How Much do Non-Tariff Measures Explain the Border Effect at Entry to the EU Market? The CEECs Agri-Food Exports to EU in the Pre-Accession Period

Since the Single European Market (SEM) has been established, the free movement of goods has been facilitated not only by removing border formalities, but also by the technical harmonisation of national legislation in each member state. For the agri-food sector a particular concern is to guarantee the safety and integrity of products. In this respect, the European Commission has developed a stringent policy regarding food safety (sanitary and phytosanitary measures) and consumer information (quality measures). Strict regulation is therefore imposed for all agri-food products commercialised in the SEM, whether of European or third countries. In the case of EU enlargement, accession to the SEM is conditional upon the candidate countries accepting the obligations of the internal market, and therefore accepting these principles of free trade. Fulfilling the requirements for EU accession means for acceding countries not only costs related to adjustments of their production technologies in order to be consistent with the acquis communautaire, but also benefits. Particularly, there will be measurable gains for the new member states (NMS), that should benefit from the abolishment of the tariff barriers and the decreasing impact of the non-tariffs measures, once they have adopted the EU standards and from the reduction of the transaction costs. The aim of this paper is to assess the impact of trade barriers on agri-food exports from Central and Eastern European Countries (CEECs) to the EU on the eve of their integration. Do the gradual tariff reduction and the convergence of production standards implied by the implementation of the acquis communautaire over the pre-accession period reduce the border effect of CECCs agri-food products when entering the European markets? At accession time do these countries enjoy equal access to the EU market as the old EU members do, or are they still in the same situation in terms of market access as any other third country? For answering these questions, a gravity modelling on disaggregated data of agri-food imports of the EU-15 in 1999 and 2004 is used. The model proposes an adaptation of the border effect methodology initiated by McCallum (1995) and widely used after (see among others Chen, 2004; Mayer and Zignago, 2005). More precisely, the principle of the analysis from the national borders to the external frontiers of the European Union was extended, assuming that the SEM is an integrated area with low trade barriers. In other words, the objective of the paper is to measure the impact of EU borders (called hereafter border effect) and assess the role of tariffs and non tariffs measures (NTMs) in the explanation of this effect. Hence, just before joining the SEM, do NMS still face a significant border effect at entry to the EU market? Has this effect been reduced over the period of preparation for EU accession ? Since most impediments to trade are difficult to measure, the model includes a global measure of trade resistances faced by CEECs at entry to the EU market (as defined by Mayer and Zignago (2005)). First, Results estimated for 1999 and 2004 show the magnitude of the border effect faced by trading partners at entry to the SEM. This effect is captured separately for three geographical zones: new member states (NMS: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia), acceding countries (AC: Romania, Bulgaria) and rest of the world. For the three groups, the coefficient is significantly negative showing that all third countries exchange less with EU countries than EU members among themselves. Contrary to what might be expected, the border effect is highest for NMS. Second, the border effect is split between tariffs, the impact of NTMs and remaining trade resistance for third countries at entry to the EU market. Concerning the impact of tariffs, the results highlight the reduction in tariff elasticity for NMS whilst this coefficient remains stable for the rest of the world. It is noteworthy that tariffs no longer act as a trade barrier anymore in 2004 for NMS. This is an expected result, since tariffs for NMS were abolished in May 2004, the date of the EU enlargement. However, in 1999 the impact of tariffs was still high because the liberalisation process was far from complete. Regarding NTMs, three dummies indicating respectively whether sanitary, phytosanitary or quality measures exist are included in the model. Sanitary measures include veterinary measures for animals (breeding and production) designed to protect both animal and public health. Phytosanitary measures refer to standards defining the maximum residue level of pesticides. Quality measures cover the set of standards relating to product quality control, other than sanitary and phytosanitary requirements, for instance commercial characteristics such as freshness, calibration, labelling and conditioning. For NMS, the impact of NTMs on exports towards EU-15 should expectedly tend to be similar to those for the intra EU-15 trade at the moment of accession to the EU. Such a result in 2004 would clearly suggest the positive role of the acquis communautaire. The impact of NTMs on traded volume is not clear and according to the literature can both stimulate or reduce traded volume. In order to distinguish the decision to trade from the volume traded and to analyse impact of NTMs on those two steps, the gravity model proposed was estimated using the Heckman procedure. Obtained results show that for NMS, sanitary measures do not act as a barrier to trade at entry to the EU market and even significantly stimulate traded volume for NMS firms fulfilling sanitary requirements. For ACs these measures still act as barrier to trade, and once the barrier has been overcome, traded volume is lightly increasing. Phytosanitary measures do not act as barrier to trade at entry to the EU market for CEECs product (both from NMS and ACs) but still limit traded volume. These results call for two comments. The first comment deals with the CEECs fulfilments of the EU requirement (in other word, the adoption and implementation of the acquis communautaire). Sanitary measures have been fulfilled in NMS leading to a non significant impact of such measures on decision to trade, whereas for ACs it was not the case, justifying therefore the transition period imposed by European authorities. Concerning phytosanitary measures, they do not act as trade barriers for CEECs product rather because the use level of pesticide is structurally low in those countries than because of the technological changes related to the implementation of the acquis communautaire. The second comment deals with the opposite impacts of sanitary and phytosanitary measures on traded volume. Results concerning sanitary measures is easily explained because the high degree of food safety policies integration in the EU. Since the BSE crisis the European authorities have harmonised their sanitary measures to a very high degree. The harmonisation is much more complete in the sanitary field than in the other. Fulfilment of the EU sanitary requirements by NMS firms therefore enhances their traded volume. Phytosanitary and quality measures, far from integration on the SEM, still limit traded volume. Even the intra EU-15 trade is concerned by the negative role of those measures both on the decision to trade and on the traded volume. Results also show border effect is not totally explained by tariffs and NTMs; remaining trade resistances are still significant. In other words, determinants other than tariffs and NTMs explain trade resistance at entry to the EU market. This is particularly true for NMS for which the border effect remains high. How can this remaining high level of trade resistance be explained? Among transition-related factors that impede trade and are difficult to measure, the low quality of transport infrastructures, the lack of expertise of foreign firms in doing business with these countries, as well as institutional uncertainties surrounding the transition process can be mentioned. The role of history also offers some explanations for the geographical orientation of CEECs traders away from the EU (trade flows between the Czech and Slovak Republics, between the Baltic states, and between Slovenia and former Yugoslavia still remain quite strong). This is what Anderson and van Wincoop call the multilateral trade resistances.