Whenever the European Union (EU) aims at taking a bold step forward, there is criticism that wider or deeper European integration is being realised at the expense of the rest of the world. The expansion of the 15-member EU with up to 13 new members, is the Union's most ambitious ongoing project. Its effects will surely be felt to an outsider such as India.

The issue, i.e. the effect of enlargement on outsiders, boils down to the age-old question - whether regional integration causes trade diversion or trade creation? This classical question, whether free trade areas such as the EU are building blocs or stumbling stones for global free trade, is well exemplified by the effect of EU's enlargement on India and other similar countries. 

In the worst-case scenario, the enlargement will divert EU trade away from India, from the outside of 'fortress Europe' towards the candidate countries on the inside. In the best-case scenario, India's trade with the enlarged EU can be greater than the sum of its overall trade with the present EU-15 and its trade with the candidate countries. This would be the case if India's gains from having a one-stop-entry to a larger, and possibly more prosperous EU outweigh the negative effects of both possible trade diversion to the candidate countries and possible new trade barriers enforced by EU to protect its new enlarged market.
 
Instead of having to abide by 13 different set of rules to export to the present accession countries, post-enlargement India would simply have to deal with one set of rules, and possibly only use one currency, when trading with the EU. This has the potential of facilitating trade substantially. But the overall effect will, at the end of the day, depend on the EU's trade policy, as a whole, towards the outside world after enlargement.

Thirteen countries are today considered as 'candidate' countries in the sense that they have applied to join the EU. These are Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Turkey. Of these the largest economies and the largest traders with the EU are Turkey, Poland, Czech Republic and Hungary. 

EU's foreign ministers have reassured applicant countries - mostly from Central Europe - that up to ten of them could complete talks to join the EU by the end of the 2002. These ten EU hopefuls are Poland, Hungary, Czech Republic, Slovakia, Slovenia, Cyprus, Malta, Estonia, Latvia and Lithuania. Turkey is lagging far behind the other countries, among other things, due to its human rights record and Cyprus, Bulgaria and Romania are also on the limb.

The 13 accession countries differ from large countries such as Turkey with a population of more than 60 million, to small countries like Cyprus with a population of less than one million. All the candidate countries have GDP (gross domestic product) per capita much lower than the present EU members. 

Despite the fact that EU's enlargement will mean a much bigger EU in terms of sheer size of the population, in terms of the market size, the difference will not be that large. In 2000, the GDP of the EU-15 was Euro 8,500 bn, whereas the GDP of all the 13 candidate countries taken together amounted to only Euro 600 bn. Hence, as a market for Indian exports, the present EU-15 market will still remain the main catch.

Another interesting fact is that as compared to the EU-15, the candidate countries are much more dependent on agriculture. In places like Romania and Bulgaria agriculture accounted for more than ten percent of the GDP.

At present, India's trade with Eastern Europe is very small, accounting only about 0.5 percent of exports and 0.3 percent of imports. Some of the candidate countries used to be India's big trading partners prior to the split up of the Soviet Union.

For example, in 1999 the value of India's exports to Poland was US$200 mn. It comprises mainly of food and agricultural products i.e. tea, coffee, pepper, oil seeds, rice and also textile and fabrics. Indian export to Romania was as low as US$12 mn in 2000. Top export items to Romania were drugs and pharmaceuticals, iron ore, machinery, textiles and tobacco. 

One of India's largest trading partners among the accession countries is Turkey. It accounted for US$440 mn in 1999. Main export items were tea, iron-ore, finished leather, drugs, pharmaceuticals and chemicals. 

Some candidate countries today have high trade barriers towards India, some of which are likely to come down as they join the EU. For example, Romanian duty on Indian tobacco exports is today much higher as compared to imports from countries like Cyprus and Turkey. Similarly, the duty towards Indian two-wheelers entering Romania is 30 percent. The same goods from Eastern Europe and the EU have a duty of only six percent. Customs duties for these Indian items in Czech Republic and Poland are around five to eight percent. For some products, such as machinery, where the EU keeps low barriers, India might gain as the candidate countries may be forced to lower their barriers to the levels as that of the EU-15.

The EU is India's largest export market, accounting for a quarter of India's foreign trade. The EU is also the largest foreign direct investor in India. To the EU though, India is but a small trading partner, accounting for less than one percent of EU's trade with the outside world. Indian exports to the EU consist of mainly textiles and clothing, leather and agricultural produce. Gems and jewellery is another major Indian export, Antwerp in Belgium being the world's diamond capital and India being one of the world's largest diamond cutters.

To the EU, however, the candidate countries are important trading partners accounting for almost 15 percent of EU's trade with the world. The candidate countries already account for 30 percent of EU's textile imports, and more than ten percent of EU's agricultural imports. If India and the candidate countries compete by exporting roughly the same goods to the EU, trade diversion from India towards the candidate countries is most likely to happen. 

