a customs union between spain and the eec: an attempt at quantification of the long-term effects in...

European Economic Review 18 (1982) 345-368. North-Holland Publishing Company

A CUSTOMS UNION BETWEEN SPAIN AND THE EEC

An Attempt at Quantfficatfon of the Long-term Effects in a General Equflibrfum Framework*

Jean-Marie VIAENE Erasmus University, 3000 DR Rotterdam, The Netherlands

Received March 1981, final version received June 1981

This paper is an ex ante analysis of the long-term static and dynamic effects of a potential customs union between Spain and the EEC in a general equilibrium framework. A model of tariff manipulation is first constructed to trace the effects of changes in geographic discrimination in trade barriers. This system is linked to a macroeconomic model of the Spanish economy where supply conditions are extensively elaborated. The analysis consists then in comparing what would have happened had the union not been formed to what happens when it is formed. The principal focus is to quantify the effects of integration in the pattern of trade and production, price stability, domestic and foreign investment, government savings and the balance of payments. The time pattern of the response of the system to tariff changes is also analysed.

1. lntroductfon

As defined by Lipsey (1960) the customs union theory is that branch of tariff theory which deals with the effects of geographically discriminatory changes in trade barriers. A same commodity is subject to different rates of duty, the rate varying according to the country of origin. Members of a customs union eliminate tariffs among themselves but also form a common tariff against the outside world. Trade is freed because some flows face lower restriction than before. Trade is also distorted because goods coming into a member country pay different tariffs depending on their origin, the external tariff if from the rest of the world, a zero rate if from a partner of the union.

Much of the analysis of customs unions is conducted by reference to two fundamental forces: trade creation and trade diversion.’ Trade creation

*This paper stems from the author’s Doctoral Dissertation submitted to the university of Pennsylvania in May of 1980. The author is much indebted to his advisor, Professor L.R. Klein, for his invaluable advice and stimulating discussions. Gratitude is also due to Professors W.J. Ethier, R. Mariano and R.C. Marston for their helpful comments. Any shortcomings remain the responsibility of the author.

‘The formation of customs union attracted great attention among economic theorists and several excellent interpretive surveys were written on the subject. See Lipsey (1960), Johnson (1962), Krauss (1972), Michaely (1976, 1977). For a general equilibrium analysis of customs unions using geometrical methods, see Vanek (1969).

0014-2921/82/000Cr0000/$02.75 @ 1982 North-Holland

346 J.-M. Viaene, A customs union between Spain and the EEC

occurs when a union member switches its imports from a high cost source of supply to a lower cost source of supply. Trade diversion occurs when a union member switches its imports from a low cost source of supply to higher cost suppliers. The former leads to an improvement of welfare, the latter generally to a deterioration of welfare. The conclusion reached has been that, on theoretical grounds, a customs union may raise Welfare, lower it, Or leave it unchanged.*

Excepting the studies of Cline (1978) and Xafa (1979) the main body of empirical literature on customs unions centres on the integration effects of the European Common Market. Integration effects are quantified by the meas- urement of trade creation (the increase in imports from union members) and trade diversion (the reduction, if any, in imports from non-union members). Two broad methods of measuring integration effects may be distinguished [Verdoorn and van Bochove (1972)]. The first method which is known as the residual imputation method estimates the total effect of integration for a given post-union year as the difference between the actual level of a variable and its hypothesized level without integration. The other method consists of specifying and estimating international trade flows to estimate price re- sponses and simulate the effects of tariff changes.3

The common agreement in the empirical treatment of customs union is that, in order to measure the effects of integration, the analysis should be ex ante, to compare what would have happened had the union not been formed to what happens when it is formed. The use of this approach would avoid the risks of lumping together the static and dynamic effects of customs unions with exogenous flctors that affected the trade pattern of a union member. The second common agreement is that a general equilibrium approach is called for but that its implementation is rather complex. In a general equilibrium framework, tariff changes would directly modify bilateral trade flows through relative price changes which would bring changes in production, income and price stability, which in turn, would further affect bilateral trade flows. It would permit the treatment of trade creation and trade diversion but also of export expansion that would follow the formation of a customs union. Excepting multi-country trade models where one country’s import is another country’s export [Resnick and Truman (1975)], the effect of export expansion has been quite neglected in the customs union literature. Several hypotheses about this effect can be advanced. An expansion of exports may improve a country’s terms of trade and/or improve the utilisation of factors of production. The tendency is towards higher real income that would further increase the level of imports from all sources. Hence, partial equilibrium studies that have ignored the export effect would

‘Several inferences can be derived to determine the likelihood of one outcome or the other. For example, see Michaely (1977).

3 Empirical works using either residual imputation methods or regression models are sur- vexed in Verdoorn and van Bochove (1972) and Xafa (1979). The empirical results me compared in Balassa (1976).

J.-M. Viaene, A customs union between Spain and the EEC 347

probably be biased downward in their estimates of trade creation and trade diversion. An expansion of exports may also offset net trade creation (trade creation plus trade diversion) on a country’s level of international reserves. This may have serious implications on the level of income and the pattern of production if the amount of credit available domestically represents the bottleneck in the credit market.

Geographic discrimination can take several forms but the type generally discussed, though under the heading ‘theory of customs unions’, is the free-trade area. The imposition of a uniform tariff on imports from non-union countries, second condition to an effective customs union, has been less frequently analysed whereas the third condition, the contribution to the EEC budget has rarely been discussed. No one has yet given a convincing account of how tariff changes affect government savings. The government’s response to the loss of tariff revenues may be in the form of reduced transfers to households, a reduction of public investment or an increase in other tax rates to preserve a balanced budget, or in the form of an increase in borrowing from the central bank. Conditional on the government’s reaction is the movement of real income and prices.

The effect of tariff changes on price stability should also be investigated. Tariffs represent the difference between import prices and supply prices, all expressed in single currency units. Since import prices are a cost term in the mark up formula for prices determination, tariff changes would affect producers’ prices and consumers’ prices.

The effects observed above are static in that they represent movements along the production possibility frontier attainable to the country given its resources. In addition, there are dynamic effects [Ohlin (1933), Corden (1971), Cline (1978)], i.e., outward shifts of the production possibility frontier, which may originate from either of three sets of factors: structural transformation of the economy, increase in factor productivity and increase in factor endowments. Increased competition may transform the production structure of the economy. Integration may provide a market large enough to permit the expansion of industry and reduce the economy’s dependence on volatile primary production. Trade expansion may entail an increment in output which may be achieved with less than proportional increase in inputs due to the exploitation of economies of scale. More integration could affect the economy’s capital endowment either by its impact on domestic capital formation or via its effects on capital inflow from abroad. International trade theory shows that commodity movements are to some extent a substitute for factor movements such that an increase in trade impediments stimulates factor movements [Mundell (1957)].

