwares could conceivably be subject to non-tariff protectionist measures in the future. Indeed, a recent EC proposal to revise GATT rules on anti-dumping to provide exemption of action against developing countries if the margin of dumping was very small, but not to extend the same exemption to the four Asian NICs (Business Times, 16 December 1989) will have potentially serious negative implications for Singapore (and possibly Malaysia and Thailand in the near future). A reduction in the rate of new DFI flows into the electronics industry in ASEAN would also imply a slower rate of learning and technological transfer that accompanies such DFI. In this regard, recent tendency by the EC to use the "last substantive processing" rule to pressure non-European firms to transfer their higher value-added processing stages to the EC itself is particularly worrisome to the ASEAN countries. A further problem that the less advanced member countries of ASEAN face is the preferential tariff treatment that the EC gives to imports from the African,

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Carribean, and Pacific (ACP) countries. If EC tariffs on electronic products were to be maintained at present levels or even increased after 1992, then the ACP countries would enjoy a cost advantage over the ASEAN countries. Although this differential has so far been insufficient to divert any substantial production from the ASEAN countries to the ACP countries, it may become a factor in the future, especially for Indonesia and perhaps the Philippines.

6.3.2. Redirection of EC investment away from ASEAN to within the EC itself and Eastern Europe: To the extent that the completion of the internal EC market leads to a significant increase in real investment by European electronics firms within the EC itself to exploit the benefits of a single market, there may be a reduction in investment flows to the ASEAN countries. In particular, this diversion of investment flows is likely to benefit less-developed Member States (especially Portugal and Spain). The recent opening up of the Eastern European countries also provides additional opportunities for absorbing substantial EC investments both to exploit these markets as well as to tap the supply of low-cost labour. Although not part of the original EC internal market plan, this unexpected new development may none the less be made complementary to the pan-European market strategy of the major European electronics firms. For example, the proposal to step up investments in the public infrastructure of the Eastern European countries, especially telecommunication, and to integrate these developments with EC infrastructural networks, would greatly enhance market growth opportunities for the telecommunication industry in Europe. A greater channelling of EC investments into less-developed EC Member States as well as Eastern Europe over the next few years may also pose a longerterm problem for the ASEAN countries - by accelerating the industrial and technological development of these countries, they would sooner become more competitive as manufacturers of electronic goods not just for the EC market, but for the world market as well. This increased source of competition in world trade is a welcome development for the world economy as a whole, but may mean lower export growth by ASEAN producers, and hence be perceived as a negative impact by them. In addition to the possibility of inducing a greater focus of EC electronics investments within the EC itself, an expanded internal EC market may also cause the EC electronics industry to become too inward-looking and fail to expand aggressively into other parts of the global market. Being too absorbed in restructuring and re-positioning their market presence in the unified EC market, the EC firms may thus run the danger of losing out in other strategic regional markets to Japan and the United States in the longer run. Politically, all the ASEAN countries are mindful of becoming too dependent on Japanese capital and technology. Already, the level of dominance of Japanese investments in many manufacturing sectors in ASEAN has become too high for the liking of ASEAN economic planners, and there is increasing concern that this overdependence should be balanced by a stronger presence of other countries, especially EC countries which are currently under-represented. In this regard, ASEAN would

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view with concern a greater retreat by European firms from the region as a result of their greater inward-looking tendency after I 992. While recognizing that the flow of trade and investment is by no means a zerosum game, and that the forces of comparative advantage and strategic regional market positioning will continue to drive EC firms to diversify their investments beyond Europe, the fact remains that there are limits to financial and managerial resources of EC firms, and consequently, a greater focus of management attention on the growing EC internal market will inevitably mean that expansion into other lesser regions will be slowed, at least in the short run.

6.3.3. Use of technical standards as strategic competitive tool: From an ASEAN standpoint, it is obviously advantageous that technical standards for all future generations of electronic products in general and IT products in particular be open, non-proprietary, and inter-operable. Non-proprietary standards lower the cost of acquiring the necessary technologies, while inter-operability increases network externality, reduces interfacing/upgrading cost, and hence stimulates market demand. Although EC promotion of technical standards harmonization has so far been positive in terms of facilitating greater openness of standards, there is none the less a danger that certain technical standards can be used as a competitive tool for segmenting and protecting markets. The case of HDTV is an example of this strategic use of technical standards, whereby the strategic lead by the Japanese in HDTV technology is effectively nullified by the EC opting to adopt a different HDTV standard for the European market. Other potential examples include ISDN network standards and mobile personal telephone network standards where currently no single country enjoys a substantial lead at the moment. While the danger of this strategic use of technical standards being generalized is not very high, and its effects will be more serious on the more advanced countries, it does create more uncertainties for local firms in the ASEAN countries when choosing which technologies to concentrate on. For a country such as Singapore, which is aggressively developing leading-edge telecommunication infrastructure as a key competitive advantage, a slower growth in standards harmonization in telecommunication does pose a problem. 6.3.4. Other possible negative impacts: In addition to the above specific negative implications, another possible negative impact which is of a more general nature is the likely reactions of other major trading nations towards a relatively protectionist EC. To the extent that EC external policy does become more protectionistic after 1992, it is likely to provoke greater quid pro quo protectionist policies by the other major trading blocs as well. A general increase in protectionism and trade frictions world-wide will obviously be bad for the ASEAN countries. A more protectionist EC is also likely to intensify the breaking up of the world trading system into trading blocks, which would not be in the interest of the ASEAN countries. 6.4. Overall Assessment of Impacts As is clear from the above discussion, the relative magnitudes of the various positive

