The European Single Market at the Crossroads : An Asian Perspective

 

Paper for the General Assembly of the World Trate Center Association (WTCA), Geneva, Switzerland, September 12, 1989.

 
Where Is the EC Moving?
 

               One of the simple but most fundamental questions frequently raised regarding EC '92 by Asian policy makers and businessmen today may be put in the following terms: "Is the EC moving toward regional protectionism or toward a multilateral open trading system?" The answers to this question coming from the Community are varied and not always unequivocal. The Communique of the European Summit in Hanover in June 1988, for example, stated that "the internal market should not close in on itself. In conformity with the provisions of GATT, the Community should be open to third countries and must negotiate with these countries where necessary to ensure access to their markets for Community exports." This speaks for openness, but implicit in the statement is the familiar concept of reciprocity that the EC will be open to the outsiders only if they are open to the EC. A more revealing policy statement is found in a Commission document published in late October last year, which stated that in certain cases the EC would replace national protection with EC-wide protection. However, the overall level of protection would not go up. It stressed that they are not aiming at "fortress Europe, but partnership Europe."

Whatever assurances come from the Europe, Asian businessmen remain concerned about the evidence of growing protectionism in the EC-a spate of antidumping actions, a tightening of "rules of origin" and local content requirements, exclusive technical standards, and strong demands for "reciprocity" abroad, which all appear to be shaping the trade regime of EC '92. Let me discuss this trend in more detail in what follows.

Reciprocity

First, concerning reciprocity, it would be unfair to expect that the EC alone should take the responsibility of promoting a free trade regime in the world, with its major trading partners enjoying a free ride. It is therefore understandable that the Community argues that market opening measures can only be extended internationally on a firm basis of international reciprocity. An Asian reaction to this position, however, is that if what Brussels has in mind is purely a "level playing field," Asia would not be too worried, because most Asian nations accept that the "protectionism for growth" strategy is no longer valid in the modern world, and they are rapidly opening up their markets. Moreover, Asia includes such free trade areas as Hong Kong and Singapore. Hong Kong, for example, feels that if the EC truly lives up to the principle of reciprocity in its trade negotiations, Hong Kong should benefit because of its free trade policy. Unfortunately, the EC is not likely to accept a free trade agreement with Hong Kong on a reciprocity basis because it would require EC members to abolish all their restrictions on imports from Hong Kong.

The fear in Asia is that the case for reciprocity could be used to defend or advance protective measures employed by the Community. It is already no secret that the Commission is using reciprocity as a bargaining tool. In the area of finance, for example, the Commission only grants foreign banks an EC-wide license on the basis of reciprocity. Because-under current domestic law-U.S. banks are not allowed to do business in the securities underwriting, insurance, and real estate services in which European banks regularly engage, this could be used as a pretext for keeping American banks out of the EC. I understand that negotiations are currently underway between the two parties.

Antidumping

One of the gravest concerns for Asian countries is the proliferation of antidumping action against those countries in recent years. Japan, Korea, Hong Kong, Taiwan, China, and other Asian countries have been major targets, with more than 50 cases (as of July 1989) against companies that make anything from computer chips to microwave ovens to photo albums.

The most worrying aspect of these antidumping actions is the way their scope is widening, the way dumping is defined, and the way prices are calculated. The number of products and companies affected by antidumping actions has been increasing rapidly since the mid-1980s. For instance, in the past 19 months the EC has initiated 20 antidumping investigations against Japan, 15 against China, 9 against Korea, 8 against Taiwan, and 6 against Hong Kong.

The classic definition of the dumping is that it occurs when the export price of a product is below its domestic price, presumably owing to government subsidies. It is reported, however, that an Asian company's export price may be 50 percent higher than its domestic price and it could still be charged with dumping. This kind of situation occurs because of the lack of an internationally established uniform definition and standard for calculation of costs and prices.

To sustain a dumping complaint, the Commission is required to show not only that dumping has occurred but that it has caused "material injury to a major portion of the Community industry," according to the GATT rule. Although there is no precise definition of what constitutes a "major proportion" of Community industry, it is reported that the figure is probably as low as 30 percent. In imposing a 30 percent antidumping duty on Japanese and Korean VCRs, the Commission stretched the definition of material injury to include "the long-term effect of seriously weakening the European electronic industry's ability to develop new consumer products"-distinct from the injury inflicted on the existing industry.

The Rules of Origin

On a closely related point, the rules of origin and local content regulations become indispensable when a degree of preference-or a nontariff barrier-creeps into trade policy. If there is a quota or antidumping duty on cars from Japan, for example, then you have to define what makes a car Japanese when it is made in Europe or elsewhere using locally produced parts to varying degrees. If the EC wants to preserve "Community preference" in its open procurement market, it must define what goods or services are of EC origin.

The EC's definition of origin internationally accepted in 1968 is that goods originate where they undergo their "last substantial transformation." In current practice, a 34-45 percent European local content requirement is most common for radios, televisions, and ball-bearings. Recently, as high as an 80-90 percent local content requirement was talked about in connection with Nissan cars made in Britain. Under these circumstances, many Asian companies felt that-unless they could manufacture inside the EC just like local firms-there would be little chance of avoiding antidumping actions by the Commission.