If we reach a conclusion that in a situation in which economic integration leads to a static income gain (loss), a further dynamic gain (loss) is added by way of leading to an increase (decrease) of the equilibrium stock of capital and thus to a further increase (decrease) of income.


The objective of this paper is an attempt at quantifying the ex ante effects of a potential entrance of Spain into the EEC in a general equilibrium framework. After this introduction, section 2 will deal with the’construction of a model of tariff manipulation with a primary interest in specifying commodity bilateral flows. Section 3 discusses the specification and estimation of the latter. When estimated, this system of tariff manipulation is linked to a macroeconomic model of the Spanish economy.4 The exercise consists then in comparing a ‘control’ simulation of the system with a ‘disturbed’ one where tariffs within the new union are abolished and the EEC common tariff wall is applied by Spain on imports from non-union countries. Section 4 analyses the simulation results and is followed by the conclusion. The emphasis will be on Spain and the principal focus is to quantify the effects of integration on the pattern of trade and production, price stability, domestic capital formation and foreign investment, government savings and the balance of payments. The time pattern of the response of the system to tariff changes will also be analysed. Welfare effects can also be quantified if it is accepted that welfare increases can be interpreted as there being more of per capita real income.

2. Model of tariff manfpdation

Regional integration favours specialisation on the lines of comparative advantage and contributes towards a rational policy of import substitution for a group,of countries as a whole. This evidence calls for a specification of import and export bilateral flows which explicitly include relative prices and tariffs as arguments. This model can be expressed in the following form:

where

Mj ="jVi,pil~pi*~~ . -9 pin). j=l,..., n, j#i,

xij=X,~~,Pjl,Pj*r...,Pji,...,Pj”), j=l,. . .) i# i, (1)

(2)

i = Spain, i = Spain’s trading partner, n = number of trading regions, Mij= Spain’s deflated import from region j, Xii= region j’s deflated import from Spain (or Spain’s deflated export to

region, j), x = Spain’s real income, 5 = region j’s real income, Pij = region j’s export price (corrected for tariff and exchange rate changes)

relative to Spain’s domestic price, Pjk = region k’s export price (corrected for tariff and exchange rate changes)

relative to region j’s domestic price, k = 1,. . ., i,. . ., n, k# j. 4The skeleton of the model is discussed in the appendix.

J.-M. Viaene, A customs union between Spain and.& EEC 349

These import demand functions have a specification similar to demand functions derived from the theory of households and the optimization of a utility function: demand theory would indicate that own-region price elasticity is negative, income elasticity has a positive sign. In a multi-country world the demand for imports theoretically depends on all of the n - 1 relative prices. Estimation of the model described above would lead to inconclusive results, given the large number of parameters to be estimated and multicollinearity due to the tendency of prices to move together in the same trend. Therefore our aim is to develop and estimate a trade model that yields a reasonable set of price effects while reducing the number of parameters to be estimated and endeavouring to avoid the problem of multicollinearity of price. This is left to section 3 which deals with the estimation of what we call the ‘System of Interdependent Bilateral Trade Flows’.

Though all studies of integration effects focus on specifying trade flows, it is equally important to channel the effect of tariff changes on two new sources: dollar denominated import price and import duties. The dollar denominated import price, PMG$i, can be determined in the following way:

PMG$i = i pS’ii(MiJM), j=l.j#i

where

Pb, =region j’s export price (corrected for tariff changes) denominated ‘in dollars,

Mi =Spain’s deflated total import.

It is defined as a weighted average of dollar denominated export price (correct for tariff changes) of all trading partners where the weights are given by import shares. Government tariff revenues, TR,, are defined as the sum of tariff revenues perceived on individual partner’s nominal export,

TRi = 2 (tj*iWVij), i=l.i#i

(4)

where

=average tariff rate applicable on Spain’s nominal import from region j,

MN,= Spain’s nominal import from region j.

In this form, the model is applicable to the analysis of both non- discriminatory tariff changes and discriminatory or preferential tariff changes. It is equally applicable to the analysis of tariff increases and tariff reductions. In particular, it is suitable to analyse the formation of a customs


union between Spain and the EEC. Formation of a customs union corresponds to a change in geographic discrimination in trade barriers. A given commodity is subject to different rates of duty, the rate varying’according to the country of origin, the external tariff if from the rest of the woyld, a zero rate if from a partner of the union. This assumption would entail the following changes in explanatory variables in the system described above. In eq. U),

Pii(post-union) <Pii(pre-union) if j = union member,

Pii(post-union) 2 Pii @e-union) if j = non-union member.

In eq. (3,

Pii (post-union) < P,(pre-union) if j = union member,

Pii(post-union) = Pii (pre-union) if j = non-union member.’

In eq. (3),

Psij(post-union) < P$,,(pre-union) if j = union member,

P$,,(post-union) sP$,,(pre-union) if j = non-union member.

In eq. (4),

4 (post-union) = 0 if j = union member,

g(post-union)2 $(pre-union) if j = non-union member.

Though the effects of tariff changes on union members are unambiguous, the effects on non-union members are conditional on the height of the common external tariff compared to the tariff height in Spain before integration against the rest of the world. In addition, the impact of integration on dollar denominated import price depends on the magnitude of net trade creation which shifts import shares in favour of union members. Also, import duties will vary in proportion to the post-union level of nominal import from the rest of the world.

3. System of interdependent bilateral flows

The methodology of a trade linkage model has received much attention both in Project Link and elsewhere. These studies which generally concen- trate on one particular specification of these flows can be divided into three groups: (1) the approaches estimating trade share matrices, (2) the approaches estimating bilateral trade flows directly, and (3) the approaches estimating aggregate export furiction using the RAS method to determine

’ It is assumed that Spain’s trading partners out of the union do not retaliate by changing their tariff wall following the integration of Spain in the EEC.


bilateral trade flow~.~ In the present section we intend to introduce an alternative functional form of bilateral trade flows. They will be considered as a system of demand equations derived from the most general direct utility function. It combines the gravity model assumptions with the concept of interdependent equations of Glejser and Dramais (1969). In estimation the system of bilateral flows economizes on the number of parameters and therefore gives a clear cut vision of the real world. Under certain conditions, it permits efficient estimatiop.

The organisation of the section is as follows: the mathematical model is outlined in subsection 1; economic properties of the system are then analysed in subsection 2; and subsection 3 discusses estimation efficiency and current results of estimation.

