Trade Creation and Trade Diversion in the European Common Market Author(s): Bela Balassa Reviewed work(s): Source

: The Economic Journal, Vol. 77, No. 305 (Mar., 1967), pp. 1-21 Published by: Blackwell Publishing for the Royal Economic Society Stable URL: http://www.jstor.org/stable/2229344 . Accessed: 03/04/2012 13:20
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THE

ECONOMIC
MARCH 1967

JOURNAL

TRADE CREATION AND TRADE DIVERSION IN THE EUROPEAN COMMON MARKET1
I FOLLOWING the lead provided by Jacob Viner, several contributors to the theory of customs unions have suggested that the desirability of a union be evaluated with referenceto its trade-creatingand trade-divertingeffects.2 At the same time, while a number of criteria have been put forward for appraising the chances of trade creation and trade diversion in a union, it seems to be generally agreed that an a priori judgment regarding the net effect of customs unions on trade flows cannot be made.3 This circumstance lends especial interest to empirical studies of trade creation and trade diversion in a customs union. Such investigations can be of an ex anteor an ex post character; one may attempt to evaluate the possible repercussionsin advance or after the union has been established. Among ex anteestimates, those of P. J. Verdoorn, L. H. Janssen and L. B. Krause may be mentioned.4 Verdoorn and Janssen used a generalequilibrium framework in their investigation and inquired into the effects of changing one variable-eliminating internal tariffsin the union-on trade flows and on the terms of trade. Their work has been subject to criticism on theoretical as well as on empirical grounds, and they have been said to have underestimated prospective trade creation-in part because of their
1 At various stages in the preparation of this paper I have had the able collaboration of M. Alain Camu, Economic Adviser to the Belgian Prime Minister. I am also indebted to Messrs. Mesnage of the Commission of the E.E.C. and Nederveen of the O.E.C.D. for helpful discussions. Much of the research on this paper was financed by the Economic Growth Center of Yale University. 2 Cf. Jacob Viner, The CustomsUnion Issue (London: Carnegie Endowment for International Peace, 1950); H. Makower and G. Morton, " A Contribution Towards a Theory of Customs Unions," ECONOMIC JOURNAL, March 1953, pp. 33-49; and J. E. Meade, The Theoryof Customs Unions (Amsterdam, North Holland, 1955). 8 On this point, see R. G. Lipsey, " The Theory of Customs Unions: A General Survey," InteECONOMICJOURNAL, September, 1960, pp. 496-513; and Bela Balassa, The Theoryof Economic gration (Homewood, Illinois: Richard D. Irwin, 1961), Ch. 2. 4 P. J. Verdoorn, " A Customs Union for Western Europe-Advantages and Feasibility," World Politics, July, 1954, pp. 482-500; L. H. Janssen, Free Trade, Protectionand Customs Union (Leiden: H. E. Stenfert Kroese, 1961); and L. B. Krause, " European Economic Integration and Economic the United States," American Review,Papers and Proceedings, May 1963, pp. 185-96, and " The European Economic Community and the United States Balance of Payments," W. S. Salant, ed., The UnitedStatesBalanceof Paymentsin 1968 (Washington: The Brookings Institution, 1963).

No.

305.-VOL.

LXXVII.

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pp. op.6 This solution amounts to the application of a procedure suggested by Richard Stone and Alan Brown for examining changes in input-output matrices.3 But these results may conceivably be explained by the increasing importance of the E. pp. " The Common Market: Production and Trade. Extrapolating the 1951-52 world trade matrix to 1959-60. To abstract from the influence of the latter factors.4 Similar conclusionshave been reached by R. and the 1960 1 Cf. the share of intra-area trade in total exports rose from 32 4 to 43. Having considered changes in trade flows between 1958 and 1960.2 In discussionson the actual effects of integration on trade flows. Lamfalussy has not found clear evidence for either a positive (trade-creating) or a negative (trade-diverting) effect of the Common Market." Economic Review.. L. cit.7%. 2 B.E. Balassa. countriesin the marketsof the Community and elsewhere. " Tariff Reductions and Trade in Manufactures among the Industrial Countries. 139-64. it does not provide fully consistent results. pp. who has examined the share of individual exportersin Common Market imports for eleven commodity groups.Johnson's review ofJanssen's book in the Journal of Political Economy. the rise of intra-area trade as a proportion of the total (intra -and extra-area) exports and imports of the E. it is open to the objection that. on March 13. " Intra-European Trade. L.C. 1964).E. as well as between 1960 and 1962 (first three quarters). and H. 466-72. 6 J. June 1966. countries has often been interpreted as evidence for the trade-creating effects of the Common Market.April 1964.E.August 1962. 208-9. Major. 5 R.." National InstituteEconomic Review. B.1 On the other hand.E.E. and in total imports from 33 3 to 41.C." in et (Bruges. 4 Alexandre Lamfalussy. the latter being calculated under the assumption that the structure of world trade indicated by the world trade matrix of an earlier year has remained unchanged. 24-36.2 THE ECONOMIC JOURNAL [MARCH failure to take account of intra-industryspecialisationfollowing the elimination of tariffswithin a union. 1963. and should examine the relative performance of the E. Balassa. Major of the United Kingdom National Institute of Economic and Social Research. " Le Commnercede la Communaut6 Europeene avec les Pays Tiers. in the exports of participating and non-participating countries. Alexandre Lamfalussy has suggested that we should compare changes in the share of the European Economic Community.C. in world marketsand by changes in its competitive position. by proceeding in a piecemeal fashion.C. as an import market. and the Competitive Position of the E.Jean Waelbroeck has proposed that comparisons be made between actual and hypothetical trade flows. Krause appears to have over-estimatedthe trade-divertingeffects of the European Common Market for United States exports by assuminga high supply elasticity for the " dominant suppliers" within the E.5%." paper read at The Manchester Statistical Society. Waelbroeck. pp.C.5 While the method used by Lamfalussy avoids the pitfallsof arguing from a comparison of the relative proportionsof intra-area and extra-area trade. IntigrationEuropeene RealiteEconomique . G. 49-51. American 3 Between 1959 and 1965. To remedy this deficiency. pp.