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and negative impacts identified above will be significantly influenced by the extent to which the EC will become more "protectionist" and "inward-oriented" as we approach 1992 and beyond. Despite the concerns expressed above, we believe that there is cause for optimism that a relatively "protectionist" scenario will not materialize, and that a relatively open Europe will in fact be put in place after 1992, at least as far as the electronics industry is concerned. This optimism is based not only on the progress that has been made so far, but also on the apparent initial success that European electronics firms have been able to achieve in restructuring themselves to meet the challenge of the global market and competition. The significant increase in EC R&D efforts in IT -related technologies in recent years should also contribute positively towards enhancing the competitiveness of the EC electronics sector. In addition, the wave of mergers and acquisitions in recent years has resulted in the emergence of many European firms that are pan-European in character, thereby reducing the political identification of "national champions" that require special protection. Visible progress towards market liberalization, such as the lowering of the local-content requirement for public procurement of telecommunication equipment to 50 per cent under a recent EC directive for the internal market, also suggests that the previously national monopolistic markets are definitely becoming more liberalized than more protectionistic. Ultimately, our cause for long-term optimism is based on our assessment of the progressive economic impacts of the technological changes identified in section 2.1 earlier. Thus, for example, the liberalization of the telecommunication market is not so much driven by political pressures as by fundamental economies of scale and network externalities. Similarly, the emergence of pan-European electronics conglomerates are dictated more by the economies of scope and the requirements for global competition than by the political identification of being European. For this reason, we can expect to see a lot more mergers and strategic alliances between European and non-European firms into forming global competitor groups. Thus, for example, the Siemens-Fujitsu alliance in mainframe computer is in competition with Bull-NEC more so than Siemens and Bull against Fujitsu and NEC. Such developments would tend to dilute nationally based competition and instead strengthen globally based competition. From the perspective of the ASEAN countries, it is beneficial that the "renaissance" of European electronics industry be successful, and the sooner the better. A viable and confident European electronics sector would provide a useful counterbalance to technological dominance by American or Japanese firms, increase global competition and hence the need to seek expansion of new markets and offshore production locations by all concerned, and make Europe (as well as the rest of the world) less protectionist.

6.5. Implications for Possible Government Roles The ASEAN countries, while having to prepare for the possible prospect of persistent or even increasing protectionism in the EC, should equally prepare for the likely

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growth in new opportunities and potentials when the EC market in fact turns out to be relatively open. Indeed, the ASEAN countries cannot afford to wait passively until after 1992. They need to actively and immediately respond to the challenges and opportunities created by this move towards a single EC market, or else risk being left out or pre-empted by other more far-sighted nations. While a detailed discussion of the possible policy actions that the ASEAN governments can take is outside the scope of this chapter, we can none the less highlight a number of key areas of concern that follow directly from the above analysis. First is the need for the various ASEAN governments to increase the awareness of their respective local electronics industries to the potentials and threats posed by developments in the EC internal market, and to step up programmes to promote trade and investments of local firms with the EC. Indeed, the Singapore Government in recent years has actively pursued various trade promotion measures (through agencies such as the Trade Development Board) to encourage the diversification of Singaporean electronics exports into Europe. At the same time, the government is also actively promoting the growth of technically competent domestic enterprises to internationalize by investing overseas in general and in the EC in particular, to take advantage of the envisaged expansion of the European market. Other ASEAN governments should profitably learn from Singapore. In addition to such trade and investment promotion policies, the ASEAN governments should also consider a number of other actions to enhance the spillover benefits and to minimize negative impacts from the development of the internal market in the EC, for example: a greater integration of ASEAN as a regional production platform for major EC firms to relocate certain product lines to ASEAN as a "world product" centre; a collective stand on GATT to liberalize trades in general and electronic products in particular. Particular emphasis should be paid to the shaping of anti-dumping rules, the interpretation of rules of origins, and other NTBs; the liberalization of domestic market in general and government procurement in particular, to allow fair access by EC firms to entrench their presence in the ASEAN region; policies to promote technology transfer and collaborative R&D between EC and ASEAN firms; and greater participation in technical standards development efforts initiated by the EC, and so forth. 7. Conclusions The move towards an internal EC market by 1992 represents a very significant development that will greatly alter the structure and dynamics of world trade and investment in general and in the electronics sector in particular. The external trade policies of the EC internal market after 1992 with regard to electronic goods are as yet not fully worked out, but in the mean time, the EC has resorted to the use

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of various non-tariff protectionist measures targeted against certain electronic goods. Whether the EC will become more or less protectionist-oriented after 1992 is likely be influenced by the outcome of the 1991 GATT negotiations, the extent to which the United States, Japan, and other major nations are liberalizing their own domestic markets, as well as how well the EC electronics industry succeeds in restructuring itself to become more competitive over the next few years. The move towards a single EC market will have both positive and negative impacts on the development of the electronics industry in the ASEAN countries. The relative magnitudes of these impacts are difficult to quantify given the uncertainties surrounding the issue of how external policies of the EC may evolve as we move towards 1992 and beyond, but indications based on recent trends are that there is cause for cautious optimism. However, there is a real danger that the local electronics industries in the ASEAN countries, given their lower level of development compared with their counterparts in the United States, Japan, and the Asian NICs, will not be able to respond fast enough to opportunities created by the internal market and hence risk being pre-empted in the long run. The ASEAN governments should therefore consider policy options they could pursue to maximize the positive spillovers from the EC internal market while minimizing the negative consequences.

NOTES I. 2. 3. 4.

5.

6.

All mention in this chapter of "European" should be taken to mean EC Member States unless otherwise stated. The abbreviation EC will be used in this chapter to denote either "European Community" or "European Commission". Whichever is intended should be clear from the context. For a detailed exposition of the institutional mechanisms by which proposals in the White Paper would be translated into EC directives and regulations, see Euromonitor (1988). According to the Economic Report of the President, January 1989, the average post-Tokyo Round tariff rate for import of "electrical machinery" to the EC was 7.9 per cent versus 4.7 per cent for all industrial products, and 6.9 per cent for all finished manufactures. References to EC anti-dumping charges as protectionist measures do not imply that every case of such charges is without basis. However, it is believed that sufficient controversies exist around the basis of computation used by the EC to warrant referring to many (though by no means all) such imposed charges as protectionist-inspired. "ASEAN" in this chapter does not include Brunei because of the lack of data. In any case, the electronics industry in Brunei is miniscule compared with the other ASEAN countries.

REFERENCES

Asian Business. "United Europe: The Threat to Asia". June 1989, pp. 34-41. Asian Electronics Union (AEU). Journal of AEU, June 1986.