3.1. The linear mathematical model

Consider n regions in relation with each other. Let us assume a linear relationship between Mii, the trade flow from exporting region j to import market i, and m predetermined variables Xk, for i = 1,. . ., n, j = 1,. . ., n, j#i, k=l,..., m,

(5)

where the p$‘s are parameters. Here t denotes the period of observation. It is assumed that there are T periods of observations, where T> n - 1. Aggregate imports from region j in importing market i are regarded as a composite good, the real demand of which is determined by Xk’s. The Xk’s are all predetermined variables in the specification of all flows to region i. Similarly to demand functions derived from the theory of households and the optimization of a utility function, they represent region i’s domestic price and income, region j’s bilateral export price and competitors’ bilateral export prices. The disturbance term I+ has been introduced to represent all factors that affect bilateral trade flows other than Xk’s. Their combined effects will be considered as a random variable. Estimation of (5) would lead to inclusive results for the reasons mentioned in section 2. Therefore we imposed the gravity model assumptions and the concept of interdependency to our model.

The main assumption of gravity models is that the flow between regions j and i depends only on variables pertaining to i and j and not to those of a third region h. In terms of the model above, this is equivalent to imposing zero restrictions on the p:s when they are associated to variables pertaining to any other region h (h = 1,. . ., n and h # i# j). This assumption implies that only flow creation or destruction is possible in these models: substitution or complementarity among the sources of supply is excluded a priori.

6 For a summary of these hypotheses, see Amano, Kurihara and Sarnuelson (1980).


With interdependent flows, the model would then be

where pzs and olijh’ls are parameters. Here, Uij denotes a disturbance term, different from z+. With interdependent flows Mij is related not only to X:‘S but also to trade flows from the n-2 remaining regions to import market i. If the effect of the change of Mih on Mij is positive, we have positive interdependency or complementarity of flows. If it is negative, then we have negative interdependency or substitution of flows. The response of changes in Mih will be measured by (Yijh. When all aijh’s are zero, Mij is not dependent on all other flows. Consider, for example, the case of car imports. Any increase in car imports by import market i from region j may increase imports of parts by region i from a third region h, in which case we have positive interdependency. Any loss of competitiveness of region j with respect to region h will increase Mih at the expense of Mii: this is negative interdependency.

The bilateral import flows which together form, for the importing market i, a complete system are all of the same functional form. The constants to be estimated are 0:‘s and (Yijh’s. If mij (qj < m) is the number of predetermined variables pertaining to i and j then there will be, in each equation mii + (n - 2) coefficients to estimate.

Eq. (6) can be written as (deleting the time subscript)

Mij-cYij1Mil-(Yij2Mi2- . . . -aijnMin = F X:p;+uij,. (7) k=l

For the importing market i we have a set of (n- 1) equations in (n - 1) unknowns which can be represented in matrix form as (deleting the i subscript)

1 -a12 -0113 *** --(Yl?l Ml --a21 1 . . .

-cf2n M2 .f................................... I[ 1 . . . .

-Q”l -%2 . . .

1 M

or Ay=Bx+u

where

A =(n-l)*(n-1) matrix, y = column vector of (n - 1) elements, B =(n-l)*m matrix, x = column vector of m elements, u = column vector of random disturbances.

(8)

(9)


The reduced form of the system is

y =A-‘Bx+A-‘u. (10)

The analytical form of A-’ is difficult to derive. However, by imposing

(Yijh = aij, h=l,..., n, hfifj, (11)

more sensible analytical properties of the system can be obtained. Under this constraint, eq. (7) can be rewritten as

k=l h (12)

that is, all bilateral import flows of importing market i from the n -2 remaining regions are competitive or complementary with imports from region j, the extent being the same for all II - 2 remaining regions. Omitting the i subscript, matrix A becomes

r 1 -a1 *-* -a, 3x-2 1 * * * -cNz , . . . . . . . . . . . . . . . . . . . . . . . . . -a, -a, * *- 1 1 (13)

the inverse of which is

44 a -)(1+9) * *- e , (14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ~“I4 %I4

-m m where

4=1- 2 O!J(l+CY,), (15) s=l.s#i

and ds = 1 + CY,, (16)

for s = 1,. . ., n and s# i. fii is the measure of overall interdependency. When greater than 1, it indicates that, for all trade flows to the importing market i, substitution outweighs complementarity. When less than 1, com- pletmentarity outweighs substitution. When equal to 1, then either there is no interdependency or substitution is offset by complementarily.

It is desirable that the system posesses certain equilibrium properties such that the model is susceptible to dynamic simulation experiments. In particular,

as > -1, (17)


and

Bi >o. (1%

When the aij’s are equal, let us say to (Y, matrix A reduces to a Rodman matrix, the inverse of which is much simplier than (14) with

l-(n-3)CY as diagonal elements, (19)

(Y as off-diagonal elements, (20)

dut is premultiplied by the scalar

l/(1-[(n-3>+(n-2)c~]a). (21)

In a world of no interdependence, i.e., in the extreme case where all the aii’s are null, matrix A reduces to the identity matrix.

3.2. Economic properties of the system

The reduced form (9) of the system is very attractive since a change in any predetermined variable will affect all flows. This is also true in simulation mode of the system. For example, if (1) region i’s domestic demand (Yi) and domestic price (Pi) and region j’s bilateral export price (Pii) are the variables explaining the independent part of eq. (6) (mii = 3), (2) this specification is standard across import equations from other sources, and (3) the aijh’S are non-null then the reduced form of the system for Mii is

Mjj =Mj(Y,.PiyPi,,e . .) Pi”), j=l,..., n, jfi. (22)

which corresponds to a very general demand function derived from the most general utility function.

In particular, under constraint (ll), the reduced form parameters can be computed analytically. Let us consider import flows measured in a single common unit of currency. Mi, represents aggregate imports of country i from country 1. Assume also that X’ is the activity variable of country i, that X2 is country l’s bilateral export price relative to country i’s domestic price, and X3 is country 2’s bilateral export price relative to country i’s domestic price. Any change in the first predetermined variable X1 provokes a change equal to

L& [p!,+g p+E.b+ . . . +$)I (23)

of Mj 1. The first parameter in the bracket is the change of Mi 1 in response to a change in X’ in a world of no interdependence. The second term in the bracket represents the net induced change of Mil, in proportion (l/d,) to a change in X1. The smaller fii is, the bigger will be the net contribution of

J.-M, Viaene, A cu.s~~tns union between Spain and the EEC 355

the second term, and conversely. Relation (23) indicates that the ‘income’ elasticity can be negative when CY~ CO, allowing for inferior goods in international trade.

Any change in the second predetermined variable X2 provokes a. change equal to

L&+$ (F+!?j+ . . . +Ei)] (24)

Of Mi,.