Duquesne de la Vinelle.1967] TRADE CREATION AND TRADE DIVERSION 3 matrix to 1962 and first half of 1963. trade exceeds hypothetical trade. P6yh6nen.E. No. 2 . pp. Verdoorn and F." ibid. with gross national products and geographical distance as the principal determining variables. to the problem at hand." Informations Statistiques.C. At the same time there is no evidence for trade diversion on imports from North America and from the countries of the European Free Trade Association.E. Verdoorn and F. and K.E. J. Poyh6nen and K. J. to extrapolate the matrix of world trade from 1958 to 1962. cit. In the Finnish study the following formula was used to describe the influences affecting the exports of country i to countryj: (1) jj= ci CCiC yiay.b. Pullianinen. results obtained by the use of these proceduresdo not permit us to judge whether the observed " deformation " of the world trade matrix has been due to trade creation or to trade diversion. P. pp. either because the reduction of intra-area tariffs has created new trade or because trade has been diverted from extra-area to intra-area channels. " La creation du commerce attribuable au March6 commun et son incidence sur le valeur du produit national de la Communaute. ri1is the distance between them and c is a scale factor." Ekonomiska SamfundetsTidskrift. P. 69-77. as Waelbroeck notes. d when yi and yj are the gross national products of the two countries. " Trade Creation and Trade Diversion et in the Common Market. Shapingthe WorldEconomy(New York: Twentieth Century Fund. 1963 (2). ci and cj would remain unchanged over time.. M. 4. The finding that actual intra-E. Waelbroeckhas suggested the application of a method used by Tinbergen and two Finnish economists. cj and c1 are their export and import parametersindicating the " openness " of their economies. Meyer zu Schlochtern. tions are also cited in L. Waelbroeck has found that intra-E. Comparing the hypothetical trade figures derived by the use of this method with actual trade. " Toward a General Theory of International Trade. Pulliainen. Meyer zu Schlochtern who used a similar method.1965. 'Jan Tinbergen.. trade has increased considerably more than the Finnish model would have led us to expect.3 These authors attempted to explain trade flows by regression analysis. 1948-60. calculated under the assumption of an unchanged composition of world trade. Waelbroeck has assumed that the coefficients c. 1963.. 157. These calculapp. estimated from a cross-sectioninvestigation of world trade in the year 1958. J. To provide an indication of the trade-creatingand trade-divertingeffects of the E.C. J."' Analogous conclusions have been reached by P. " A World Trade Study: An Econometric Study of the Pattern of the Commodity Flows in Intcrnational Trade. 78-91. 1 op. 95-137. M. and has utilised the values of coefficients a and b. p.2 But. is compatible with trade creation as well as trade diversion: the Common Market countries trade more with each other. P.C. Waelbroeck has concluded that " the existence of a ' Common Market effect' on the composition of world trade can hardly be doubted." in Int6gration Europeene R6alitdEconomique.

J. 113-14. since increasedinternationalspecialisationwithin the manufacturing sector tends to raise the share of foreign trade in G. .N.4 THE ECONOMIC JOURNAL [MARCH inasmuch as actual imports exceed hypothetical imports in trade with these areas. But similar developments had taken place between 1954 and 1958. pp. Meyer zu Schlochtern. in the former group of countries. Denmark and Switzerland.2 Further. the opposite conclusion also holds: an increase in relativetariff levels will lead to a shift in imports from third-country to partner-country suppliers. 2 The expression " external trade creation " is used in this paper to refer to increased imports from third countries. but not the former. M. yet if tariff reductions lead to increased trade. In fact. since the aggregate resultsmay conceal changes in opposite directionswith respect to individual commodities and commodity groups.C.is significantly different from zero at the 5 % confidence level. too. cit. to the European Economic Community. the relatively high income elasticities of export supply and import demand in the Common Market countries will explain. Verdoorn and F.4 But the method utilised is open to the usual objections against calculating substitution elasticities from cross-sectiondata. and is therefore the opposite of trade diversion. " Trade Creation and Trade Diversion in the Common Market. these elasticitiesare generally higher in the industrial economies.'s establishment.A. and is taken to reflect the expansion of trade that would have taken place in the absence of the E. cit." op. a consideration of total exports and imports has only limited interest.. in a cross-section study of thirty-eight commodities. the apparent impact of tariff changes on trade corresponds to an elasticity of -2.J.E. 1 or -39 with respect to price. calculated in a cross-sectionanalysis of all trading countries. one may question the validity of a method that applies average income elasticities of export supply and import demand. ' Verdoom and Schlochtern use the results as evidence for trade creation only. when the latter. Thus.. The results thus provide some evidence of the trade-creatingandtrade-divertingeffects of the E.F. Sweden. pp." op." The latter has been calculated as an unweighted average of the rates of change of imports of the commodities in question into the United Kingdom.P. while industrialisation cum protectionism have the opposite effect in the latter. accompanying the establishment of a union. 8 P. one may question the validity of using the data of four E. in part. 160-3.E.3 Depending on the form of the regression equation used.C. countries with lower growth rates and rather different economic structureas a yardstickfor the expansion 1 Waelbroeck. Verdoorn and Meyer zu Schlochtern have attempted to explain inter-commodity differencesin the expansion of imports into the Common Market by utilising as explanatory variables a weighted average of internal and external tariff reductions and an index representing "effective import demand.' At any rate. Further. In turn. and lower in lessdeveloped areas.T. and hence the results do not provide a clear indication of the trade-creatingand the trade-divertingeffects of the Common Market. the presumedinternalandexternaltradecreation. " Le Commerce de la Communaut6 Europ6enne avec les Pays Tiers.