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Beuter, R. and J. Pelkmans. "The External Dimension of the Internal Market: A Survey". Paper presented at the Colloquium on ASEAN and Europe 1992, 10--11 July 1989, Kua1a Lumpur. Borrus, M.G. Competing for Control: America's Stake in Microelectronics. Cambridge, MA: Ballinger, 1988. Carpentier, M. "An Action Plan for HDTV in Europe". Telecommunications, September 1989, pp. 23-26. Cecchini, P. The European Challenge 1992: The Benefits of a Single Market. United Kingdom: Wildwood House, 1988. Commission of the EC. "The Economics of 1992: An Assessment of the Potential Economic Effects of Completing the Internal Market of the European Community". European Economy, no. 35 (March 1988). Cordaro, G. "Towards 1992: The European Community Telecommunication Policy". Telecommunications, January 1990, pp. 33-38. Department of Statistics, Malaysia. External Trade Statistics 1988. Kuala Lumpur, 1988. Department of Statistics, Singapore. Census of Industrial Production. Singapore: Economic Development Board, 1980, 1987. _ _ _ _ . Singapore Trade Statistics, I988. Singapore, 1988. Development Bank of Singapore (DBS). An Integrated European Market in 1992: Implications for Singapore. Economic Research Department report no. 8. Singapore, January 1989. Economic Intelligence Unit. European Trends 1989 First Quarter. London, 1989. Economist. "Under Construction: A Survey of Europe's Internal Market", 8-14 July 1989. English, M. "The European Information Technology Industry". In European Industry: Puhlic Policy & Corporate Strategy, edited by A. Jacquemin, pp. 227-73. Oxford: Clarendon Press, 1984. Euromonitor. 1992: Single European Market. 1988. Far Eastern Economic Review. "Onto the Drawbridge: Japanese and South Korean Firms Lay Seige to 'Fortress' Europe", 18 May 1989. _ _ _ _ . "Restating the Rules: The EC Agrees to Talks on Rules of Origin", 16 November 1989. "Fortress Fears: Asia Bears Brunt of EC's Protectionist Measures", 30 November 1989. Grewlich, K.W. "Telecommunications: A European Perspective". In Comparative GovernmentIndustry Relations: Western Europe, United States and Japan, edited by S. Wilks and M. Wright, pp. 251-73. Oxford: Clarendon Press, 1987. Herrnann, A. "The European Market in 1992: Opportunity or Threat for the World Economy?" Tokyo Cluh Papers, no. 3 (1990), pp. 244-96. Hiemenz, U. Perspectives for ASEAN-EC Trade in Manufacture.\ in the Late 1980s and Early 1990s. 1988. Hiemenz, U. and R.J. Langhammer. ASEAN and the EC: Institutions and Structural Change in

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Hiemenz, U., R.J. Langhammer et al. "The Competitive Strength of European, Japanese and US Suppliers on ASEAN Markets". Kieler Stud en 211 (1987). Hobday, M. The International Telecommunication Industry: The Impact of Microelectronics Technology and Implications for Developing Countries. Unido Technology Trend series no. 4. Vienna, 1987. Howell, T.R. et al. The Microelectronics Race: The Impact of Government Policy on International Competition. Boulder: Westview Press, 1988. International Data Corporation (IDC). European Computer Market 1988. IDC report. Boston, 1989. James, B.G. Trojan Horse: The Ultimate Japanese Challenge to Western Industry. London: Mercury Books, 1989. Langlois, R.N. et al. Microelectronics: An Industry in Transition. Boston: Unwin Hyman, 1988. MacKintosh, I. Sunrise Europe: The Dynamics of Information Technology. London: Basil Black well, 1986. Malerba, F. The Semiconductor Business: The Economics of Rapid Growth and Decline. Madison: University of Wisconsin Press, 1985. McGrath, M.E. and R.B. Bequillard. "International Manufacturing Strategies and Infrastructural Considerations in the Electronics Industry". In Managing International Manufacturing, edited by K. Ferdows, pp. 23-40. Amsterdam: North-Holland, 1989. Organization for Economic Co-operation and Development (OECD). Trade in High-Technology Products: The Semiconductor Industry. Paris, 1984. ____ . Science and Technology Indicators. No. 2 - R&D, Invention and Competitiveness. Paris, 1988. Pelkmans, J. "The Assignment of Public Functions in Economic Integration". In The European Community- Past, Present and Future, edited by Loukes Tsoukalis, pp. 97-121. Oxford: Basil Blackwell, 1983. Schmitt-Rink, G. and T. Lilienbecker. "'An Analysis of ASEAN-EC Trade in Textiles and Electronics 1980--1988". Mimeographed. I 990. Sharp, M. "The Community and New Technologies". In The European Community and the Challenge of the Future, edited by J. Lodge. London: Francis Pinter, 1989. Small, H. "The Single Market: Opportunities and Threats for European Telcos". Telecommunications, May 1989, pp. 37-47. Tan Loong-Hoe and Chia Siow Yue, eds. Trade, Protectionism, and Industrial Adjustment in Consumer Electronics: Asian Responses to North America. Singapore: Institute of Southeast Asian Studies, I 989. United Nations Centre on Transnational Corporations (UNCTC). Transnational Corporations and the Electronics Industries of ASEAN Economies. UNCTC Current Studies no. 5. New York: United Nations, 1987. United Nations Industrial Development Organization (Unido). Indonesia. Vienna, 1987.

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Vienna, 1988.

Van Tulder, R. and G. Junne. European Multinationals in Core Technologies. New York: Wiley, 1988. Von Gizycki, R. and J. Schubert. Microelectronics: A Challenge for Europe's Industrial Survival. Munich and Vienna: R. Oldenboury Verlag, 1984. Wagner, N. "The European Internal Market: Threat or Challenge for Asean?" Mimeographed. 1989. Wheeler, D. and A. Mody. Automation and World Competition: Korea's Future in Semiconductors, Automobiles, and Textiles. Seoul: Korean Development Institute, 1986. World Bank. World Development Report 1988. Oxford University Press, 1988.