As of today, textiles and clothing make up 32 percent and agriculture nine percent of India's exports to the EU. Though the aggregate figures of the candidate countries' trade with the EU are somewhat less (16 percent for textiles and five percent for agricultural products), the figures are too close for comfort.

India is a developing country, for which development and poverty reduction is an absolute must. Broad-based agricultural growth will have the strongest effects on poverty reduction, as will the growth of labour-intensive manufactured exports, such as textiles and clothing. The relevant question for India is hence: what will enlargement do to the market access for goods from the sectors where growth is most likely to reduce poverty, i.e. labour intensive sectors such as agriculture, textiles, clothing and footwear? 

At present, the EU trade regime, to which the candidate countries will have to accede, retains high barriers towards exactly those products, which matter most for the reduction of poverty in India.

The EU's agricultural market is highly protected against all imports, with average tariffs of around 20 percent. Further, the EU farm subsidies are the highest in the world, and they are increasing. This means that the Indian farmers are not only struggling to enter the EU market, but once there, they need to compete against subsidised counterparts of the EU. EU's Common Agricultural Policy (CAP) is likely to be changed before the enlargement owing to the simple fact that it would become impossible to maintain the same level of subsidies to the agriculture in the candidate countries, as existing currently in the EU-15. 

However, the candidate countries might put additional pressure on the EU to keep its protection, if not by outright subsidies, then at least by high tariffs. Hence, for India's agricultural sector, the enlargement could have the positive effect by the reduction of subsidies as they become too expensive, or the negative effect of higher tariffs due to the pressure from the candidate countries for protection of their agricultural sector.

The EU market for textiles and clothing remains highly protected. Under the WTO (World Trade Organisation) Agreement on Textiles and Clothing (ATC), EU uses quota restrictions against India. Studies show that export tax equivalents of the quota protection system applied to India's exports to the EU has in fact increased from about 14 percent in 1993 to about 18 percent in 1999. Some of the problems of trade diversion away from India can already be seen in the textile and clothing, and leather sectors. Clothing and footwear from Eastern Europe and Turkey is now, after free trade deals negotiated in the run up to accession, effectively facing a zero tariff when entering the EU market, while the Indian exporter faces effective tariff of nine percent on clothing and around six percent on footwear. The East European countries have, thus, managed to triple their share of the EU clothing market since 1990 whereas India's share has hardly increased at all over the same time. 

One way in which India might benefit from the enlargement is from the expanded use of trade preferences under the EU's Generalised System of Preferences (GSP) scheme. At present, India, as a developing country, enjoys some preferential access for certain products entering the EU markets. 

However, considering EU's preferential trade agreements with, for example the African, Caribbean and Pacific (ACP) countries under the Cotonou Agreement; the Least Developed Countries (LDCs) under the Everything but Arms deal; the Mediterranean countries under the MEDA regime; and individual countries such as Chile and Mexico, under various free trade deals, the GSP scheme does not help India that much. Despite this, the total market, which India will be able to access under the GSP scheme in the post-enlargement regime, will be bigger. 

As far as imposing new import restrictions, the EU is leading the league of antidumping cases against developing countries. During 1995-2000, 145 cases were registered. The EU also had 16 definitive countervailing measures in place in 2000, up from six in 1999, with products from India the most frequently affected. Post-enlargement, these measures will not only hit India's access to EU-15, but its access to the markets of the candidate countries as well.

Another issue is that of non-tariff barriers, such as product standards, which are hindering market access. At present, the EU is helping the candidate countries in adopting the same strict (that is higher than international) standards that the EU applies. For India, this can mean that the present high standards limiting Indian exports, especially in foodstuffs, from entering the EU-15 will be extended as barriers to enter the candidate countries as well. Foodstuffs are one of the major Indian exports to some of the candidate countries, such as Poland.

An interesting angle of the complex issue of the enlargement is what effects it will have on the development of other similar trading blocs around the world. For example, as the EU developed as a single market, the US policy towards bilateral trading arrangements is changing and they have been negotiating with a number of countries. Similarly, Japan is negotiating bilateral trade deals with Singapore. Such developments could lead to a tri-polar world with the US, EU and Japan as heavyweights. Care must be taken so that India, which does not belong to any of these trading blocs, nor has any other particularly beneficial agreements with any such blocs, fall outside the nexuses of world trade with the world's richest markets.

At the end of the day, what will matter is the post-enlargement EU's trade policy with the rest of the world. What is somewhat discouraging for India is that as of now it has often been the less developed EU members, more dependent on agriculture and textile industries, which have been calling for EU protectionism. With the addition of more such countries, the pressure on the EU to protect its domestic market from Indian products is likely to increase. 

EU's dealing with this situation will determine the effect of enlargement on outside countries. If the EU manages to withstand the pressure from protectionist forces and gradually open its borders in line with its WTO commitments, India might benefit from easier access to a larger market.


About the Author: Mr. Bipul Chatterjee is Associate Director Consumer Unity & Trust Society (CUTS)