5 1 Ex post income elasticities of import demand have been defined as the ratio of the average annual rate of change of imports to that of G. given the shortness of the time series and the variability of data." Revued'Economie 3 Gross trade creation refers to increases in intra-area trade.N. while an increase in the income elasticity of demand for imports from all sources of supply would give expression to trade creation proper. it is assumed that the Common Market's establishment has been the single largest influence affecting trade flows in the E.3 In other words. May 1963. In tum. a rise in the income elasticity of demand for intra-area imports would indicate gross trade creation. .-expressed by the income elasticities of import demand for the period preceding integration-during the period that has elapsed since. 201-27. trade creation in the Vinerian sense relates to newly created trade due to a shift from domestic to partner-country sources of supply. " Les effets du march6 commun sur les courants d'echanges Politique." American and Proceedings. 175-84. a fall in the income elasticity of demand for extra-areaimports would provide evidence of the trade-diverting effects of the union. may provide a way of dealing with the first two problems. Economic Review." II This short survey indicates some of the problems encountered in the estimation of trade creation and trade diversion in a customs union. and provides comparable estimatesof trade creation and trade diversion.C.Papers 2 Bela Balassa.. we note the need for: (a) abstractingfrom the effects of economic growth on trade flows. (b) ensuring the comparability of the estimates of trade creation and trade diversion. In carrying out the present investigation. for periods preceding and following integration.N. In turn. For an application of this method to the 1953-63 period.F. " European Integration: Problems and Issues. satisfactory results have not been obtained.4 At the same time.E. 1966 (2). (c) providing for a disaggregation of the results according to the main commodity categories.1967] TRADE CREATION AND TRADE DIVERSION 5 of trade that would have taken place in the absence of the Common Market's establishment.A.P. In particular. the proposed method abstracts from changes in the growth rate of national income.2 Under the assumption that income elasticities of import demand would have remained unchanged in the absence of integration.P. pp. between the pre-integrationand the post-integration periods. rather than comparing trade shares at the beginning and the end of the period. I will return to this at a later point. The introduction of variables expressing changes in relative prices and tariffs have not improved the results either. and long-run influences or special factors would not have appreciably altered the relationshipsbetween imports and G. I earlier suggested that a comparison of expost income elasticities of import demand1 in intra-area and extra-area trade. irrespective of whether this has been due to substitution for domestic or for foreign source of supply. effect. while trade diversion entails a shift from foreign to partner-country producers.N. by comparing the relationship of internal and external trade to G.T. 4 The effects of autonomous price changes on trade flows provide a further problem. and (d) indicating the effects on individual supplying areas. I have also experimented with regression analysis but. see Bela Balassa and Alain Camu. pp.P. internationaux.especially in view of the fact that by 1962-the terminal year of the calculations-there might have already been an " E. 5 The reader will note that. this method implicitly considers trends in shares over time.

calculations have also been carried out with alternative explanatory variables in the case of the imports of food. the increase in intra-area trade resulting from the establishmentof the union would be understated. in part because of the difficulties encountered in ascertaining the " proximate " income variable for some of the commodity groups and in part for ensuring the comparability of the results. On the other hand. however. these were extended to non-member countries.P. 308-9)." Weltwirtschaftliches Archiv. 1963.P. beverages and tobacco (SITC 0 + 1 less 07). and the post-integration period 1959-65. With the exception of trade in ships and aeroplanes. 2 On the other hand. pp. 8 The latter conclusion would not hold. 2.Vol. Raw materials (2 + 4). " The Future of Common Market Imports.1 Estimatesrelating to these commodity categories have further been utilised to indicate the impact of the Common Market's establishment on imports from various groups of non-member countries. and the decrease in extraarea imports generally overestimated. in the calculations. But the results are not meant to reflect the full impact of the union's establishmenton trade flows. Pro. Fuels (3). but these influences cannot be separated from trade creation and trade diversion proper. 1 It may be suggested that the imports of the various groups of commodities be related to some other variable that would have a more direct influence on imports than G. separate consideration can also be given to individual commodity categories and supplying areas.N.or anti-trade bias in Common Market growth would also affect the results obtained by the use of the proposed method.P. Transport equipment (73) and Other manufacturedgoods (6 + 8). has been chosen as the " benchmark " year that separatesthe two periods. At the same time the choice of the year 1959 has appeared preferableto using an average of the years 1958-60.6 THE ECONOMIC JOURNAL [MARCH In applying this method. the year when the actual operation of the Common Market began. The commodity categories distinguished in the present study are Temperate zone foods.C. Although tariff reductions were undertaken already on January 1 of that year.e. 90. Bela Balassa. does. Machinery (71 + 72). since no account is taken of the possible influence of integration on economic growth. this method purports to indicate the static effects of integration. 1959.N. imports in 1958 declined due to the recession in that year. so that there was no discrimination against outsiders until 1960. 1959 was apparently a " normal " year as far as the internal and external trade relations of the Common Market are concerned.E. no account has been taken of differential changes in tariffs within the Common Market.'s establishment. Should the actual growth rate exceed the rate that would have been obtained in the absence of integration.2 In the calculations the pre-integration period has been taken to include the years 1953-59. By abstracting from the influence of changes in the rate of growth of G. and trade flows in 1960 were already affected by the E. raw materials and machinery. . structural changes and uncertainties relating to the underlying relationships also gives rise to errors. Thus. I have chosen to use G. if economic growth had a strong anti-trade bias (cf.. the impact of the elimination of internal duties on trade under ceteris paribusassumptions. on trade. i. Nevertheless. Chemicals (5).3 The influence of non-recurring factors.N.

. taken together. In the case of these products.2 The reduction in the preferential advantages accorded to Algerian wine in France and the lowering of internal tariffs on tobacco have further contributed to this result.' Further.and extraarea) imports. wheat and sugar into the food-deficit countries of the E. the data of Table I do not show trade creation in food. it rose from 2-4 to 2-8 for intra-area trade and it hardly changed in regard to extra-areaimports (1 6 as against 17).N. Between the periods 1953-59 and 1959-65 the income elasticity of demand increased from 1-8 to 2 1 with respect to total (intra. But the results vary to a considerable extent between commodity groups.1967] TRADE CREATION AND TRADE DIVERSION 7 A further considerationis that the statistical reliability of the estimates cannot be tested. instead of the grossnational product. amounts to the application of variable quotas since the purpose of the levy is to ensure that imports from non-member countries are admitted only after all produce of member country suppliers has been sold. food consumption is used as the explanatoryvariable. calculated with respect to industrial production. Correspondingly.the results shown in the following sections should be considered as being indicative of general tendencies rather than expressingexact magnitudes. This conclusion is not affected if. the actual-and anticipated-effects of Common Market agricultural policy appear to have been of importance. III A consideration of ex postincome elasticities of demand for imports of all commodities. too. member-country producers have increased their share to a considerableextent in imports of live animals. Within the food. while there is no indication of trade diversion (Table I). On the other hand. where the reduction of internal duties has been accompanied by substitution against natural and synthetic rubber originating in non-member countries. in fact. subsidies to the 1 The total import elasticities for raw materials. To begin with. Shifts from foreign producers to partner-country sources of supply have taken place in the case of rubber.E.C. Tariff preferenceshave affected the pattern of tradein some raw materials. The variable levy system. Moreover. inasmuch as changes in income elasticitiesof demand between the two periods show a shift from foreign to partner-countrysources of supply. the data point to the existence of trade diversionin food and raw materials. 2 The common agricultural policy entails the use of variable levies designed to bring the prices of foreign exporters to the domestic level. the relevant figures for intra-area trade are 1b4and 1i5 and for extra-area trade 0 7 and 07. beverages and tobacco. there is some indication of trade creation in the raw materials category if imports are related to industrial production rather than to G.P. dairy products. provides evidence of trade creation in the European Common Market. are 0-8 in the period 1953-59 and 0 9 in the period 1959-65. and more useful conclusionscan be reached if the data are appropriatelydisaggregated. since the income elasticity of demand for food failed to decline between the pre-integration and the post-integration period. beverages and tobacco group.