VII. The EC Internal Market and the ASEAN Textile and Clothing Industry MAR/ PANGESTU AND IDA N. HASNI

As 1992 approaches, there is much discussion of the effects of the single market on third countries. The main concern of third countries is the creation of a "fortress Europe" rather than a Europe that will share its "prosperity" with the rest of the world. One of the traditionally sensitive sectors already subject to import restrictions is the textile and clothing industry. Since the EC market is one of the most important markets for textiles and clothing from countries of the Association of Southeast Asian Nations (ASEAN), 1 it is useful to analyse how full economic integration of the European Community (EC) will affect its exports of textiles and clothing. The aim of this chapter is to look into the various possible scenarios of the impact of the formation of the EC single market on third country imports of textiles and clothing. This includes an examination of the impact of specific EC policies on textiles and clothing on third countries, as well as any impact arising from changes in the textile and clothing industry in the EC countries after the formation of the single market. The rest of this chapter is divided into five sections. The first section provides a general background of trends in textile and clothing production, employment, and trade of the EC and ASEAN countries relative to other countries. The second section compares the characteristics of the textile and clothing industry in each region. The third section describes EC policies towards third countries on textiles and clothing and the impact on the ASEAN countries up to the present time. We then look into a set of alternative scenarios regarding the impact of the EC single market on ASEAN trade in textiles and clothing. Some conclusions and recommendations are provided at the end of the chapter.

1. General Trends in Production, Employment, and Trade in Textiles and Clothing To understand EC policies on textiles and clothing, we begin with a background on the trends in production, employment, and trade in textiles and clothing of the EC and ASEAN countries relative to other countries.

The EC Internal Market and the ASEAN Textile and Clothing Industry

191

1.1. Production

Table VII. I provides data on the index of production of textiles and clothing of member countries of the Multi-Fiber Arrangement (MFA) during MFA III ( 198286) and up to the latest available comparable data. With regard to textile production, recovery from the recession of the early 1980s is evident as most countries recorded annual increases in production. Developed countries clearly experienced a slowdown in growth and the index of production had shown a decline for the EC and Japan compared with 1973. A further slowdown in the growth of textile production was apparent in the 1987-88 period for developed countries. The most apparent decline in textile production growth was experienced by Japan, this being indicative of the industrial restructuring in progress in response to the appreciation of the yen and rising labour costs. The decline in EC production since the 1970s 2 is related to the restructuring and rationalization of the industry due to increased intra-EC and extra-EC competition, a declining consumption in EC markets, and technological change. These will be discussed in the next section. In the 1980s the EC had fairly stable growth in textile production, although the growth rate had been much lower than that in the United States. Less-developed countries (LDCs) register a much higher rate of growth compared with developed countries because of their lower starting base, increased capability to compete, and the catching up process in their industrialization. Rapid growth is most evident for newly industrialized economies (NIEs) such as South Korea and Hong Kong. In the case of South Korea, by 1988 its textile industry had grown almost fivefold from the year 1973, whereas for Hong Kong it had grown 1.7 times over the same period. However, the NIEs had experienced a slowdown in growth in 1988, and this is expected to continue, reflecting a decline in their comparative advantage due to rising labour costs and the appreciation of their currencies. These countries have also begun restructuring their industries. Of the ASEAN countries, Indonesia, Malaysia, and the Philippines exhibit strong growth. Production has also increased in Thailand, although no data on Thailand is given in Table VII. I. The index of textile production in Malaysia and the Philippines more than doubled compared with the year 1973. Growth in production is related to import-substitution and the subsequent export-orientation in the four ASEAN countries. As for Singapore, the substantial decline in textile production is due to its declining comparative advantage in such production and a shift in its industrialization policy. As for clothing, the increase in production for developed countries is generally low and relatively lower than those for developing countries. The decline in the index of clothing production for the EC since 1973 is more marked compared with that of textiles since clothing tends to be more labour-intensive, thus conferring more of a comparative advantage to developing than developed countries. With regard to textiles, the index of production has fallen in Japan compared with 1973. A fall in production was evident for the EC in 1987 and 1988. Of the developed countries only the United States continues to experience positive growth although

TABLE VII.l

Index of Textile and Clothing Production of Selected MF A Members, 1982-88 (Index: 1973 = 100) ~-------~---------------·-----

1982

1985

1987

1988

United States Japan Canada

91 91 82 102

95 106 84 134

98 118 77 148

97 119 77 151

Czechoslovakia Hungary Poland

138 106 111

147 109 128

153 113 133

114

Bangladesh Brazil" Hong Kongh India' Indonesiaa Korea, Republic of Malaysiac Philippines Romania Singapore

115 117 95 108 126 300 204 207 219 63

101 112 120 125 121 325 246 281 233 28

125 170 129 142 435

447

259 33

35

United Statesd Japan' Canada

91 98 88 107

90 113 88 116

86 121 85 129

84 123 85 127

Czechoslovakia Hungary Poland

135 103 134

146 99 163

152 90 182

90

Brazildf.R Hong Kong• Korea, Republic of Philippines Romania Singapore

142 100 399 506 223 95

130 105 498 728 330 106

125 141 696

140 702

416 144

152

Textiles

EC

167

Clothing

ECd

Index: 1975 = 100. Index: 1981 = 100. ' Includes clothing and footwear. d Includes made-ups. e Includes made-ups and knitted articles. !Index: 1975 = 100. ' Includes footwear. h Index: 1981 = 100. a

b

SoURCE: U.N. Yearbook of Industrial Statistics; national statistics.

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193

at a very much lower rate than those of the LDCs. Clothing production in the LDCs has been growing rapidly and continues to be so. Even though growth in this sector in the NIEs (Hong Kong, South Korea, and Singapore) continues to be positive, it is still much lower than that in the LDCs and other ASEAN countries.