By the specification of gravity models, variable X2 will be present in the first equation only, whereas X’ is part of the specification of the (n - 1) equations. So,

Pfp=O, .-9% Pfk p =2,. (23

which simplifies relation (24). The latter indicates that the own price elasticity can lie anywhere between 0 and --oo when 01~ > 0, but can be positive when

allowing for Giffen goods in international trade. Similarly, any change in the third predetermined variable X3 provokes a change equal to

(27)

of Mi,. Since X3 is only present in the second equation,

Pit=% r=l,3 ,..., n, rfi, (28)

which simplifies relation (27). It indicates that the cross price elasticity of Mi, is

1 a1 pi: x3 --=--- d,Di d2 Mil’

which is positive when ‘cur C 0.

3.3. Estimation efficiency and current results

(29)

Estimation of eq. (6) will give rise to simultaneous equation inconsistency and methods of estimation, other than OIS, have to be considered.

By assuming a gravity model specification of the independent part of each equation, we implicity impose zero restrictions on elements of matrix B. It is well known that under linear restrictions on structural coefficients, the

356 J.-M. Viaene, A CUSIO~S union berween Spain and the EEC

necessary but not sufficient condition for identification of linear models is that the number of excluded predetermined variables is greater or equal to the number of included endogenous variables minus one [Fischer (1966)]. In our framework, the number of included endogenous variables minus one is

n-2, (30)

and is the same in all equations. The number of excluded predetermined variables is

m - mij, (31)

and it is possible to find a specification such that exact identification always holds. In that case, and if structural errors are normally distributed and serially uncorrelated 2SLS, LIML, indirect least squares and IV using all the predetermined variables as instruments will give equivalent estimators. When all equations are just-identified then 3SLS reduces to 2SLS and efficiency in the estimation of eq. (6) is attained [Klein (1974)].

The number of bilateral import demand functions to be estimated increases as n, the number of regions, increases. As a result, as n increases, the inequality

T>rnii+n-2 (32)

may not hold, in which case the single equation estimation of (6) cannot be proceeded or the number of degrees of freedom reduces in which case the empirical validity of the estimated coefficients can be questioned. In that case, constraint (11) should be imposed and the equation to be estimated becomes (12). The latter is always overidentified and efficient methods of estimation should be used.

The rest of this section is devoted to the empirical test of the hypotheses. We test the mathematical model for (1) commodity import flows and (2) commodity export flows of Spain.

The estimating equation for import bilateral flows of Spain has the following general form:

Mii, = P~iAVi, + p:CVi, + PsPi, +aii C Mihl + uiil, h#i

(33)

where

i = Spain j, h = Belgium-Luxembourg, Denmark, France, Germany, Ireland-UK,

Italy, The Netherlands, the Rest of the World (ROW), Mij =Spain’s real imports from country j, AK =activity variable: real gross value added in agriculture and industry,

J.-M. Vinene, A customs union between Spain and the EEC 351

CUi =pressure of demand variable: rate of capacity utilisation of the whole economy,

Pj = region j’s export price (corrected for tariff and exchange rate changes) relative to domestic price.7

The specification of the independent part of each flow is standard: Spain’s real imports from region j are function of the level of domestic activity and region j’s relative prices. It captures also the effect on imports of changes in cyclical conditions in the importing country. Cyclical changes in demand raise imports via the change in the activity variable and via the domestic capacity constraints which it imposes. Resnick and Truman (1975) found that in general there is no significant difference between price and tariff elasticities of import demand. This allows us to estimate a coefficient on the import price inclusive of tariffs.

The system of eight equations was estimated using the 3SLS estimation method. Constraints on the (Y’S had to be imposed’ and the countries lumped together because of the small size of our sample (sample period 1961-1977). Table 1 presents our results of estimation. The t-statistics aLe given in parentheses below the coefficient estimates. All coefficients associated with the activity, demand pressure and the relative price variables have the expected sign. Most of them are significant at the five percent level. Imports from ROW are not sensitive to the activity and demand pressure variable whereas a lagged dependent variable was significant at the five percent level with a value of 0.700. The system as a whole is stable since (1) fii is greater than zero with a value of 0.46 in the short-run and 0.18 in the long-run, and (2) Ctij’S are greater than minus one for all regions. Overall interdependency is of the positive type, and important positive interdependencies should be accounted for the bilateral flows from all sources except UK-Ireland. EEC countries’ exports (except UK-Ireland) and ROW’s exports to Spain are all complementary and substitute for UK-Ireland’s exports. Given the sign of aii’s, the possibility.of having inferior goods in the model is excluded. To the extent that the model was implemented for very broad aggregates, we can readily consider this as a reasonable conclusion.

Commodity export flows of Spain are viewed as import demand for Spanish goods by trading partners. The independent part of import demand functions of trading partners for Spanish goods is left as an empirical question. However, the estimating equation for import bilateral flows of

‘Tariff rates are average tariff rates, computed as an average of individual tariff weighted by a country’s own imports. For a detailed methodology in the computation of tariff rates, see Preeg (1970). Gatt publications were the main statistical source of individual tariff rates.

s Using the likelihood ratio test, we could not reject, with a 95 percent confidence interval, the null hypothesis that the individual bilateral trade flows should be constrained.

358 J.-M. Viaene, A cusmtns union between Spain and the EEC

Table 1

3 SLS estimation of import bilateral flow equations; (1) coefficients, (2) elasticities.

st P; Pr; % (1) (2) (1) (2 (1) (2) (1) (2)

Belgium- 0.0056 0.784 0.0413 0.530 -5.713 -0.846 0.0117 0.528 Luxembourg (2.486) (1.282) (-1.942) (2.795)

penmark 0.0018 0.809 0.0521 2.149 -4.822 -2.357 0.0027 0.397 (1.859) (3.773) (-3.524) (1.539)

France 0.0304 0.978 0.2764 0.816 -31.409 -1.078 0.0293 0.281 (5.426) (3.490) (-4.064) (2.750)

Germany 0.0440 1.108 0.2944 0.680 -39.910 -1.077 0.0393 0.287 (4.709) (2.961) (-3.893) (2.159)

Italy 0.0212 1.195 0.1779 0.920 -23.488 -1.402 0.0163 0.286 (4.850) (3.263) (-4.777) (1.960)

The Netherlands 0.0037 0.395 0.0645 0.632 -6.793 -0.817 0.0230 0.786 (1.579) (2.453) (-3.151) (4.883)

UK-Ireland 0.0306 1.317 0.1002 0.396 -11.504 -0.510 -0.0145 -0.191 (6.346) (1.984) (-2.182) (-1.616)

ROW -23.176 -0.136 0.7708 0.505 (-1.264) (3.278)

partners has the following general form:

where

+aji 1 Mjhtf"jitr

hFi.hfj (34)

i = Spain, j, h = Belgium-Luxembourg, Denmark, France, Germany, Ireland, Italy,

the Netherlands, UK, US and ROW, Mji =region j’s real imports from Spain, A5 = region j’s real aggregate demand,’ CU, =pressure of demand variable: region j’s rate of capacity utilisation, pi =Spain’s export price (corrected for tariff and exchange rate changes)

relative to region j’s domestic price.