Observedchanges in trade patternsreflectthe policy followed by the E. tobacco Raw materials 2 + 4 3 Fuels 5 Chemicals 71 + 72 Machinery 73 Transport equipment 6+ 8 Other manufactured goods Total of above 0 to 8-07 Gross National Product 90 5.C. production of rapeseed and tariff discrimination against vegetable oils of foreign origin have tended to discourage extra-area imports of oils and oilseeds. 1958-65. Ex-postincome elasticity of import demand.E.07 Non-tropical food.1 0 +0o7 +0 3 +1P3 +0-8 -0*1 +0 3 13-8 10-3 59 16-2 113 15-6 15-1 12-8 13-2 10-3 70 21-4 16*9 20-6 15-8 15.07 Non-tropical food. Different considerations apply to fuels where an acceleration of extraarea imports is shown.C.8 THE ECONOMIC JOURNAL [MARCH TABLE I Ex-postIncome Elasticities Import of Demand theEuropean in Common Market Annual rate of growth. An exception has been made in the case of tropical products.StatisticalBulletins. unit value indices have been derived by utilising the appropriate indices for individual countries. machinery and transport equipment.E. beverages. tobacco 2 + 4 Raw materials 3 Fuels 5 Chemicals 71 + 72 Machinery 73 Transport equipment Other manufactured goods 6 + 8 Total of above 0 to 8-07 Intra-area imports (M. Commerce Ext6rieur.1 1P6 30 1P5 2*6 2*6 1.E.C.).9 12-2 18.4 6-3 5-0 13-6 14-8 13-6 1441 10-3 9*0 5-4 1-4 1.07 Non-tropical food. (formerly O.1 30 2*1 2-9 2-8 2-4 2-4 1P9 1-3 40 3*l 3-8 2-9 2*8 -041 0 +0-2 +1P0 +1-0 +0 9 +0 1 +04 7-7 5.) O+ 1 .1953-65.9 1. beverages. Tableaux Analytiques. 1953-59. Difference.9 8-9 1641 8. tobacco Raw materials 2+ 4 3 Fuels 5 Chemicals 71 + 72 Machinery 73 Transport equipment 6+ 8 Other manufactured goods 0 to 8 .1 2-5 1. beverages.07 Total of above Extra-area imports (Me) 0 + 1 . 1959-65.0 15-4 18-4 13-3 11P2 1P7 1.D. Note: To express import values in current prices.E.0 14*2 14*4 9-6 8-3 5. Foreign Trade. countries which aims at reducing reliance on highcost domestic coal. 1959-65. Total imports (MI) 0 + 1 . Office Statistique des Communaut6s Europeennes.9 16-0 5^0 12*1 13-7 8*3 5.0 1P8 30 09 2-2 2-5 1*6 1-2 09 2-5 2-7 2-5 2-4 19 17 -0-2 -041 +0 7 -0 3 +1-6 +0-2 -0-6 +04 I Sources: O. 1953-59.3 9. where the indices have been calculated from the original data. The chief beneficiariesof this policy have been the lessdeveloped countries that provide over 80% of oil consumed in the Common .8 1P6 11 2-3 3-3 2-8 3-4 2*5 2*1 -0.

that the explanation must lie elsewhere. At the same time there is evidence of trade diversion in two of these groups of commodities. so that the share of foreign suppliers in the incremental purchases of machinery will tend to rise with 1 The relevant figures (in 1953 prices) are: 1958.on the one hand. By reason of a large decline in the imports of ships and aeroplanes occurring in 1959. $564 million. the results are hardly affected if. However. an accelerator-type relationship exists between machinery purchases. included in the group of other manufactures. $318 million. the rate of increase of extra-area imports of machinery declined as the investment boom subsided and domestic machine-building capacities caught up with demand.' Thus. 1959.P.1967] TRADE CREATION AND TRADE DIVERSION 9 Market. 2 The ratio of the annual rate of change of machinery purchases to that of the gross national product was 1b5in the period 1953-59 and 1-6 in 1959-64. According to this explanation. then.C. In view of the considerationsunderlying the energy policy of the Community.. and the importsof machinery from non-member countries. instead of G. one may argue that it is incorrect to relate imports to gross national product in the calculations. Data on machinery purchases in 1965 are not available. whereas the increase in the income elasticity of demand for extra-area imports of machinery and transport equipment points to " external trade creation.2 It would appear. It is suggested here that the observed acceleration in Common Market imports of machinery from non-participating countries can. The investment boom necessitated substantial purchasesof machinery and equipment which domestic capacities could not cope with. trade diversion rather than external trade creation is shown. and 1960. the extraarea imports of transport equipment of that year were considerably below the level of the preceding and the following years. $538 million.N. I noted above that the choice of the year 1959 as the benchmarkbetween the pre-integration and the post-integration periods gives rise to distortions in the calculations concerning transport equipment. in great part. recent trends in regard to oil imports are expected to continue. As regardsmachinery. be explained by reference to the investment boom that accompanied the establishment of the E. since an accelerator-type relationship may exist between investment in machinery and national income. inasmuch as the ratio of these purchasesto the gross national product hardly changed between the two periods. on the other. In turn. since tariff discrimination against outsiders would have been expected to lead to a deceleration ratherthan an accelerationof purchasesfrom non-member countries. purchases of machinery and equipment are used as the explanatory variable. With the exception of semi-manufactures and non-durable consumer goods." It is the latter result that requires explanation.the establishmentof the Common Market appears to have led to trade creation in manufactured products. if we replace the data for 1959 by an average of the years 1958-60. .E.

