Europe 1992: how will it affect international competition?

Europe 1992: How will it affect international competition? What is the European Community of 1992 all about? What are its implications for international competition?

The impact of 1992 is far from clear. Will it be a panacea for the economic ills of Europe and a liberalizing influence on international competition? Or will it result in a "fortress Europe" that will give the continent a competitive advantage over its trading partners?

I will look at 1992 from two perspectives: first, the likely effect of 1992 within Europe and, second, how 1992 will influence competition between Europe and the rest of the world.

The impact within Europe

In regard to the European Community, it should be emphasized that Europe is a collection of sovereign states, each with its own language, culture, and talent pool. Despite all the hype surrounding 1992, Europe is not a single operating environment. The Community does, however, have the potential to become the world's largest unified trading area and economy. This market will comprise 322 million inhabitants , engaging in 37.1 percent of global trade, with an annual GNP of $ 4.1 trillion.

The push to complete the economic union has a thirty-year history. The decisive turning point, however, was in 1985. In the early 1980s, the performance of the European economy was sluggish. No European Community nation had been able to get unemployment back to the levels that existed before the first oil shock levels of the early '70s. The economy needed a shot in the arm. The significance of the appointment of Jacques Delors as European Commission president in 1985 cannot be overestimated. He has mounted a skillful public relations and marketing campaign. Many critics consider it a triumph of form over substance. Nonetheless, Delors remains a dynamic symbol of the market integration.

The physical, technical, and monetar y barriers now hindering the economic potential of the Community were the s ubject of Delors' 1985 white paper, Completing the Internal Market. The potential benefits of enhanced competition within Europe could be enormous, it said. Completing the internal market could well be the "short in the arm" the European economy requires. The Commission has estimated a 5-percent growth in GDP if the market were fully opened and a substantial rise in employment took place.

At the heart of the 1992 proposal are some 285 directives aimed at breaking down the economic walls within Europe. Central to this is the principle of "mutual recognition." This means that any good or service that is acceptable to authorities of one member state will be acceptable to those of any other. This is evolving to include, for example, automotive standards, insurance policies, investment funds, professional qualifications, and technical standards.

To date, good progress has been made. Almost 100 directives have been approved. A major institutional step forward has been the adoption of majority decision-making within the Community. The historic veto power of any one nation dating back to De Gaulle has been removed--except on such key issues of national sovereignty as taxation, monetary policy, and professional recognition.

This initial momentum may be slowed down as the Commission starts to address issues which infringe upon national sovereignty. While Delors' plans may look good on paper, national political and economic issues may wel get in the way of a truly unified market.

Britain has been a strong proponent of the free market in a national, European, and global sense. Margaret Thatcher, however, recently stated that "we have not successfully rolled back the frontiers of the state in Britain only to see them reimposed at a European level." As such, Britain has rejected the proposal of a Eurocurrency and European central bank.

At the other extreme, the newer, lesser developed member states such as Spain, Greece, and Portugal have sent a different political and economic message. While they are keen to receive regional aid funds from Brussels, they are less than enthusiastic at opening their economies to unfettered competition.

Indeed, most nations have some reservations about the plan. Few would realistically admit to foreseeing a federal Europe in the near future. The restrictions on the 1992 plan placed by national political considerations cannot be underestimated. Member states can hinder the program by taking any number of actions, ranging from refusing to enact reforms to sluggishly implementing Brussels' directives. In this respect, it is important to think of 1992 as a directional trend and not as a formal deadline.

The impact of integrated markets

Let's take a look at some moves toward an integrated market and assess their impact on competition.

The automobile industry in Europe poses interesting challenges for the Community. One in 10 Community workers are employed in this and related sectors. With an annual production of 13.2 million cars, the Community is the world's largest producer. But the automobile industry is also one of Europe's most fragmented. Many firms produce heavily in one national market, such as Fiat, 60 percent of whose sales last year were within Italy. Additionally, emission and safety standards are not yet universally regulated. The total cost of this market fragmentation in Europe has been estimated at $700 per car.

The effects of 1992 on the automobile industry may be mixed. Consumer preference will not change. The Germans choose large engine autos, while the Italians favor much smaller models. The emissions question is also unsettled. Recent negotiations collapsed on establishing standards, when France withdrew support for a Dutch proposal that was seen as too stringent.

In spite of all this, a larger standard market should benefit consumers. Mutual recognition will help decrease added costs of nationally mandated specifications. Also, car insurance rates, now with a 300-percent spread in prices, should equalize as the market expands. Those firms with a Pan-European presence, like Peugeot and Volkswagen, are more likely to gain. More national firms, like Fiat, amy suffer from the open market.

Finally, American automobile manufacturers Ford and General Motors are potentially the largest gainers. Their operations are in many respects already Pan-European. Additionally, Japanese firms are increasing their direct presence to negate import quotas. This will likely increase disputes over local content standards. The scramble to position optimally in the internal market may well lead to an investment boom and further increase excess capacity--and so reduce profitability.

Another area likely to become increasingly competitive is public procurement. Today, only 2 percent of Community procurement contracts are awarded to firms from other member nations. The intention is to open bidding in telecommunications, energy, and public construction. The potential to promote larger, more cost-effective firms is enormous. This reality has promoted a wave of mergers and joint ventures. These include, for example, the link-up between Asea of Sweden and Brown Boveri of Switzerland in the power transmission sector, as well as the takeover attempt on Plessey in the U.K. by a combination of GEC and Siemens.

However, because public procurement accounts for as high as 10 to 15 percent of Community GDP, it is likely to remain a well-guarded sector. Political factors will limit change. In particular, the fear of short-term unemployment will become a brake on competition.

Progress is on the horizon, but it is slow in coming. In March of 1988, a directive was adopted to open large Community supply contracts to Community bidding. Additionally, while older telecommunications areas are still controlled by national interests, newer technologies have seen broad community support for a single market. Thus, while each nation has a separate telephone exchange system, a Pan-European cellular phone network has been agreed to.

The banking industry has also seen moves toward a more liberal market. The recently approved second banking directive will allow for mutual recognition of bank licensing with home country supervision. This means that a bank established in one member state will be allowed to offer a full range of services and products in any other member state.

The outlook for large, Pan-European banks is good. For example, Deutsche Bank's purchase of Banca d'America d'Italia and recent actions in spain promote their Community-wide interests. We are already experiencing major restructuring in the banking and insurance sectors.

The impact on international competition

While the achievement of the single market will be a significant stride toward increasing competiton within the Community, the effect on international competition is not so clear.

The essential question here is which direction the Community will take: the liberal road or the restrictive road. Unfortunately, the Community has spent so much energy on internal problems, it has not adequately addressed potential foreign trade issues. The Community's statements thus far have been ambiguous. For example, Commissioner for External Relations Willy De Clerq recently asserted that "our approach will remain the same as before: we use our growing influence to ensure that the liberalization process which we are pursuing in the Community is accompanied by increasing liberalization of world markets." However, in the same speech, De Clerq raises the contentious issue of reciprocity, when he notes that "the Commission will check on a case-by-case basis whether similar institutions from all member states are given the same treatment in the non-Community country concerned."

The Greek commissioner in Brussels has called for full banking reciprocity with non-Community states. This would have a major impact on U.S. financial institutions, if implemented. This issue of reciprocity negates the tradition of national treatment and could possibly create problems for non-Community banks operating in Europe. Furthermore, the potential dangers to the world services industry are profound, as these are not yet covered by GATT.

On balance, the enthusiasm toward open international competition has decreased since the Community was founded. This is not an issue of price tariffs levied against trade partners, but rather the restriction of global competition owing to other forms of market intervention. These include the use of straight quotas, as in the Italian limit of 3,000 Japanese car imports each year; measures designed to halt the contentious Asian dumping policies; and specific subsidy programs aimed at protecting local markets.

The Community's views on agricultural subsidies are a case in point. Agricultural disputes between the U.S. and Europe are continuing and may have disatrous knockon effects on global trading agreements.

Currently, 60 to 80 percent of the Community budget goes to supporting farm subsidies. Prices for Euro-grain and soybeans are more than double the world selling price. Additionally, major disputes have arisen over nonprice discrimination in Europe, such as the beef hormone dispute.

Because the Commission has no coherent agriculture and foreign trade policy, and the U.S. also faces a strong agriculture lobby, misunderstandings are rampant. The recent beef-hormone debate accounts for only 2 percent of Community-U.S. agricultural trade. However, it symbolizes a much deeper problem. It is significant that recently GATT negotiations broke down over agricultural disputes. This may undermine the GATT system, which up to now has been used to help keep world markets freely competitive. Although the primary focus of GATT is on agriculture and industrial issues, the long-jam may have a serious effect on services as well. Many fear the next few years could see escalating trade problems between the U.S., Japan, and Europe.

North American-Community trade is substantial, and common sense requires that recent disputes will not be blown out of proportion. This mutually beneficial trade, indeed, in many respects means the U.S. and the European Community have much more in common in terms of opening up Asian markets and focusing on their restrictive trading practices. The 1988 U.S. Omnibus Trade Act, as well as European and American anti-dumping measures, reflects this. With the current GATT round in disarray and potential protectionist actions increasing, the new administration in Washington, as well as European leaders, should act on the free-trade rhetoric. The U.S.-Canada free trade agreement and 1992 solution offer regional answers to market liberalization that must be applied in a more global sense--or the world trading system will become one of regional protected blocs. There is, however, a real risk that political confrontation will lead to a proliferation of unilateral and bilateral trade agreements that contradict the spirit of GATT.

One encouraging sign to mitigate this pessimism is that the Community's competition policy has allowed for foreign merger and joint-venture activity within Europe. For example, Nestle got a foothold in the Community with its acquisition of rowntree. It is at least clear that, for the present, non-European Community firms are allowed to establish a base in the Community through direct acquisition. This is a positive trend in most sectors, but reciprocity remains a serious threat.

In conclusion, we should look to the benefits of 1992. Like the U.S.-Canadian free trade agreement, it is designed to foster liberalization. As Europe consolidates its market power, it is hardly surprising that it will attempt to test its position in world markets. Until Brussels sends a clearer message to her trading partners, we can only hope that the European forces for freer international markets, as championed by Great Britain and Germany, will hold the day.

Recent disputes should be of great concern to the international busiess community. They indicate areas which require international cooperation and fair negotiation, not confrontation. Europe 1992 should serve as a symbol both to Europeans and the world that increased economic competition will stimulate growth and development. Europe can use its political, social, and cultural diversity to take advantage of its economic potential. The real risk is that the Community, in overcoming internal differences, will then redeploy national barriers toward her international trading partners. Let's hope not.

This article is based on an address by Mr. Hexter at the 1989 FEI Treasurers Conference.