Like import demand functions (33), this specification incorporates an activity, demand pressure and relative price variable. Unlike Spanish bilateral

’ ROW’s gross domestic product is the activity variable in the ROW equation. Unit value index of world commodity export price is used as a proxy for ROW’s domestic price.


imports, there is a lagged dependent variable to take into account the gradual adjustment of the trading pattern to price and activity changes.

Since region i’s imports from Spain represents one equation out of n - 1 import functions associated to region i, we are unable to have the list of predetermined variables that are present in this system. Consequently, 3SLS estimation of the parameters cannot be performed. Table 2 represents the OLS estimators of import bilateral flows of partners for Spanish goods.

The results suggest the following considerations. Fist, interdependencies should also be accounted for in import bilateral flows of partners. These interdependencies are of the positive type. Second, all coefficients associated with the activity, demand pressure and price variables have the expected sign. It is apparent that price considerations, more than activity and degree of utilisation of resources, affect variation of Spanish exports. Third, unlike Spanish import flows, the lagged dependent variable has, in many cases, an important explanatory contribution indicating that Spanish exports gradually adjust to relative price and activity changes.

4. ResuIts

The objective of this section is to establish a long-term baseline projection for the whole system until 1987 and to examine, from 1983 on, the effects of the formation of a customs union between Spain and the EEC with reference to the control solution. The long-term baseline projection is built upon best guesses about detailed movements of exogenous variables either on the basis of policy commitments, institutional practices, or firmly estab- lished trends and is meant to agree with the contemporary business cycle situation. Tariff rates were maintained at their 1978 actual values. To each new assumption for the tariff structure corresponds an alternative solution and no other change is introduced in terms of exogenous inputs.

The simulation exercise is carried on under six assumptions. First, it is assumed that tariffs are removed within the union and the external tariff is applied against the rest of the world. The height of the latter is fundamental to this analysis and, according to tariff theory, should be exactly equal to the one given in the optimum tariff formula for the welfare of the union to be maximized [Takayama (1972)]. We did not attempt to construct the optimum tariff due to the inherent difliculty to estimate the post-union offer curve elasticity. Instead Spain’s external tariff was computed as a weighted average of its pre-union and EEC’s tariff against ROW with the 1978 import shares as weights. Second, it is implicitly assumed that su$ply of imports from foreign suppliers is infinitely elastic with respect to their price. Third, one can reasonably assume that, given the small share of Spain in the EEC, US and ROW trade, any change in the volume of trade is not able to influence output and prices prevailing in the different regions. Fourth, it is

Tabl

e 2

OLS

estim

atio

n of

pa

rtner

’s im

ports

fro

m

Spai

n;

(1)

coef

ficie

nts,

(2

) el

astic

ities

.

I yii

2

Yii

3 Yi

i 4

Yii

+i

(1)

(2)

(1)

(2)

(1)

(2)

(1)

(2)

(1)

i2)

I?2

L&em

bour

g

Denm

ark

Fran

ce

Germ

any

Irela

nd

Italy

The

Neth

erla

nds

UK

us

ROW

0.00

03

0.29

5 (0

.486

)

0.00

12

0.83

1 (2

.353

)

0.00

04

0.37

6 (0

.730

)

0.00

20

0.80

5 (1

.058

)

0.00

03

0.74

8 (3

.640

)

0.00

01

0.19

9 (1

.710

)

-0.7

243

-0.2

78

0.53

51

0.48

9 0.

0048

(-2

.540

) (4

.061

) (4

.026

)

-0.4

16

(-3.0

57)

-0.3

682

(-3.3

73)

-0.1

281

(-3.5

62)

-0.0

013

(-3.9

75)

-0.0

314

(-0.9

35)

-0.1

701

(-6.6

34)

-0.0

267

(-3.9

01)

-0.1

453

(-3.1

73)

-0.4

516

(-15.

211)

-0.3

03

-0.2

69

0.66

63

0.57

2 (5

.160

)

-0.1

61

0.44

79

0.42

0 (3

.454

)

-0.4

81

-0.4

01

0.15

63

0.14

4 (0

.790

)

-0.5

66

-0.3

35

0.03

71

0.03

5 (0

.308

)

-0.5

44

0.79

31

0.72

1 (5

.548

)

-0.5

82

0.00

58

(1.6

65)

0.01

17

(4.0

12)

0.00

76

(4.9

62)

0.00

34

(2.4

03)

0.00

94

(4.7

77)

0.00

70

(1.0

52)

0.01

41

(8.1

70)

0.00

06

(0.4

46)

0.00

81

(13.

604)

0.79

4

1.00

9

0.69

9

0.74

0

0.65

0

0.96

2

0.76

2

1.30

0

0.07

5

0.82

5

0.98

1

0.97

5

0.94

0

0.82

2

0.93

1

0.95

8

0.97

3

1.38

3 0.

992

0.93

5


Table 3

Gross trade creation (+) and trade diversion (-) (big. current Ptas and percentage of difference), 1983-1987; (1) partial equilibrium, (2) general equilibrium.

Belgium- Luxembourg Denmark France Germany Italy

Year (1) (2) (1) (2) (1) (2) (1) (2) (1) (2)

1983 1.545 2.159 1.169 1.223 9.352 9.49 10.512 10.410 7.636 7.208

2.4 3.4 7.1 7.4 3.7 3.7 3.1 3.1 5.1 4.8

1984 1.713 2.195 1.269 1.270 10.150 9.618 11.319 10.332 8.498 7.602

2.4 3.0 6.7 6.7 3.5 3.3 2.9 2.7 5.1 4.5

1985 1.873 2.350 1.376 1.363 10.966 10.245 12.245 10.989 9.385 8.324 2.3 2.9 6.4 6.3 3.3 3.1 2.8 2.5 4.9 4.4

1986 2.028 2.523 1.486 1.463 11.858 10.944 13.282 11.744 10.364 9.116 2.2 2.7 6.1 6.0 3.2 2.9 2.7 2.4 4.9 4.3

1987 2.367 3.057 1.672 1.679 13.627 12.937 15.398 14.094 11.987 10.759

2.3 3.0 6.1 6.1 3.3 3.1 2.8 2.5 5.1 4.6

The Netherlands UK-Ireland EEC US and ROW

(1) (2) (1) (2) (1) (2) (1) (2)