Index: 15 1959In 0. trade diversion in several commodity categories has apparently been compensated by changes in the opposite direction in fuels and machinery. With machinery purchases rising at an average annual rate of 16. (5) - (6) 100-0 101*6 102*0 105*1 106*5 107*6 n.a. to the average of the corresponding deflators for the United States and the United Kingdom.E.4% during the investment boom of 1959-61. there has been a decline in the annual rate of increase of extra-area machinery imports.1 135 6 150*1 160*9 169*9 n. although they cannot provide a full explanation. and the net effect on indi1 While data on purchases of machinery and equipment are not available for 1965.a. * The index of relative prices has been calculated as a ratio of the implicit deflator for purchases of machinery and equipment in the E. for all non-market countries. +35-3 +35-6 +18-6 + 85 + 5*8 + 04 2-0 2-4 1*7 1-2 1. TABLE II and Purchases Imports Common MarketMachinery (In current prices) Purchases of machinery and equipment.2 IV I have shown that while aggregate relationshipsprovide no indication of trade diversion following the establishment of the European Common Market. In turn.C. Thus. 2 Changes in the prices of Common Market machinery as compared to the prices of her two largest competitors appear also to have contributed to these results. (2) - Index: 1959 = 100. indications are that the increase over the previous year was of negligible magnitude.' A year-to-year comparison of the relevant figures indicates that this decline has led to a continuous fall of the share of imports in the incremental purchases of machinery. taken together.0 n. But this result conceals substantial inter-regional differences. the importsof machineryfromnon-membercountriesincreased 35 4 % a year. weighted by their respective machinery exports to the Common Market in 1959. The data of Table II provide support to this proposition. 1959 1960 1961 1962 1963 1964 1965 +1841 +14 8 +?107 + 72 + 56 n. (1) 100-0 118. General Statistics. different conclusions apply if the data are appropriately disaggregated. with the slackening of investment activity after 1961.a. (4) - R atio of Relative prices of maehinery. Index: 1959 d100 0 199 I_________ Extra-area machinery imports.January 1965. (3) 100*0 135*3 183*6 225-2 236*3 250*0 251b0 rates of change (4):(2). Annual rate of change. . Source: See Appendix I and Organisation for Economic Co-operation and Development.10 THE ECONOMIC JOURNAL [MARCH the increase in the rate of growth of these purchases.a. Annual rate of change.

Turkey).E.E. (3) the Continental countries of the European Free Trade Association. (6) Countries and territories associated with the Common Market. it has been derived by summing up the differences between actual imports.. Spain. I have attempted to separate a "Common Market effect. in addition to the Western European countries that are not members of either of the two trade blocs (Finland. In turn. In the present section I will examine some of the factors determining the export performance of non-member countries in E.1967] TRADE CREATION AND TRADE DIVERSION 11 vidual suppliers will depend on the composition of their exports to the Common Market.1 (5) Communist economies. Among the factors determining export performance. the impact of changes in price-relationshipson import volume has not been estimated. calculated by applying actual growth rates of total extra-area importsin the periods 1959-65 and 1953-59. . For each supplying area the " Common Market effect " has been taken as the difference between two sets of estimates of hypothetical imports into the E. However. markets. and (7) Other less-developed countries.2 Price changes between 1959 and 1965 provide the third influence on export values. Canada. respectively.to the 1959imports of the main commodity categories. the " competitive effect " gives expressionto changes in the shares of the seven supplying areas in the extraarea imports of these groups of commodities into the Common Market. (4) Other developed countries. the " price effect " of Table III refersto the difference between imports expressedin current and in constant prices. The results of the calculations are shown in Table III and in Appendix 1. Nonmember countries have been classified in seven groups: (1) the United States. it should be noted that the use of the same price deflator in regard to the imports of a given commodity category from all suppliers is likely to give rise to errors in estimating the area breakdown of import volumes. (2) the United Kingdom." and have further calculated differences in the value of exports expressed in current and in constant prices. and it is affected by the commodity composition of exports within each category." a " competitive effect.C. in the absence of reliable information on price elasticities and on changes in relative prices in the appropriate commodity breakdown. 2 The " competitive effect " as defined here reflects the influence of supply as well as demand factors. Greece. measured in constant prices. Iceland. In this connection. Australia and New Zealand.C. I have added here tropical beverages (SITC 07). Ireland. Thus. and hypothetical imports. 3 To include all commodities in SITC classes 0-8. Japan. calculated by applying growth rates of total extra-area imports in the post-integrationperiod to the 1959 imports of each commodity category. It appears that a continuation of past trends in the extra-area imports of the eight commodity groups under consideration3 would have led to relatively small discrepanciesin the exports of the seven groups of countries 1 This group includes.

A.214 213-0 2. . Actual imports.515 +1046 +219 + 99 .135 168-9 2.0 1.873 172*9 (2) 4. 1965.82 -286 +225 +113 + 61 -629 --804 "Price effect. (3) 4. Associated countries Other less-developed countries All non-member countries "Competitive effect.12 THE ECONOMIC JOURNAL [MARCH to the Common Market. with deviations from the overall index of 166-5 rarely exceeding ten percentage points.537 195-5 4 160 170-0 3.116 100-0 Differences between actual and hypothetical imports. Other developed countries Communist economies Associated countries .700 180*5 2. Continental E. United Kingdom .215 172-2 2.980 147X3 9. . (In 1959 prices) (1) United States United Kingdom Continental E.491 164-5 26. the United States.1959 and1965 Common Imports theEuropean into Extra-area Hypothetical imports in 1965 calculated at growth rates of extra-area imports for the period 1953-59. in in 1959 prices.770 100 0 16.776 169-4 27. United States . 2.041 151X9 9 147 158-6 27.594 169-2 2. Communist economies .344 100-0 5. .F.(2) (6) . Actual imports 1959.113 157X2 9.55 -166 7 -133 +285 +242 0 -171 Source: Appendix 1.160 170-0 2.976 155-6 27.400 184*9 3.A." (3) . ." (4) .952 202-3 2.587 168*5 1.874 158-3 2.298 100-0 2. 1965 1959-65.448 100 0 1. . But changes in the commodity composition of imports following the establishment of the European ComTABLEIII Market.T.866 100-0 942 100.F.069 167*9 (5) 5.827 166*5 Other less-developed countries All non-member countries .041 151-9 8.T. () ()-(2 (2 (9) +1079 + 154 55 + 298 + 157 72 . mon Market have widened inter-area differences in export performance: the range of the relevant index numbers is 146*3to 191*2. "Common Mark-et.(3) (7) +598 .751 185*9 2.069 167*9 (4) 4.482 191*2 4.354 177-9 2. .383 183*2 4. the United Kingdom and the less- . Other developed countries .955 158*4 1.448 100-0 1.194 171*2 1. 1965 prices.896 155*2 1." 5 (5-(4 (4 (8) +262 +137 +286 +239 + 51 Together.730 146-3 1. Apparently. . .