1.2. Employment Increased protection from imports of textiles and clothing in developed countries is often related to the falling employment level in the industry. Developed countries, especially the EC and Japan, experienced a fall in employment compared with the 1970s (see Table VII.2) because of the decline in production and technological developments. Breitenacher et al. (1987, p. 6) estimate that in the EC the number of employees in the textile and clothing industry declined from 3. 7 million in 1963 to 3.3 million in 1970, and to 2.2 million during 1970-80. Employment indices for developed countries seem to be more or less stable in the 1980s, except for some slight declines. For the ASEAN countries, except Singapore, there has been an increase in the employment level along with rapid growth in the production of textiles and clothing. 1.3. Trade in Textiles and Clothing The ASEAN countries are still small suppliers in the world market of textiles and clothing. Nevertheless, it is important to understand the position of ASEAN relative to its competitors so as to better understand possible changes arising from the formation of the EC single market. 1.3 .1. Textiles: Table VII.3 provides a comparison of textile imports by MFA members for two time periods 1973 and 1987. The biggest importers of textiles are the developed countries. The EC had been the biggest importer throughout the period, accounting for almost 25 per cent of total member country imports. Meanwhile, Hong Kong had become the second biggest importer in 1987, reflecting its entrep6t role, especially in relation to China. The United States, Japan, and Canada were the next biggest importers. The growth rate of imports into the United States and the EC had been relatively high, at 11 per cent per annum over the period. Looking ahead, one can expect imports into Japan to increase substantially as it opens up its market. Due to their market size and progress in developing the textile industry, the LDCs are not big importers of textiles although some have experienced high growth rates. As for the ASEAN countries, Singapore's relatively high share of 3 per cent is indicative of its entrep6t role. It is interesting to note that Malaysia, Thailand, and especially the Philippines had experienced import growth rates of around I 0 per cent and higher during the period. Meanwhile, Indonesia had experienced a low growth of only 2 per cent. The growth in textile imports in the ASEAN countries is related to the growth in garment exports. The slower growth experienced by Indonesia can be explained by the fact that Indonesian garment exports only started

TABLE VII.2 Textile and Clothing Employment of Selected MF A Members, 1982-88 (Index: 1973 = 100) 1982

1985

1987

1988

EC"·h United States Japan' Canada

65 77 59 75

59 74 54 73

56 77 51 77

77 50 73

Czechoslovakia Hungary Poland

97 80 82

95 74 76

70

66d

121 69 116 102 137 100

124 68

73

70

Textiles

China' Hong Kong' India! Indonesia• Korea, Republic of Malaysia" Mexico' Romania Singapore"

138 45

131 134 78 104 138 19

67 80 105 88

61 77 108 82

89 92 91

88 82 91

126 157 600 232

134 158 1,743 265 122 103 141 119

107 21

21

74 111 81

72 112 75

77

65d

Clothing EC"·h United States Japan'J Canada Czechoslovakia Hungary1 Poland China' Hong Kong Indonesiag Korea, Republic of Malaysiah Mexico' Romania Singapore" ----·--·--·

lOO 129 137 - - . - - -. .

!59

!52

109 133

139

- - ·--·-----------·-

Data based on a single observation for the year. Enterprises with twenty or more workers. ' Regular workers in establishment with thirty or more employees. d Average for first and fourth quarters only. ,. Index: 1980 = 100. f Employment in cotton mills. " Index: 1975 = 100. "Index: 1982 = 100. 'Index: 1974 = 100. 1 Includes made-ups. a

b

SouRcE: Responses to GATT textile questionnaires; national statistics.

The EC Internal Market and the ASEAN Textile and Clothing Industry

195

to increase significantly from 1987. The same pattern can be observed for China, whose imports rose by 18 per cent, although in the case of China some of the imports may also have been for domestic consumption. Of the MFA members the EC was still the biggest exporter of textiles (see Table VII.4), although its share had declined from one-third to one-quarter. Developed countries such as the United States and Japan also experienced a significant decline in their shares of exports, from 18 to 11 per cent for the United States and from 9 to 6 per cent for Japan. The decline in the shares of developed countries was due to the higher growth rate of exports from the LDCs as they became more competitive. Export growth in the LDCs was bouyant. China emerged as the second biggest exporter of textiles, growing very rapidly at 18 per cent per annum over the 197387 period, with its share increasing from 4 to 13 per cent. South Korea also experienced spectacular growth, its share increasing from 3 to 9 per cent. As for the ASEAN countries, even though their shares were still low, Thailand and Malaysia recorded growth rates of 16 and 19 per cent per annum over the 1973-87 period. Indonesia's growth was spectacular because of the almost zero starting base. Relatively high growth rates were recorded for Singapore, but once again this partly reflects its entrepot role. The Philippines, however, recorded the slowest growth, at 8 per cent. 1.3.2. Clothing: From Table VII.5 we can see that the major clothing importers are the United States and the EC, which together accounted for 60 per cent of total imports from MFA member countries in 1973 and 67 per cent in 1987. The compound growth rate over the 1973-87 period was higher for the United States, at 18 per cent per annum compared with 15.6 per cent per annum for the EC. The next biggest importer was Japan, which accounted for 7.4 per cent of imports in 1987 and a growth rate of 15 per cent over the period. The other major importers were Hong Kong, the Nordic countries, and Canada. NIE importers such as Hong Kong and Singapore exhibited strong growth, mainly because of the inclusion of reexports. No other LDC emerged as an important importer of clothing. The EC was the largest exporter of clothing (see Table VII.6), accounting for 21 per cent of exports. This share declined slightly, from 23 to 21 per cent over the period 1973-87. Hong Kong and South Korea were the two next biggest exporters, and their positions have not changed since 1973. Next in rank were developing countries that experienced rapid growth. China's share went up from 3 to 9 per cent, raising it from ninth to fourth place, while Turkey's share too increased from 0.1 to 3.6 per cent, raising its rank from thirtieth to fifth. The ASEAN countries too experienced high growth rates in clothing exports, placing Thailand and Singapore seventh and eighth in rank, while Indonesia, Malaysia, and the Philippines ranked sixteenth, eighteenth, and twenty-fifth, respectively. The ASEAN countries as a group accounted for 9.2 per cent of clothing exports from MFA members in 1987. While the NIEs remain important exporters of clothing, in recent years their

Mari Pangestu and Ida N. Hasni

196

TABLEVII.3 Textile Imports of MF A Members, 1973 and 1987 ------··

·--

--

- -

US$ Billions - - - -

1973" ---··

1987a

---

--

EC Hong Kong" United States Japan Canada China Austria Switzerland Singapore Korea, Republic of Sweden Finland Norway Macau Malaysia Thailand Yugloslavia Hungary Sri Lanka Philippines Poland Bangladesh Egypt Indonesia Others ------··--·.

