DP1004 | Textiles and Clothing Trade with Central and Eastern Europe: Impact on Members of the EC

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31/08/1994

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Abstract

This paper discusses the Europe Agreements, implicit trade preferences given to the Central and East European countries (CEECs) and their impact on European Community (EC) members. As expected, South European countries compete in the same range of products and in a more similar quality market with the CEECs than do other EC countries. A significant part of this trade is explained by outward-processing trade (OPT) of clothing, however. EC firms increasingly move the labour-intensive stages of production to the CEECs. OPT competes in a different quality market than `direct' trade. Up to 1993, trade policy favoured outward processing and was against `direct' trade and foreign direct investment. We draw some lessons from a similar experience in Portugal regarding OPT movements, foreign direct investment and effects of trade policy changes. During the CEECs' transition period, the policy bias will be eliminated. EC firms may go on processing products in the CEECs or may move elsewhere. The competitive pressures on South European countries will not change with further trade liberalization towards the CEECs because those pressures are unlikely to depend on OPT location. New OPT legislation designed to keep employment in the EC may have distributive effects among EC countries, however. The CEECs are the most likely to suffer from the proposed legislation if it is strictly applied.