telecommunication equipment. countries." A negative " competitive effect " is indicated also in the case of the Continental E.C.55 % for other less-developed countries and the United States. semimanufacturedand non-durable consumergoods. 65% for the associatedcountries and territories. products1and the existence of excess capacity in American machine-building industrieshave contributed to the favourable United States performance in machinery exports. imports. and 47% for the United Kingdom. the less-developed countries have profited from the rapid expansion of E.T.E. and United States producers have also gained in exporting a variety of non-durable consumer goods. fruit.expansion of machinery production and a relatively unfavourable product-mix. raw materials. while the rapid expansion of soybean exports has given rise to aboveaverage gains in the raw materials category. countries have 1 The commoditiesin questioninclude computerequipment.1967] TRADE CREATION AND TRADE DIVERSION 13 developed countries other than those associated with the E. electronictubes and measuring .. the Continental E. have. Furthermore. and she also experienced a fall in her share of E.C. for which trade diversionis shown.A. Further. etc. Britain's competitive position has apparentlydeterioratedin most other commoditygroups. These " competitive " losses have largely wiped out the gain Britain has derived from the " Common Market effect. all other areas have been handicapped by their reliance on exports of food. the corresponding proportions were 72% for Continental E. American producers have increased their share in Common Market imports of cereals. the availability of new. fresh meat. Denmark has been the main loser following the reduction of butter imports into the Common Market. devices. benefited from the " Common Market effect " while other country groupings have suffered a loss. fruit preparationsand animal feed within the food. with capacity limitations restricting the.C. beverages and tobacco group. on balance. On the other hand.F.E. associated with falling prices of petroleum and petroleum products.F. In turn. technologically advanced.E. In 1965 sales of these commodities accounted for 90% of the exports of the group of other developed countries to the Common Market. 70% for Soviet-type economies. with rising exports of whisky as a further contributing factor.A. The United States and the United Kingdom have derived a gain from the high share of machinery in their exports to the Community. the major exception being fuels.F. Among these countries. imports of livestock.C. beverages and tobacco group. petroleum imports.specialmachinetools. Increases in her exports of livestock to the E.E.C.A. In addition to benefiting from the " Common Market effect. cereals and cheese. the shift from coal to oil in E. However." the United States has also improved her competitive performance in most commodity categories.T. has adversely affected the United States performancewithin the fuels group.E. from $4 million to $64 million largely explain the positive competitive effect shown for the United Kingdom in the food.T.

countries. Australian exports of wheat have been a casualtyof Common Market agriculturalpolicy and have accountedfor much of the " competitive " losses shown in the food. beverages and tobacco group. Within the first group much of the expansion has taken place in live animals. as well as consumer non-durables and semi-manufactures.C.have not been fully offset by the fall in the prices of petroleum and chemicals. machinery and transport equipment. Increaseshave been especially pronounced in exports of steel.E. as against losses in fuels. among nonassociated countries. with exports rising from $5 million to $65 million in this period. where resource limitations have restricted the expansion of exports from other areas. the " price effect " has been unfavourablefor the group of other developing . there is no evidence that the establishmentof the Common Market would have led to a shift in the sources of supply of imports from other developing countriesto the associatedcountriesand territories. in the exports of non-member countries to the Common Market improved prices of some foods and metals. Zambia has benefited from the relatively slow increase in the exports of copper from the former Belgian Congo that accounts for much of the decline in the share of the associated countries in E. imports of tropical beverages. clothing as well as photographic. the reduced reliance on Soviet sourcesof supply of petroleum has found its origin in the energy policy followed by the E. other developed countries appear to have improved their competitive position in all commodity categories.E.C. The greatest improvements have taken place in semi-manufactures and non-durable consumer goods. The performance of the countries and territories associated with the Common Market has largely been determined by changes in the pattern of French trade with Algeria. the rise in imports of Algerian oil from $17 million in 1959 to $418 million in 1965 accounts for the spectacular increase in the associated countries' fuel exports. Still. Japan has also gained in the machinery group. On the other hand. meat preparations and fruits exported chiefly from Hungary and Poland. beverages and tobacco group.E. With the exception of food and raw materials. on the other.C.14 THE ECONOMIC JOURNAL [MARCH not been able fully to utilise the opportunitiesoffered through the growth of demand for machinery in the Common Market. the decline in French imports of Algerian wine to a great extent explains the loss shown in regard to the food.the Soviet Union has made considerable gains in wood and lumber. On the other hand. Finally. where Japanese exports to the Common Marketrosefrom $46 million in 1959 to $239 million in 1965. imports of semi-manufactures. medical and scientific instruments. Among raw materials. There has been no change in the relative share of competing suppliers in E. But while increased Algerian exports of petroleum cut into the share of the Middle East. On the one hand.for example. in turn. Communist countrieshave experienced " competitive" gains in food and raw materials.

V The evidence provided in this paper points to the trade-creative effects of the Common Market. General Statistics. In turn. expostincome elasticitiesof import demand are higher for intra-area trade than for imports from non-member countries.2 Thus.E. while trade diversion is indicated in regard to several commodity categories. for these trade-diverting effects. it would appear that increases in the prices of their imports from the E. in whose exports fuels play a major part. 2. .6% in the United Kingdom. the " external trade creation " observed in the case of fuels and machinery has apparently compensated the non-member countries. Price (unit value) indices in international trade are subject to a considerable margin of error. were we to consider the purchasing power of the exports of non-member countries. Statistics. since the competitive position of E. price changes have benefited foreign suppliers.C. investment and trade. To ensure intemational comparability. and disparities in changes of intra-area and extra-area import demand I In this connection it should be emphasised that the impact of the formation of the E. And. price deflator in manufacturingrose. have more than counterbalanced the rise in export prices. in making decisions regarding production. taken together. hence I have compared changes in domestic prices instead. on the average. Accordingly. as against an annual increase of 1.6% a year between 1959 and 1965. depending on the commodity composition of their exports to the E. Autonomous price changes cannot account for the results either.C. yet one can hardly find an explanation other than the Common Market effect for the systematic differences observedin regard to changes in the rate of expansion of intra-areaand extraarea imports between the two periods.P. on trade flows is hardly confined to the effects of tariff reductions actually undertaken. entrepreneurs take account of future reductions-and the prospect of an ultimate and irrevocable elimination-of tariffs. and the latter have a negative sign.0% in the United States and 1. I and National Accounts have adjusted the domestic price indices for changes in the exchange rates. In the Common Market countries the G.N. 1955-64 (Paris. the Common Market effect can be assumed to operate through actual tariff changes.January 1965. producers has deteriorated in recent years. The reader will recall that the analysis hinges on the assumptionthat the expostincome elasticitiesof import demand would have remained unchanged in the absence of integration.C. anticipations of future changes in tariffs and the decrease in the risk and uncertainty associated with the possibility of a reimposition of tariffs and other trade barriers.E.E. Rather.E.1967] TRADE CREATION AND TRADE DIVERSION 15 countries. 2 Organization for Economic Co-operation and Development.C. United States data refer to the period 1959-64. Structural changes may indeed have affected the measured expostincome elasticities.' With the exception of the fuels and machinery group. At the same time the impact of the Common Market on individual suppliers has been shown to vary greatly. 1966).