---------

1973-87 Compound Growth Rate(%)

%of Total Members' Imports - · - - . · -

1973"

---·--· - - - - - -------

Total of members

---

1987" ·---·

--~-·---

10.76

41.31

100.0

100.0

10.09

2.43 0.96 1.31 1.05 0.77 0.19 0.47 0.50 0.41 0.29 0.49 0.26 0.22 0.05 0.13 0.09 0.19 0.12 0.03' 0.05 0.13 0.03d 0.02 0.16 0.43

10.19 6.37 5.92 2.50 1.95 1.85 1.42 1.39 1.32 1.24 1.06 0.72 0.54 0.48 0.46 0.46 0.43 0.33 0.32 0.28 0.28 0.26 0.22 0.20 1.14

22.6 8.9 12.1 9.8 7.2 1.7 4.4 4.7 3.8 2.7 4.6 2.4 2.0 0.5 1.2 0.8 1.8 1.2 0.2 0.5 1.2 0.3 0.1 1.5 4.0

24.7 15.4 14.3 6.1 4.7 4.5 3.4 3.4 3.2 3.0 2.6 1.8 1.3

10.78 14.47 11.38 6.39 6.86 17.65 8.22 7.58 8.71 10.94 5.67 7.55 6.62 17.53 9.45 12.36 6.01 7.49 18.42 13.09 5.63 16.68 18.68 1.61 7.21

- - . ·---

--

·---

1.2 1.1 1.1 1.1

0.8 0.8 0.7 0.7 0.6 0.5 0.5 2.8 ·--·-

---

Rank -··--·-

1973" 1987" ·-----

--··

4 2 3 5 14 8 6 9 10 7 11 12 22 17 20 13 18 27 23 16 26 35 15

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

-----

" Or the nearest year. "Includes imports for re-export. Re-exports amounted to US$0.20 billion in 1973 and US$3.04 billion in 1987. 'For 1974. d For 1975. SouRcE: United Nations, Comtrade data base and yearbooks of international trade; national statistics.

The EC Internal Market and the ASEAN Textile and Clothing Industry

197

TABLE VII.4 Textile Exports of MF A Members, 1973 and 1987 ~·-~----·

US$ Billions

Total of members EC China United States Japan Korea, Republic of United States Switzerland Hong Kongh Pakistan Austria Egypt Turkey India Brazil Czechoslovakia Singapore Thailand .;;weden Canada Indonesia Yugloslavia Poland Hungary Malaysia Philippines Others

%of Total Members' Imports

1973-87 Compound Growth Rate(%)

1973"

1987"

1973"

1987"

13.61

46.16

100.0

100.0

9.12

4.60 0.60 1.31 2.39 0.36 1.22 0.63 0.45 0.44 0.44 0.17 0.10 0.33 0.22 0.22 0.14 0.07 0.18 0.15 0.00 0.13 0.16 0.15 0.02 0.02 0.43

11.63 5.79 5.92 5.30 3.77 2.72 2.03 1.94 1.83 1.41 1.17 1.16 0.80' 0.71 0.67' 0.61 0.56 0.54 0.47 0.44 0.41 0.29 0.29 0.25 0.06 1.36

33.8 4.4 12.1 17.6 2.6 9.0 4.6 3.3 3.2 3.2 1.2 0.7 2.4 1.6 1.6 1.0 0.5 1.3

25.2 12.5 14.3 11.5 8.2 5.9 4.4 4.2 4.0 3.1 2.5 2.5 1.7 1.5 1.5 1.3 1.2 1.2 1.0 0.9 0.9 0.6 0.6 0.5 0.1 2.9

6.85 17.58 11.38 5.85 18.27 5.89 8.72 11.09 10.72 8.67 14.77 19.13 6.53 8.73 8.28 11.09 16.01 8.16 8.50

1.1

0.0 1.0 1.2 1.1

0.2 0.2 3.2

8.55 4.34 4.82 19.77 8.16 8.57

Rank 1973" 1987"

5 2 2 9 3 4 6 8 7 14 21 10 11 12 18 23 13 16 36 19 15 17 30 29

2 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 32

--~·------

" Or the nearest year. h Domestic exports. 'For 1986. SouRcE: United Nations, Comtrade data base and yearbooks of international trade; national statistics.

198

Mari Pangestu and Ida N. Hasni

TABLE VII.5 Clothing Imports of MF A Members, 1973 and 1987 -

-·--·----~---

~----

US$ Billions -·-·-----

1973"

1987"

----·-

--- ----------

%of Total Members' Imports -----~

1973"

1987"

1973-87 Compound Growth Rate(%)

Rank --·---

1973" 1987"

----------~-------------------------·-

Total of members

6.56

53.17

100.0

100.0

16.1

United States EC Japan Hong Kong" Switzerland Sweden Canada Austria Norway Finland Singapore Czechoslovakia Poland Hungary Mexico Malaysia Yugoslavia China Korea, Republic of Macau

1.97 2.02 0.55 0.11 0.43 0.37 0.31 0.18 0.19 0.05 0.04 0.10 0.06 0.04 0.06 0.01 0.02 0.00 0.01 0.01

20.17 15.42 3.96 3.10 2.46 1.85 1.63 1.54 1.15 0.53 0.50 0.20' 0.19 0.14 O.J1d 0.05 0.02 0.02 0.02 0.02

30.0 30.8 8.3 1.7 6.6 5.6 4.8 2.7 2.9 0.8 0.5 1.6 0.8 0.5 0.9 0.2 0.3 0.0 0.2 0.1

37.9 29.0 7.4 5.8 4.6 3.5 3.1 2.9 2.2 1.0 0.9 0.4 0.3 0.3 0.2 0.1 0.0 0.0 0.0 0.0

18.1 15.6 15.1 26.9 13.3 12.2 12.6 16.6 13.7 18.4 19.8 5.1 8.6 9.4 4.4 12.2 0.0 5.1 5.1

2 1 3 9 4 5 6 8 7 13 14 10 12 15 11 17 16 34 18 22

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

-----·--·------·--------- --------------

" Or the nearest year. "Includes imports for re-export. Re-exports amounted to US$0.03 billion in 1973 and US$2.18 billion in 1987. 'For 1986. d For 1985. SoURCE: United Nations, Comtrade data base, yearbooks of international trade; national statistics.