1983 2.631 2.823 4.435 3.174 37.279 36.487 15.593 14.192 3.3 3.5 2.8 2.0 3.5 3.5 0.8 0.7

1984’ 2.902 2.870 4.885 3.191 40.736 37.078 16.815 9.447 3.2 3.2 2.7 1.8 3.4 3.1 0.8 0.4

1985 3.168 3.071 5.362 3.489 44.375 39.83 18.123 8.412 3.1 3.0 2.7 1.7 3.2 2.9 0.7 0.3

1986 3.457 3.309 5.872 3.741 48.347 42.84 19.311 7.354

3.0 2.9 2.6 1.6 3.1 2.8 0.7 0.3

1987 4.006 3.994 6.969 4.577 56.027 51.097 25.283 13.683 3.1 3.1 2.7 1.8 3.3 3.0 0.8 0.4

assumed that Spain’s trading partners, non-members of the union, do not retaliate by changing their tariff wall following the integration of Spain in the EEC. Fifth, Spain allocates all the tariff revenues to the EEC budgets but gets benefits and subsidies for the same value. Any increase in the government deficit is financed through increased borrowing from the central bank. Sixth, the simulation results are conditional on the assumption that structural relationships are not subject to change following the formation of the customs union.

The-basic results for the benefits and costs of the integration are presented in tables 3 through 5. These results include estimates of gross trade creation and trade diversion and its distribution among regions (table 3); estimates of export expansion and its distribution among regions (table 4); and estimates of structural changes of the economy (table 5). In tables 3 and 4, results derived from the general equilibrium approach are compared to those

362 J.-M. Viaene, A customs union behveen Spain and the EEC

Table 4

Export expansion (bill. current Ptas and percentage difference), 1983-1987; (1) partial equilibrium, (2) general equilibrium.

Year

1983

1984

1985

1986

1987

Belgium- Luxembourg Denmark France Germany

(1) (2) (1) (2) (1) (2) (1) (2)

’ 0.407 0.420 0.151 0.156 1.861 1.918 0.981 1.011 0.9 0.9 1.2 1.2 0.5 0.6 0.5 0.5

0.685 0.705 0.166 0.172 3.389 3.492 1.545 1.592 1.4 1.4 1.2 1.2 0.9 0.9 0.7 0.8

0.889 0.915 0.183 0.188 4.690 4.829 1.920 1.976 1.6 1.7 1.2 1.2 1.1 1.1 0.9 0.9

1.057 1.086 0.202 0.207 5.863 6.030 2.219 2.280 1.8 1.8 1.2 1.2 1.2 1.2 0.9 0.9

1.210 1.241 0.223 0.228 6.971 7.155 2.497 2.550 1.8 1.9 1.2 1.3 1.3 1.3 0.9 1.0

Year

1983

1984

1985

1986

1987

Ireland Italy The Netherlands UK

(1) (2) (1) (2) (1) (2) (1) (2)

0.086 0.088 1.396 1.438 1.155 1.190 1.801 1.855 1.0 1.0 1.2 1.2 1.2 1.3 1.2 1.2

0.094 0.097 1.783 1.837 1.272 1.311 2.057 2.118 1.0 1.0 1.3 1.4 1.2 1.3 1.2 1.3

0.104 0.107 2.000 2.058 1.397 1.438 2.261 2.397 1.0 1.0 1.3 1.4 1.2 1.2 1.2 1.2

0.114 0.117 2.209 2.269 1.542 1.583 2.496 2.562 0.9 1.0 1.3 1.3 1.2 1.2 1.2 1.2

0.126’ -0.129 2.440 2.498 1.706 1.745 2.760 2.824 0.9 1.0 1.3 1.3 1.2 1.2 1.2 1.2

US

Year (1)

1983 0.0

1984 0.0

1985 0.0

1986 0.0

1987 0.0

ROW EEC US and ROW

(2) (1) (2) (1) (2) (1) (2)

0.147 0.0 0.430 7.837 8.075 0.0 0.577 0.1 0.04 0.8 0.8 0.05

0.274 0.0 0.471 10.991 11.324 0.0 0.745 0.1 0.04 1.0 1.1 0.05

0.390 0.0 0.496 13.443 13.837 0.0 0.886 0.2 0.04 1.1 1.2 0.05

0.491 0.0 0.502 15.702 16.135 0.0 0.993 0.2 0.03 1.2 1.2 0.05

0.558 0.0 0.448 17.935 18.380 0.0 1.006 0.2 0.02 1.2 1.2 0.04

Table 5

Response characteristics of the model to the formation of customs union, 1983-1987.

1983 1984 1985 1986 1987

Final demand components constant Ptas (percentage difference)

Gross domestic product Private consumption Government consumption Gross ftxed capita) formation Exports, goods and services Imports, goods and services

Value added components constant Ptas (percentage difference)

Agriculture Industry Construction Services

Labour market (percentage difference)

Employment in agriculture Employment in industry Employment in construction Employment in services Total employment Civilian labor force Unemployment

Prices and nominaf wages (percentage difference)

V.A. in agriculture V.A. in industry V.A. in construction V.A. in services Consumption deflator Commodity export deflator Commodity import deflator GDP deflator Nominal wage rate

Gouernment sector current Ptas

Tariff revenues (%) Personal taxes (%) Contribution to social security 1%) Government savings on capital

account (level) Balance o/payments current Ptas

Trade balance (level) Current account balance (level) Foreign direct investment (%) Foreign private borrowing (W) International reserves (level)

Monetary sector current Ptas (level)

Money supply (M3) Domestic credit

-0.307 -0.314 -0.290 -0.278 -0.308 -0.133 -0.211 -0.225 -0.241 -0.248 -0.041 -0.064 -0.086 -0.107 -0.115 -0.401 -0.574 -0.606 -0.645 -0.721

0.565 0.707 0.781 0.812 0.813 1.489 1.257 1.183 1.121 1.281

-0.253 -0.091 -0.053 -0.027 -0.039 -0.386 -0.390 -0.342 -0.326 -0.363 -0.186 -0.399 -0.562 -0.693 -0.866 -0.298 -0.338 -0.337 -0.334 -0.356

-0.078 0.116 0.230 0.324 0.385 0.016 -0.074 -0.158 -0.145 -0.128

-0.134 -0.245 -0.338 -0.412 l-0.515 -0.093 -0.104 -0.080 -0.092 -0.109 -0.065 -0.073 -0.078 -0.074 -0.080 -0.016 -0.038 -0.051 -0.052 -0.055