while internal duties were at 70% of their pre-Common Market levels in 1961.E.P. the rate of discriminationand changes in extra-areaimports have been negatively correlated during the period under consideration: the ex postincome elasticityof demand for extra-areaimportsof manufacturedgoods has declined paripassuwith the increase in tariff discriminationagainst nonmember countries. a I % increase in the gross national product has been accompanied by a rise of 2 1% in the total imports of the E. This elasticity fell from 2-7 in the years 1959-61 to 2. and cannot be immediately applied in judging the possible long-term repercussions of the E. Indications point to an increased exchange of consumer goods. But has the rate of growth of national income in the E.C. 60% in 1963 and 30% in 1965.N. they can be used to speculate on possible future changes. In fact. specialisation in narrower ranges of products in machine building and the subdivision of production processes without regard to national frontiers.C.C. countries exceeded the growth rate that would have been obtained in the absence of integration? While it is difficult to provide an answer to this question. while the corresponding elasticity was 1-8 in 1953-59. it has been argued that the trade-diverting effects of the Common Market would be offset by an expansion of imports associated with the acceleration of economic growth resulting from the E. In turn.E. There is little doubt that the trade creation observed in regard to manufacturedgoods will continue as internal tariffsand the uncertainty associated with the possibility of the reimposition of tariffs and other trade barriers disappear. Rather than estimating the once-for-all static gains from improved resource allocation.E. Nevertheless. According to the results shown in Table I. At the same time the application of the common agricultural policy and increasing tariff discrimination against outsiders can be expected to augment the trade-divertingeffects of the Common Market. Thus.3 in 1961-63 and again to 1-4 in 1963-65. This paper has presentedsome tentative conclusionsregardingthe impact of the European Economic Community on trade flows during the six-year period that has elapsed since the Common Market's establishment. the results pertain to the short-termeffects of the E.E. Assuming that this differencehas been due to the Common Market effect.'s establishment.C. I will consider the dynamic benefitsof increasedtrade that are derived from economies . an indication can be provided of the absolute magnitude of trade creation and its possible implications for the rate of growth. on trade flows.16 THE ECONOMIC JOURNAL [MARCH elasticities between pre-integrationand post-integrationperiods would have been larger rather than smaller in the absence of price increasesin the Common Market relative to its competitors. Similar observations pertain to the individual categories of manufactured goods as well as to raw materials.C.. the question remains to what extent the increase in trade has contributed to the growth of G.E. countries in the period 1959-65.

' On the static gains of tariff reductions.C. With an income elasticity of import demand of 2. A. Since in the Common Market trade accounts for about one-fourth of G. (from. this would mean that a 1% increase in trade would lead to a i% rise in the gross national product. for example. see Bela Balassa and M.P. According to Walters. " A Note on Economies of Scale.P.N. LXXVII. November. No. Kreinen.N.N.3 While the application of Walters' findings to the Common Market is open to criticism. say.P. The impact of the corresponding rise in the growth rate of G. Duquesne de la Vinelle concludes that. By 1965 the cumulative effect of the Common Market'sestablishmenton the grossnational product of the member countries would thus have reached one-half of 1% of G.55). pp. since trade creation and trade diversion for the case of the complete elimination of tariffs have not been estimated." Reviewof Economics Statistics. would be accompanied by a one-tenth of one percentage point increase in the growth rate. then. the absolute increase in the gross national product due to trade creation would be double the increment in E.. and in trade is bidirectional. 5-3 to 5 5%) on extra-area imports would then offset a decrease in the income elasticity of import demand not exceeding one-twentieth of one percentage point (from 1 6 to 1.P.P. BELA BALASSA Yale University International for and Bank and Reconstruction Development.. that the complete elimination of tariffs would double the trade creating effects of the E. trade creation has contributed to an increase of the gross national product of the Common Market by 4-5%. we may apply Walters' results to indicate the impact of the expansion of trade on productivity.2 Assuming that increases in trade in the Common Market entail a corresponding rise in the output of firms producing for export. Assume.N. Walters.-VOL. and Duquesne de la Vinelle calculated with a 9% increase in trade. " Trade Liberalizaand tion and the Kennedy Round: The Static Effects.N. trade. C . But this result does not stand up to close scrutiny since it is predicated on the assumption that the statistical relationship between increases in G. these figures serve for illustrative purposes only. 2 A. in the first half of the century a doubling of inputs in the United States non-agriculturalsector has been accompanied by an approximately 130% increase in output due to the economies of large-scale producdon. estimated for the period 1959-1965. Walters on the probable extent of large-scale economies in the United States. the results may provide a general order of magnitude. A.E. and hence on G. referencecan be made to the results obtained by A. 425-27. It would appear.P.1967] TRADE CREATION AND TRADE DIVERSION 17 of scale." ibid. 3 In the paper cited above. E.N. 1963.1 In this connection.forthcoming. 305. that the 0 3 percentage point rise in the ratio of the annual increment of trade to that of G. by 1964. longer production runs and increased specialisation.C. Needless to say.E.