TABLE VII.6 Clothing Exports of MF A Members, 1973 and 1987

US$ Billions

%of Total Members' Export

Rank

''~~

1973"

1987"

1973"

1987"

Total of members

6.74

42.70

100.0

100.0

EC Hong Kongh Korea, Republic of China Turkey India Thailand Singapore United States Austria Macau Japan Finland Romania Czechoslovakia Indonesia Yugloslavia Malaysia Pakistan Switzerland Sri Lanka Bangladesh Hungary Poland Philippines Sweden Brazil Canada Mexico Colombia Egypt Uruguay Norway Jamaica Peru Argentina Guatemala Costa Rica El Salvador

1.55 1.33 0.71 0.20 0.01 0.10 0.03 0.13 0.26 0.15 0.07 0.35 0.19 0.22 0.19 0.00 0.12 O.Q2 0.01 0.11 0.00' 0.00' 0.21 0.29 0.01 0.12 0.08 0.09 0.06 0.02 0.03 0.01' 0.02 0.01 0.00 0.00 0.01 0.00 0.01

23.1 19.7 10.6 3.0 0.1 1.5 0.5 1.9 3.9 2.2 l.O 5.1 2.9 3.3 2.7 0.0 1.8 0.3 0.2 1.7 0.1 0.0 3.0 4.3 0.2 1.8

20.6 18.2 14.1 8.8 3.6 3.4 3.4 2.3 2.3 2.1 2.0 1.5 1.5 1.5 1.4 1.4 1.2 1.2 l.l l.O l.O l.O 0.9 0.9 0.9 0.8 0.5 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0

8.80 7.78 6.01 3.75 1.52 1.45 1.45 1.00 0.96 0.90 0.88 0.65 0.63 0.63' 0.59d 0.58 0.52 0.51 0.48 0.44 0.42 0.42 0.37 0.37 0.36 0.34 0.20 0.16 0.13' 0.10 0.08 0.07 0.06

0.03g 0.02g 0.02 0.01' 0.01' 0.01'

1.1

1.3 0.9 0.3 0.4 0.1 0.4 0.1 0.0 0.1 0.1 0.1 0.2

1973"

1987"

I

2 3 9 30 17 22 13 6 12 20 4 lO 7 11 39 14 25 27 16 36 40 8 5 29 15 19 18 21 26 23 31 24 33 37 34 32 35 28

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Or the nearest year. Domestic exports. 'For 1985. J For 1986. 'For 1974. t For 1975. "For 1984. a h

SouRcE: United Nations, Comtrade data base, yearbooks of international trade; national statistics.

200

Mari Pangestu and Ida N. Hasni

growth rates have been slower than those of other ASEAN countries and China as they begin to experience higher costs and binding quotas. 1.4. ASEAN-EC Trade in Textiles and Clothing The above trade trends indicate that the EC is both the biggest importer and exporter of textiles and clothing. However, most of this trade takes place within the EC market and this seems to be increasingly so since the formation of the common market. Trade creation and diversion effects have been strongly in favour of the EC countries. Most EC imports of textiles and clothing are sourced from the EC internal market and other developed countries. Over 60 per cent of textile imports and just slightly under 50 per cent of clothing imports were sourced from the EC countries in 1983 and 1987 (see Tables VII.7 and VII.8). ASEAN has not been an important source of imports for the EC. In 1983 only 0.9 per cent of EC imports of textiles and 2. 7 per cent of EC imports of clothing were sourced from the ASEAN countries. Even by 1987 the shares had not changed much - 1. I per cent for textiles and 3.4 per cent for clothing. ASEAN's main competitors in the EC market are developing countries that exhibit strong growth in exports. For textiles the main competitor is China, whose share of imports increased from 0.4 to 2.3 per cent over the 1983-87 period. As for clothing imports, Hong Kong and South Korea remain the biggest importers outside the EC (15 per cent in 1983) and the Organization for Economic Cooperation and Development (OECD) (13 per cent in 1987). Other competitors are countries with low labour costs within the EC, such as Spain and Portugal, and developing countries which are closer to the EC and have made special agreements with it. While ASEAN has not been an important source of imports for the EC, the EC is an important destination of ASEAN exports of textiles and clothing. The development of textile and clothing exports from ASEAN to the EC is shown in Table VII.9. In 1982, ASEAN exports of textiles and clothing to the EC amounted to US$673 million (US$162 million for textiles and US$511 million for clothing). By 1987 this had doubled to US$1.6 billion (US$384 million for textiles and US$1.2 billion for clothing). The compound growth rate of exports to the EC during 1982-87 was 15.4 per cent per annum for textiles and 13.5 per cent per annum for clothing. High rates of growth were experienced especially in the 198587 period (data not shown in table): 23.1 per cent and 35.1 per cent for textiles, and 55.1 per cent and 89.5 per cent for clothing in 1986 and 1987, respectively. The biggest ASEAN exporter of textiles to the EC is Thailand, accounting for 61 per cent of ASEAN's exports to the EC in 1982. By 1987 the share had declined to 50 per cent. Meanwhile, Indonesia's share increased rapidly from just under 2 per cent in 198 1 to 31 per cent at the expense of textile exports from the other ASEAN countries, especially Malaysia. As for clothing exports, Thailand's share increased from 24 per cent in 1981 to 37 per cent in 1987. Over the same period Indonesia's share increased from 7

The EC Internal Market and the ASEAN Textile and Clothing Industry

201

to 11 per cent. The increase in the share of clothing exports of both countries had been at the expense of the decline in the shares of Singapore and the Philippines. Malaysia, however, had been able to maintain its share. The growth in the export of textiles and clothing to the EC market is important for ASEAN, because the EC is one of ASEAN's biggest market. For example, in 1985 Indonesia's export to the EC constituted only 13.7 per cent of total exports. but this share increased to 14.2 per cent in 1986, and to 25.6 per cent in 1987 (data obtained from Indonesia's Central Bureau of Statistics). In the case of Thailand, in 1980 Thai exports to the EC reached 37.1 per cent of total clothing exports. Although the percentage then declined, the EC market remains one of Thailand's biggest clothing market. In 1983 the share of Thailand's clothing exports to the EC accounted for 26.4 per cent of its total clothing exports, while in 1987 the share was 29 per cent (data obtained from Thailand's Custom Department).