0.774 0.516 0.349 0.275 0.315

-0.038 -0.077 -0.047 -0.017 0.032 -0.233 -0.295 -0.330 -0.354 -0.361 -0.056 -0.117 -0.168 -0.210 -0.241 -0.120 -0.198 -0.244 -0.269 -0.277 -0.119 -0.194 -0.239 -0.265 -0.247 -0.305 -0.305 -0.293 -0.269 -0.234 -0.422 -0.380 -0.344 -0.292 -0.230 -0.200 -0.290 -0.348 -0.386 -0.370 -0.220 -0.302 -0.347 -0.381 -0.423

-6.376 -6.889 -7.139 -7.444 -7.574 -0.323 -0.405 -0.445 -0.472 -0.507 -0.289 -0.377 -0.424 -0.455 -9.478

-17.305 -21.289 -24.053 -27.072 -32.844

-42.027 -34.456 -33.519 -33.067 -45.395 -42.802 -35.921 -35.379 -35.349 -48.514

-0.076 -0.073 -0.063 -0.054 -0.045 0.585 0.803 0.856 0.775 0.958

-41.148 -33.062 -31.635 -31.409 -42.624

-159.20 -229.56 -284.03 -324.69 -433.96 -178.10 -251.33 -310.26 -353.98 -474.44

EER--D


quantified under a partial equilibrium analysis with no income and price response. The trade effects are calculated as a percentage, as well as in absolute terms, in order to abstract from effects of market siie.

Gross trade creation is measured as the increase in imports from union members. Trade diversion is measured as the reduction, if any, in imports from non-union members. Net trade creation is the sum of the former and the latter. Results of table 3 indicate that there is greater substitution between total imports and domestic production than between sources of imports: the assumption of interdependent bilateral flows offsets ROW’s upward adjustment to the common external tariff, leading to external trade creation rather than trade diversion. In 1983 real gross trade creation amount to US$O.l03 billion (USSO. billion in nominal terms) representing 1.2 percent of pre-union commodity imports.” In turn, imports from non-member countries are US$O.O40 billion higher, indicating the existence of external trade creation, the amount of new trade created being estimated at US$O.143 billion or 1.7 percent of pre-union commodity imports. The magnitude of net trade creation declines slightly through time to pick up in 1987. Also there is a shift in import shares in favour of EEC countries and, among the latter, in favour of Denmark, Italy and France which gain the most in terms of export performance from integration. Given the high degree of overlapping between the class of commodities produced by these countries (Denmark, to a smaller extent) and Spain, the results indicate a reallocation of resources in a more efficient direction in favour of the former. Partial equilibrium estimates tend, on average, to overstate gross trade creation by 0.1 percent of pre-union imports and external trade creation by 0.2 percent. Imports which substitute for domestic production tend to reduce real income which in turn lowers the level of imports. In addition, since the exchange rate is fixed, reduction in import prices tend to lower domestic prices which further reduce the level of imports. The bias in estimates of external trade creation is particularly important since it almost doubles the general equilibrium estimate of external trade creation.

Results of table 4 indicate that trade expansion which followed the integration is less significant than the import effect. Exports to US and ROW marginally increase in response to relative export price decreases. Total trade expansion represents in real terms US$O.O30 billion in 1984 (0.4 percent of pre-union exports) and rise to US$O.O43 billion in 1987 (0.5 percent of pm-union exports). Export shares shift in favour of the EEC. In particular export relationships intensify with Denmark, Italy, The Nether- lands and the UK in 1983 and also with Belgium in subsequent periods. Differences between partial and general equilibrium analysis result from relative price changes induced by lower cost imports and not compensated for exchange rate changes.

“The 1978 average exchange rate (76.651 Ptas/%) is used to convert our estimates in US%.


Table 6

Economies of scale and terms of trade.

Year

Percentage increase in Percentage increase in Percentage change average productivity average productivity in terms of of capital of labour trade

1983 0.04 0.07 0.116

1984 0.10 0.14 0.081 1985 0.12 0.17 0.047 1986 0.13 0.20 0.023 1987 0.15 0.28 0.0

Although difficult to measure and to specify economies of scale brought by the expansion of output can be traced by removing tariffs on Spanish exports while leaving tariffs on imports at their pre-union level. As indicated in table 6, a greater degree of efficiency in production systems is attained and the increment in output necessary to supply export demand has been achieved with less than proportional increase in inputs. This increase in factor productivity combined with a reduction in import prices (0.4 percent) brings lower inflationary pressures in the economy and terms of trade improve (at a decreasing rate) following the integration.

Our estimates show a deterioration in the Spanish trade balance which amounts to US$O.548 billion in 1983, declines in the period 1984-1986 to pick up in 1987 and reach $0.592 billion. Since this deficit is not offset by variation in other components of the balance of payments international reserves drop by about the same amount. In the last period the EEC and non-EEC countries enjoy an improvement in their trade balance with Spain in the following absolute amount: US$O.414 and US$O.178 billion.

On the general government account there is a deterioration of government savings by US$O.226 billion essentially generated by a drop of tariff revenues (6.4 percent in 1983) and by the effect of lower wage bill and gross personal income on contribution to social security and personal taxes. The deterioration is financed by an increase in public borrowing from the central bank, which offsets the drop in international reserves on money supply and domestic credit. .

An evaluation of the integration effects cannot be based solely on the static effects and dynamic effects of economic integration must also be taken into account. Integration will probably lead to a reduction in sectoral production, due to foreign competition and import substitution not offset by trade expansion, and to almost unchanged structural transformation. The share of industrial production relative to that of primary production remains almost unchanged so that integration does not provide a market large enough to permit the expansion of industry and reduce the economy’s dependence on volatile primary production.

366 J.-M. Viaene, A cu.stoms union between Spain and the EEC

A second dynamic effect of integration is its impact on investment. Investment opportunities in Spain are reduced in function of slower economic activity. In addition, an important proportion of investment plans have not been realised because of tighter credit conditions prevailing on the credit market. Firms tend to rely on foreign borrowing but not to the full extent of the drop in domestic credit.

Like domestic investment and in accordance with Mundell’s theory the removal of trade barriers within the union and the imposition of the external .tariff reduces foreign investment (table 5). Foreign investment expenditures tend to reduce because of lower growth and profit prospects. In addition, the removal of tariffs has eliminated the incentive for a foreign company to produce inside the country rather than to export into it.

5. Conclusion

This study was an attempt at quantification of the long-term static and dynamic effects of a potential entrance of Spain in the EEC. A model of tariff manipulation was first discussed and linked to a model of the economy which provided the general equilibrium response to tariff changes following integration. The system of interdependent bilateral flows was introduced and its properties analysed. Evidence showed that important interdependencies should be accounted for in bilateral trade flows.

