EU Enlargement: Impact on EU/third countries trade with special reference to India New Delhi- April 28, 2004 Presentation by Stefano Gatto, Counsellor & Head, Trade & Economic Affairs, Delegation of European Commission in India
What is Enlargement ?
On May 1, 2004, ten countries will join the European Union (EU). These countries are: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.
The EU will extend from the existing 15 to 25 Member States. This is the biggest enlargement since the EU creation.
The enlarged EU: 455 million inhabitants ; around 18% of world trade; a combined GDP of Euro 9,712 billion or 28% of total world GDP.
Some Key Figures (2002/2003) 26.9% 28.6% Total Trade to GDP N.A. 20.5% 20.1% Share in world FDI-Inflows Outflows N.A. 24.7% Share in world trade in services 17.7% 19.4% Share in world trade in goods Euro 1.799 billion Euro 1.977 billion Total Trade with World Euro 21,100 Euro 24,100 Per Capita GDP 9712 billion 9275 billion GDP 455 million 379 million Population EU 25 EU 15
Implication for Third Countries
The obvious: an increased single market, where the same set of rules apply. A Common Commercial Policy for 25 Member States.
A Common Customs Tariff in all 25 Member States. This implies that the overall MFN tariff will decrease from the current average of 9% in the 10 new Member States to the existing EU average of 3.6%.
All EU bilateral agreements will be extended to all 25 Member States.
All FTAs concluded by the EU will involve the 25 Member States.
Implication for Third Countries…. contd
The EU GSP Scheme, EBA and other autonomous trade preferences granted by the EU will cover 25 Member States.
EU Trade Defence Measures will be extended to 25 Member States
Enlargement will remove the rules of origin between the existing 15 EU members and the 10 new acceding countries. This will remove some impediments to incorporating third country products as inputs in trade within the EU 25
One voice for 25 Member States in the WTO.
India: the possibility to increase current trade flows
At almost Euro 26 billion, EU-India two way trade is on a completely different scale to that of Acceding Countries (ACs)-India trade, which is at Euro 800 million. India’s total exports to, and imports from the ACs account for less than 1% of India’s total exports and imports.
Trade Flows between India and the 10 new Member States is well below their full potential. At the end of 2003, it was estimated to be about 6% of India-EU 15 Trade.
There are substantial intra-industry trade between India and the EU. 4 out of 10 products groups appear as both import and export category.
EU(15)- India Trade 12985152 Total Imports from India 9.9% 1286711 (42 & 64) Leather & products 24.2% 3045146 (52,61,62,63) Textiles & Clothing 12% 1556540 (71) Natural or semi-precious stones, etc EU Imports from India-2002 12872718 Total Exports to India 4% 510792 (29)Organic Chemicals 16.9% 2175777 (84) Nuclear Reactors, Boilers, etc 33.5% 4317271 (71) Natural or semi-precious stones, etc % to total (share) EUR Thousand Main Products EU Exports to India- 2002
AC- India Trade 543839 Total Imports from India 6.3% 34421 (85) Electrical Machinery, etc 25.1% 130780 (52,61,62,63) Textiles & Clothing 11.2% 60940 (29)Organic Chemicals AC Imports from India-2002 273775 Total Exports to India 9.5% 26038 (29)Organic Chemicals 20.6% 56513 (84) Nuclear Reactors, Boilers, etc 37.9% 103792 (87) Vehicles other than railway % to total (share) EUR Thousand Main Products AC Exports to India- 2002
EU(15)- AC Trade 108763505 Total Imports from AC 13.5% 14667257 (87) Vehicles other than railways 16.3% 17761515 (84) Nuclear Reactors, Boilers, etc 18.3% 19862314 (85) Electrical Machinery, etc EU(15) Imports from AC-2002 113994951 Total Exports to AC 12.5% 14228661 (87) Vehicles other than railways 13.4% 15317600 (85) Electrical Machinery, etc 17.6% 20110565 (84) Nuclear Reactors, Boilers, etc % to total (share) EUR Thousand Main Products EU(15) Exports to AC- 2002
Issues for Consideration
Market access : The most direct impact of enlargement will be the replacement of the acceding countries’ external tariff with the Common External Tariff (CET) of the EU, which will materially alter the terms of access to the acceding countries markets.
The replacement of 10 tariff regimes with one, and the general bias toward tariff reduction and simplification inherent in the change should make access by Indian exporters to these markets relatively easier.
In terms of trade relations, the only category substantially affected by the change would be those acceding countries’ imports from India, currently running at Euro 540 million approximately, where the dominant items are textiles & clothing, followed by organic chemicals, machinery & equipment, footwear and leather products, and agri-food items.
Issues for Consideration…. contd
However, these exports account for barely 0.7% of India’s total exports, and are equivalent to 4% of Euro 12.8 billion in exports to the EU. Thus, the trade expansion potential from enlargement would seem, at least in relative terms, to be limited, in a static analysis sense.
It must be noted that trade between ACs and India, especially AC imports from India, is generally understated due to transhipment through EU ports and commingling in EU distribution channels.
Detailed modelling analysis of trade flows for 10,000 plus tariff lines does not seems feasible since for many tariff lines the analysis would be of limited significance.
Instead, it may be worthwhile to look at industry sectors for tangible trade creation/diversion impacts can take place due to enlargement.
Many competing sectors: textiles & apparel, footwear & leather, chemical compounds, iron & steel, automotive parts and furniture. Out of India’s 100 top exports to the EU, countries such as Poland and the Czech Republic have a strong presence in one-third of such items.
The EU duty free access which ACs have over India (whose exports attract EU GSP ranging from 4% to 11%) will continue to confer competitive advantages.
However, EU enlargement is no “big bang” process : this tariff differential has existed for some years now and any potential trade diversionary impacts that may have arisen would have already occurred.
Impact Analysis…. contd
In terms of MFN rates, the average MFN tariff for industrial products is higher in the acceding countries (ACs), except in the three Baltic States, which have a lower average than the EU average of 3.6%.
Example: Textiles & Clothing items feature strongly in both EU and AC imports from India, accounting for 4 of the 10 largest importing categories (excluding Carpets), and 24% of total India imports for each of the two regions.
While clothing is a significant industry sector within many of the ACs, apparel exports only account for 3.5% of total AC exports to the EU.
For the vast majority of industrial products, tariffs in ACs are higher than in the EU 15. In particular, the largest economies, Poland and Hungary, apply much higher tariffs. Enlargement should, therefore, have trade creating effects in industrial products for India.
Impact Analysis…. contd
The position is reversed for applied agricultural tariffs , with 7 of the 10 acceding countries (AC) having a lower average rate than the EU’s. However, the biggest agricultural economies such as Poland (34.6%), Hungary (30.9%) and Cyprus (31.1%) have rates that are higher than the average tariff for EU imports of farm goods( 10,5%).
In terms of India’s access to the ACs, the EU GSP will tilt the advantage towards India, since India does not benefit from such a preferential scheme in the current trade with ACs.
India is eligible for most chapters of EU GSP coverage and with more than Euro 5 billion in preferential imports, it ranks second among users of the EU’s GSP. Of course, India will have to compete for these markets with all other users of EU GSP.
Impact Analysis…. contd
EU operates a sophisticated system of trade defence measures. The ACs rarely invoke AD measures.
Upon enlargement, the existing EU AD measures will extend to cover the ACs, though in some cases, a review could be sought of the operation and re-calculation with respect to the domestic market of 25 rather than 15 countries. India can seek such a review.
ACs operate some safeguard measures and these would be dropped on accession. However, these do not affect India.
Impact Analysis…. contd
Some displacement of Indian products as components or inputs in products in Intra EU-AC trade, since the rules of origin of the FTAs under the Europe Agreement will no longer apply post-enlargement between EU-15 and the ACs.
Simultaneously, the impact of extending the Common Commercial Policy and completing the Internal market will be to remove some impediments to incorporating Indian products as input in trade within the EU 25. These could represent significant gains in sectors such as textiles, apparel and automotive parts.
Impact Analysis… contd
The impact of trade diversion seems to be limited . For industrial products, this would have already occurred, while for agricultural products, though the ACs will enjoy improved market access, there is little overlap with Indian agriculture exports, such as, tea, rice, spices.
Textiles & Clothing could be one area where displacement could occur. However, the textile industries in the ACs already enjoy quota and duty free access to the EU-15 market.
Investment diversion: Unlikely, since global Multinational corporations look for cost advantages and on balance would favour India due to its low labour costs as opposed to the AC cost inflation that is likely to occur post-enlargement.
Raising trade awareness in both India and the Acceding Countries (ACs).
Strengthening Commercial Arrangements.
Strengthening Infrastructure such as trade links, air-route links.
Realising the advantages of harmonised measures: SPS, common external tariffs.
Continuous need for technical assistance to India to comply with technical standards relating to SPS and TBT. Priority, at which the EU’s Trade and Investment Development Programme (TIDP) for India already looks.
Thank You A presentation by the Trade & Economic Affairs Section of the Delegation of the European Commission in India, New Delhi