2. Development of the Textile and Clothing Industry in ASEAN and the EC The textile and clothing industry in both regions has undergone substantial changes in the last two decades, though for very different reasons. 2.1. ASEAN Like the NIEs such as Taiwan and South Korea, the ASEAN countries started their import-substitution industrialization strategy with the textile and clothing industry. Most developing countries began their import-substitution strategy with textiles because the initial capital requirement is small and standard technology is utilized. The usual policy is to provide protection from imports and sometimes incentives for foreign investment, to encourage production for the domestic market. As the industry expands and there is increased foreign investment, the technology becomes increasingly sophisticated and production capacity is expanded. But as not all the production can be absorbed by the domestic market, a shift from import-substitution to export-promotion provides an outlet for the expanded capacity. This pattern can be observed in the ASEAN countries, though with slight variations in individual countries. Because of its small domestic market, Singapore's export-orientation strategy was initiated almost from the beginning. At present Singapore has already switched its development strategy towards more capital-, human-, and skill-intensive sectors as well as services. At the other extreme, Indonesia's large domestic market and sizeable oil exports enabled it to maintain an import-substitution policy for a longer period. It was only when oil prices started to decline rapidly in 1986 that Indonesia switched to a more export-oriented industrialization strategy. The other three ASEAN countries turned to exportorientation much earlier, towards the late 1970s and early 1980s. The comparative advantage of the textile and clothing industry in the ASEAN countries lies in their low labour cost. The skill requirement for the textile industry is low, hence the labour productivity for any given type of textile machinery does not differ significantly from country to country. Skill requirement is even lower

N

0

N

TABLE VII.7 Textile and Clothing Exports to Various Major Markets, 1983 Importing Countries USA Exporting Countries

Japan

EC

Value (US$'000)

Share (%)

Value (US$'000)

Share (%)

Total OECD EC

1,584,278 708,005

48.36 21.61

527,662 350,580

33.71 22.40

15,456,984 11,878,460

83.19 63.93

Non-OECD Hong Kong Taiwan China South Korea ASEAN Thailand Malaysia Singapore Indonesia Philippines Brunei

1,691,933 161,446 224,511 255,379 245,043 90,251 34,021 7,821 7,143 13,036 28,225 5

51.64 4.93 6.85 7.80 7.48 2.75 1.04 0.24 0.22 0.40 0.86 0.00

1,037,569 15,563 115,527 348,205 269,228 78,286 36,263 13,750 4,934 20,894 2,434 11

66.29 0.99 7.38 22.25 17.20 5.00 2.32 0.88 0.32 1.33 0.16 0.00

3,082,252 148,012 152,129 66,965 155,648 170,237 98,739 35,650 9,568 22,059 4,184 37

16.59 0.80 0.82 0.36 0.84 0.92 0.53 0.19 0.05 0.12 0.02 0.00

Total imports of SITC 65 (c.i.f. price)

3,276,100

100.00

1,565,256

100.00

18,580,756

100.00

Value (US$'000)

Share (%)

SITC 65: Textiles

~ 1:> :::l. 'o 1:> ;:,

""'"' :;: "' 1:> ;:,

i:l..

......

f} ~

::r:: 1:>

"":::.

~

SITC 84: C lathing

"'~

Tota!OECD EC

1,105,322 556,594

10.61 5.34

341,264 260,399

22.59 17.23

9,760,213 7,802,283

59.81 47.81

(j

Non-OECD Hong Kong Taiwan China South Korea ASEAN Thailand Malaysia Singapore Indonesia Philippines Brunei

9,313,138 2,416,882 1,931,451 840,670 1,785,734 874,066 137,306 102,400 210,506 84,745 339,109 0

89.39 23.20 18.54 8.07 17.14 8.39 1.32 0.98 2.02 0.81 3.25 0.00

1,169,713 202,357 192,131 276,908 443,396 26,711 3,522 5,189 873 1,309 15,818 0

77.41 13.39 12.72 18.33 29.34 1.77 0.23 0.34 0.06 0.09 1.05 0.00

6,501,445 1,548,557 352,840 298,093 871,767 443,068 116,473 76,248 100,662 29,008 120,617 60

39.84 9.49 2.16 1.83 5.34 2.72 0.71 0.47 0.62 0.18 0.74 0.00

e.

10,418,462

100.00

1,510,991

100.00

16,317,865

100.00

......

;:: ~ ..., ;::

~...,

;.,.

~

l:l ;::

l:l..

s. "' V, ~

~

~ ;.,

::::-.

;;;l:l ;::

l:l..

Total imports of SITC 84 (c.i.f. price)

(j

as·

s.

NoTE: SITC 65: Textile yarns, fabrics, made-up articles, and related products. SITC 84: Articles of apparel and clothing accessories.

""......

SouRCE: Calculated from OECD, "Foreign Trade by Commodities", Series C (various issues).

"'"' ~

;::

l:l..

~ w

N

0 ....

TABLE VII.8 Textile and Clothing Exports to Various Major Markets, 1987 Importing Countries

us

EC

Japan

-----

Value (US$'000)

Share

Value (US$'000)

Share (%)

Value (US$'000)

Share

(%)

Total OECD EC

3,055,684 1,683,321

46.90 25.84

1,072,156 741,620

33.81 23.38

28,011,505 22,739,970

83.01 67.39

Non-OECD Hong Kong Taiwan China South Korea ASEAN Thailand Malaysia Singapore Indonesia Philippines Brunei

3,459,126 210,916 526,379 556,385 451,140 260,634 101,938 41,434 7,611 67,672 41,979

2,099,323 32,567 272,803 786,860 394,621 116,921 29,603 32,299 6,697 44,168 4,154

-

53.10 3.24 8.08 8.54 6.92 4.00 1.56 0.64 0.12 1.04 0.64 0.00

66.19 1.03 8.60 24.81 12.44 3.69 0.93 1.02 0.21 1.39 0.13 0.00

5,668,038 206,896 286,312 768,123 328,222 384,321 192,557 43,527 19,457 118,112 10,665 3

16.80 0.61 0.85 2.28 0.97 1.14 0.57 0.13 0.06 0.35 0.03 0.00

Total imports of SITC 65

6,514,817

100.00

3,171,473

100.00

33,745,167

100.00

Exporting Countries

(%)

SITC 65: Textiles

:s::

l:l

::!. '""\l c::: ;:::

~

~

"'

~

"'...... ;::, l::l..

!}

: