A CUSTOMS UNION BETWEEN SPAIN AND EEC: AN ATTEMPT AT QUANTIFICATION OF THE LONG-TERM EFFECTS IN A GENERAL EQUILIBRIUM FRAMEWORK

This study is an ex ante analysis of the long-term static and dynamic effects of a potential Spanish membership in the EEC in a general equilibrium framework. The principal focus is to quantify the effects of integration on the pattern of trade and production, price stability, domestic investment, government savings, the balance of payments and the international movement of factors of production. The time pattern of the response of the economy to tariff changes is also analyzed.

Our primary interest lies in isolating the effects of tariff changes on import prices, trade flows and government revenues, to develop relationships for these and link them to a medium-term macroeconomic model of the Spanish economy where supply conditions are extensively elaborated. The system of interdependent bilateral flows is introduced and its properties analyzed. It is the general specification of the bilateral trade flows and combines the gravity model assumptions with the hypothesis that trade flows are interdependent. The estimation of this system yields a set of price effects with the advantages of reducing the number of parameters to be estimated, alleviating the problem of multicollinearity of prices and permitting, under certain conditions, exact identification. Evidence showed that important interdependencies should be accounted for in bilateral trade flows and are of the positive type in most cases but can also be negative.

The experiment consists of a comparison between a control simulation of the system and a "disturbed" simulation where tariffs within the new union are abolished and the EEC common external tariff wall is applied by Spain against the rest of the world. A customs union between Spain and the EEC would entail a redistribution of trade away from domestic producers towards producers of the EEC and the rest of the world. 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 larger 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. In spite of gains in efficiency and improved allocation of resources, a customs union would retard slightly the economic development of Spain. The reason for this is the significant 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 policies for increasing national income.