This consideration appears to have prompted many big companies in Asia to jump on the mergers-and-acquisitions bandwagon that is currently sweeping across Europe and the United States. In particular, Japanese acquisition or investment in Europe, though partly aided by rising yen value and growing external surplus, reflects Japanese companies' fear of EC external barriers, as well as internal barriers that might be heightened in the course of providing for the European Single Market. Some Japanese investors seem to believe that once they become qualified as insiders with a good strategy for production and marketing, Europe 1992 could be an opportunity rather than a threat.

But for smaller Asian exporters, the prospects are not very bright. In low-tech industries such as textiles it is widely feared that the EC will favor its own low-tech producers in Spain, Greece, and Portugal over Asian competitors. For most of the small firms in Asia the investment required to become an insider in the EC is beyond their means and cost advantages. At any rate, one implication of rules of origin and local content regulations in the EC is that they are designed in part to attract large and efficient foreign producers from major industrial countries, thereby enhancing the Community's overall industrial efficiency and competitiveness.

Technical Standards

Another cause for concern for Asian businessmen relates to the technical standards of the Community. In electronics, for example, the EC has formulated standards for development of high-definition television (HDTV) that are expected to keep Japan and other countries out of the EC market. With regard to food, Asian exporters worry that regulations on preservatives and additives will be set at the level of the most demanding EC members so that they act as a nontariff barrier against outsiders.

Finally, Asian exporters are not yet sure whether the unified European market will lead to EC-wide quotas, maintain national quotas, or employ a combination of both. The most logical development that could come out of EC '92 would be EC-wide quotas for restricted imports. This would enable Asian exporters to move their goods freely around the EC. Unfortunately for many Asian exporters, it is hard to expect this to happen because it would leave the weaker national producers in the EC too exposed. An array of national quotas is likely to remain in force.

Asian Concerns

I have so far sketched the general picture of the EC's trade policy stance toward Asian countries in the run-up to the European Single Market. I am led to conclude that there is no assurance at the present stage that the European bid for the single market will automatically ensure promotion of an open world trading system. That would depend-inter alia-on what will happen in the course of negotiations among the EC member countries before and after 1992. It also depends more than anything else on how the members of the GATT work together to bring about a successful conclusion of the Uruguay Round, which is the last hope for preserving a free and open international trading system.

Currently, the EC's preparations for the Single Market are going on in parallel with the GATT's efforts to promote freer trade at the global level. It is encouraging to hear that both exercises are in a way mutually supportive in working out rules and order. In the fixing of their rules for trade in intellectual property, for example, the Commission and the GATT are said to have nourished each other's efforts very constructively.

On the other hand, it is worrisome that the EC trade policy has been evolving somewhat at variance with the GATT principles. Although understandable under the present circumstances, it is still worth noting that the policy of reciprocity deviates from the most-favored-nation principle, a pillar of the GATT, which requires of a country the same treatment as that country gives to all other trading partners. It is also hard to believe that the EC's unilateral barrage of antidumping actions, mostly directed against Asian countries, is in line with the GATT's ongoing effort to produce a refined dumping code that would minimize national abuse of antidumping action as well as dumping itself on the basis of multilateral monitoring and decision.

If the EC chooses to move ahead of the Uruguay Round in working out trade rules and regulations only for its own needs, there might result a conflict or disharmony between GATT and the EC as a trading bloc. This would be a most unfortunate state of affairs that could undermine the possibility of strengthening the GATT system and eventually encourage creation of other trading blocs elsewhere in defense of their own interests. It is therefore highly important that the EC and GATT work closely together in drafting rules and regulations in major areas of multilateral negotiations to ensure necessary conformity between the trade regime of GATT and the Community.

The three major economic regions that are the most dynamic in the world-namely the Asia-Pacific region, the EC, and North America-are expected to play the central role in shaping the world economy in the coming century. It is therefore obvious that the way these three economic centers interact with each other will determine the future course of evolution of the international trading system. In this connection I am guided by the simple analogy that if free trade is good and desirable within the boundaries of a region, it must also be good and desirable within wider boundaries, embracing more people, more countries, and more regions. Economic history seems to affirm the validity of this thesis.

Regionalism and globalism, in my view, need not contradict each other as long as both share a clearly defined common goal and objective. That common goal is global economic betterment and that common objective is to strengthen the open international trading system so that it will survive the test of time and serve the mutual interests of all nations.

I would like to conclude my remarks by saying that one of the most important tasks faced by countries in the three previously mentioned regions is to make concerted efforts to reconcile the apparently opposing tendencies of regionalism and globalism in the interest of the common objective of preserving the liberal trading system-not only in a region, but throughout the world. This is indeed the fundamental issue that has to be resolved by the major players in the regions whose responsibility it is to preserve the dynamism and growth momentum of the world economy.