A customs union between Spain and the EEC would entail a redistribu- tion of trade away from domestic producers towards EEC and ROW producers. There would be greater substitution between total imports and domestic production than between sources of imports. There would be external trade creation rather than trade diversion. The former would result from the positive interdependency between bilateral trade flows. Sources of imports producing a class of commodities similar to the class produced in Spain would gain bigger shares in post-union markets and the new union’s resources would be reallocated along more efficient lines. Domestic export industries would also expand but to a lesser extent and a greater degree of efficiency in production systems would be achieved due to economies of scale.

Despite gains in efficiency and allocation of resources, a customs union would slightly retard the economic development of Spain because of the important substitution between total imports and domestic production and low price elasticities of exports.

The resulting slower growth and higher unemployment would imply that the problem of customs union must be considered in relation to other trade policies [Cooper and Masse11 (1965)] or to other policies for increasing national income. Given our assumption of fixed exchange rate, transition to a more open economy would be, for example, facilitated by an initial


increase in the nominal exchange rate to tackle the problem of price differences. Exchange rate changes could temporarily improve the balance of payments but could not on their own sustain the improvement unless complemented by appropriate domestic monetary policies [Guitian (1976)].

The scope of this study was restricted to the analysis of integration effects. However, it would be possible to supplement it by analyzing the formation of a Common Market which allows free movement of factors of production, mainly labour, and by giving a convincing account of how the introduction of a value added tax and the possibility of gradual reduction of tariffs would affect the above analysis.

To the author’s knowledge it is the first time that integration effects have been quantified in a complete general equilibrium framework. This study is, however, limited in several respects: mainly, the model does not provide for commodity disaggregation or treat non-tariff impediments to trade. The alternative of disaggregation by commodity was rejected because we felt that disaggregation by commodity would not have provided much more explanatory power for our purposes and there is a lack of reliable price indexes on a disaggregated basis. The non-treatment of non-tariff impediments to trade was justified by the lack of reliable information on the subject though the author fully recognizes the importance of this assumption in the analyses of the development of trade relationships [Prewo (1974)].

Appendix: Schematic design of the Spanish model

The model of the Spanish economy contains seven blocks of equations: expenditure equations, sectoral gross value added, sectoral labour demand, wage and non-wage income, price determination, government financing, balance of payments and financial transactions. It has a medium-term nature and is basically neo-Keynesian. GDP is demand determined but the adjustment of demand and supply is of prime importance: any increase in excess demand will positively affect sectoral prices and output.

The structural design of the monetary system is based on a money supply process where parameters depend on the public’s, government’s, banks’ and monetary authorities’ behaviour [Brunner (1973)J Throughout the analysis we postulate that money substitutes in all directions over the whole spec- trum of assets and in particular that currency exhibits substitution relations with quasi-money, industrial bonds and physical assets. We assumed also equilibrium on the money market and on the credit market. The effects of changes in the quantity of money are transmitted to the real economy through the wealth effect and credit rationing.

The treatment of price conversion from the sector level to the final expenditure level is analogous to the I-O theory, with the exception that the

EER- E

368 J.-M. Viaene, A customs union between Spain and rhe EEC

weights to make up GDP deflators are estimated and, hence, are not derived from the column transformation of I-O theory. The procedure is to work with aggregate (import and labour) costs and variable markup factors in deter- mining sector prices which are then used to explain final demand prices.

References

Amano, A., E. Kurihara and L. Samuelson, 1980, Trade linkage sub-model in the EPA world economic model, April (Economic Research Institute, Economic Planning Agency, Tokyo).

Balassa, B., 1976, Trade creation and trade diversion in the European Common Market: An appraisal of the evidence, in: H. Glejser, ed., Quantative studies of international economic relations (North-Holland, Amsterdam).

Brunner. K., 1973, A diagrammatic exposition of the money supply process, Schweizerische Zeitschrift fur Volkswirtschaft und Statistik, no. 4, Dec.

Cline. W.R.. 1978, Benefits and costs of economic integration in Central America, in: W.R. Chne and E. Delgado, eds., Economic integration % Central America (The Brookings Institution, Washington, DC).

Cooper, CA. and B.F. Massell, 1965, Towards a general theory of customs unions for developing countries, Journal of Political Economy, Oct.

Corden, W.M., 1971, The effects of trade on the rate of growth, in: J.N. Bhagwati, R.W. Jones, R.A. Mundell and J. Vanek, eds., Trade, balance of payments and growth (North-Holland, Amsterdam).

Fisher, F.M., 1966, The identification problem in econometrics (McGraw-Hill, New York). Glejser, H. and A. Dramais, 1969, A gravity model of interdependent equations to estimate flow

creation and diversion, Journal of Regional Science 9, no. 3. Guitian, M., 1976, The balance of payments as a monetary phenomenon: Empirical evidence,

Suain 1955-1971. in: J.A. Frenkel and H.G. Johnson. eds., The monetary approach to the balance of payments (University of Toronto Press, Toronto).

_

Johnson, H., 1962, The economic theory of customs union, in: H. Johnson, Money, trade and economic growth (George Allen and Unwin, London).

Klein, L.R., 1974, A textbook of econometrics (Prentice-Hall, Englewood Cliffs, NJ). Krauss, M.B., 1972, Recent developments in customs union theory: An interpretive survey,

Journal of Economic Literature, June. Lipsey, R.G., 1960, The theory of customs unions: A general survey, Economic Journal, Sept. Michaely, M., 1976, The assumptions of Jacob Viner’s theory of customs unions, Journal of

International Economics 6, no. 1. Michaely, M., 1977, Theory of commercial policy (The University of Chicago Press, Chicago,

TL). Mundell, R., 1957, International trade and factor mobility, American Economic Review, June. Ohlin, B., 1933, Interregional and international trade (Harvard University Press, Cambridge,

MA). Preeg, E.H., 1970, Traders and diplomats (Brookings Institution, Washington, DC). Prewo, W.E., 1974, Integration effects in the EEC; An attempt at quantification in a general

equilibrium framework, European Economic Review 5, no. 4. Resnick, S.A. and E.M. Truman, 1975, An empirical investigation of bilateral trade in Western

Europe, in: B. Balassa, ed., European economic integration (North-Holland, Amsterdam). Takayama, A., 1972, International trade (Holt, Rinehart and Winston, New York). Theil, H., 1971, Principles of econometrics (Wiley and Hamilton, New York). Vanek, J., 1969, General equilibrium of international discrimination: The case of customs

unions (Harvard University Press, Cambridge, MA). Verdoorn, P.J. and C.A. van Bochove, 1972, Measuring integration effects: A survey, Euro-

pean Economic Review 3, no. 3. Xafa, M., 1979, EEC and Greece: An econometric analysis of the effects of association on

imports of manufactures, 1962-1972, Ph.D. dissertation (University of Pennsylvania, Philadelphia, PA).

a customs union between spain and the eec: an attempt at quantification of the long-term effects in...

Documents