The Distribution of West European Trade Under Alternative Tariff Policies

Abstract

r IHE purpose of this paper is to provide empirical answers to the following questions concerning the trade patterns of Western Europe. What were the impacts of the Dillon and Kennedy Rounds of tariff reductions? How did the creation of the EEC (European Economic Community) and EFTA (European Free Trade Association) affect their trade? How will the enlargement of the EEC in the context of a broader area of free trade affect the level and distribution of trade in Western Europe? The investigation is based upon the simulation of an econometric model estimated for 1953 to 1968 of bilateral trade flows for ten West European countries.1 The model is specified in a multistage framework combining traditional total import demand equations with share equations explaining the division of the total. For each of the ten EEC and EFTA countries which we call Europe, total real imports of non-food goods depends upon real income, relative prices, and a pressure of demand variable. Next, these imports are distributed between two main blocs, Europe and the rest of the world, where prices of the respective blocs are the arguments of the linear share equations. Third, imports from Europe are distributed between two competing blocs, the EEC and EFTA countries, where again prices of the respective blocs appear as arguments determining the relative shares. Finallv. the model exnlains the distribution of imports within each of the basic blocs of the system (EEC and EFTA) using prices of the individual member countries as arguments.2 The specification of the model provides estimates not only of direct price effects on bilateral trade but also of cross-price effects.3 Moreover, since the price variables referred to above are specified inclusive of tariffs, this permits us to use the estimated price coefficients directly to simulate trade patterns under alternative tariff configurations.4 The analysis in this paper is based upon the pattern of West European imports in 1968. The tariff policy simulations are designed to answer the questions: what would the 1968 trade pattern have looked like if a different constellation of tariffs had been in force and how would it have differed from the actual or some other predicted pattern. Section II presents the results of two retrospective simulations: the impact of the Dillon Round of tariff reductions and of the formation of the EEC and EFTA. Section III presents the results of two prospective simulations: the impact of the Kennedy Round of tariff reductions and of the enlargement of the European Community. The values of the relevant average tariffs used in the simulations are summarized in table 1. The simulations of the 1968 pattern of trade involve three simplifications: (1) we assume that 1968 domestic and export prices are independent of the changes in tariffs; 5 (2) we ignore