. ._ _ _ I _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 170 5 2. ___ + + (9) (5)-(2) Together.4002.nited 72 72 -8-07 07 States 07 07 Kingdom All All All All Raw Raw of Other FuelsFood.+ 0 60 +262+26215+14658 57+148 -106 I + d+. . ..380 l (2) (In 282 551 807 3 4. 0 070 0 070 6 7371 5 3 2 0 71 3 2 0 73 + + to to + + + + to to + + 8 8 4 1 United 8 8 8 4 I U. .479252 274 213 j1 2. above above materials materials commodities . commodities . tobacco . Tropical Tropical Transport Chemicals Transport Chemicals Machinery Machinery .- 990 99-174 +252 23 4 5 25 18 0 -119 34 14 +219+21932+306+108 60 (6) - j + -1 .+ imports actu in actual Effect "Price an (4) and 1965. .298 486 308 58 159 114 120 1 in 2. . . Common Market. _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ 1 2. _ _ _ _ _ __ _ . beverages. .949 (4) 1959 prices. _ _ _ _ _ _ _ .532 256 245 2. .051412 102 79 227 292 217 3 2. . . .132 4. . Extra-Area 51 2 1.351 314 517 793 4. of Other FuelsFood. area 142 226 591 2 2.079 +144+572-149 +335 +140 ." (4) -mon D and 1965 + - + Differences tive peti_ -82 85 198 92 18 16-4173 3 0 +203 +141 97 +598+59811+120-199 +247 (7) - II 1 +137+1381291 47 -1611 23 64 - "Com(3) Effect. beverages.211318 552 5. imports.18 THE ECONOMIC JOURNAL [MARCH __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ 1 . In (5) 1965 343 117 3 5." (5) (8) thetical between between + + + + + + I ..079 1 36 +1. .+ .482 877 664 125 74 3 2. .135 716 502 492 782 growth 1965 1953-59.448 331 375 279 502 (1) 1959. . . . . .214 860 1.+ Market Com(2) Effect. . tobacco . .952 800 928 401 969 303 658 890 3 4.Actual imports Imports into the t_ _ _ _ _ __ _ _ _ _ _ _ _ _ 2.. . . (3) 1959 + + + . . . beverages beverages . extraAPPENDIX 1959 1 I 4.- + - . . hypohypo- 2 -129 47 +154152 29+251 9 34 91 0 +1. .446 2.074 947 prices.394 572 109 147 244 6 858 292 172 rates imports Hypothetical period of for (3) prices) calculated European 3 4.296 1. . manufactures equipment equipment . .537 922 663 93 183 1. In Actual 1965.354 597 808 600 722 the at imports 1959-65. . . . . .383 1. manufactures . .

beverages beverages .72715 2. . and hypo- + + + + . of Other of Other FuelsFood.349 8 4.-166 -166 1 164 1 2465 0 91 - - + . .160 1. manufactures .15298774 26 655 4." (3) between - + ++ + 1 52 3 +239+2401 18-18 82+108 + . .- 11 24 550 55-272 +2935 1753 (6) - Effect.160 1.(7) 2 12 -286 -284 2 -126 4 22-159 3 Differences thetical "ComEffect. .868 96648 22 496 3.194 741 134 18 1.458 281 973 (5) 1965 prices.874 1." "Com(2) Market (4) P ___eti__ tive mon__ ++ + . above above . .955 689 116 21 1. .359 751 5 4.640 360 910 8 4.448 758 359 12 666 (1) 1959.+ + -1 +102 54 +286+287 5 +1033 5876 (5) (8) - imports in actual Effect. .+ (9) 55-3 52 -182 +2702 63-136 14 79 - + - Together Togetherm (5)-(2) . . In (continued) 25 94 813 103.89314 2.++.1967] TRADE CREATION AND TRADE DIVERSION 19 3. materials materials commodities commodities beverages. .215 1. tobacco 541 7 2 1. tobacco .155101 19 572 4.+ .373 4. . countries Tropical Tropical Transport Transport Chemicals Chemicals Machinery Machinery .442 44 148 455 2. . O 07 0 6 73715 3 2 0 0 070 6 73715 3 2 0 + + to + + Other to + + to to + + 8 8 8 4 1 8 8 4 1 72 72 Continental 07 07 8-07 07 developed EFTA All All All All Raw Raw FuelsFood. .866 254 1933 5 1. manufactures equipment equipment . .356 335 915 (4) 1959 prices. beverages.005 6 2.+ .730 458 417610 1. .. | 1959 rates imports Hypothetical period APPENDIX of for I prices) calculated the at imports 1959-65. __________________ extra_ area 1 1 2.+2317536+11 73 72 +225+2179 8 + .277 6 3. .864 1. Actual imports in 843 3 2. (3) In imports.- 7 +192 14 +298+29111+1099 1430 . . .+ .368 338 893 (3) growth 1965 1953-59. 4.. Actual 1965. .207 87481 21 708 (2) (In 778 3 2.896 549 2580 9 1.184 3." (4) __Price___ 1965.94424 112 705 2. . . . .

at imports (In 1 2. .692 517 In 1959In prices. . . 2.+ + - - + + 3535200 0 2 803463 + .+ (7) 1166+161 +113+1083 2 5 3 22 + - Differences 0 .. APPENDIX of for I prices) calculated the 1959-65.+ . tobacco . . beverages beverages manufactures manufactures equipment equipment .""Combetween (5) (8) - 7 7 572 157 756 29 + - + - . beverages.- - + . . . . . .584 18 419 357 (3) 2. .148 1 1232441 942 940 8 1848195 248 (1) 2 158 265 i 1959.11 69 -133 -122 0 +12 131055 - - - 0 - . . .+ + 511 52211 6 16 513358 "Price Effect. .- - 617 68830 2 15+487-263 56 ++. .594 342 24117 362 344 386 (2) 1.835 1 2956602 278 417 0 730 3 1. .751 303 4783302 437 (5) 7 1. . hypo- . . . beverages. . 196 193 469 0 1. . . . .0411. extra1959-65.0411. of Other Fuels of Other Fuels Tropical Tropical Transport Transport Chemicals Chemicals Machinery Machinery . above above materials materials commodities commodities. .1131.- - . 2 (continued) Actual 1965.++ - + - - (3) (6) mon Market (2)Effect." (4)(5 actual and .""Com(4) tive peti(3)Effect.587 285 39110 356 3 1.Associated Communist 8-07 8-07 07 07 countries All All All All Raw Raw economies Food. . 1965 1959 | rates imports period Hypothetical 1953-59. . . . 0 07 6 73715 3 2 0 0 070 6 73715 3 2 0 to Oto to to + + + + + + 8 8 8 + 8 + 4 1 4 1 72 72 . . .700 282 4199353 379 8 1.20 THE ECONOMIC JOURNAL 6. 5.713 675 267 0 1. .++.980 348 2 2769592 1.59116 1. [MARCH tobacco . .++ ++. . Food. l In 1965 prices. . . .781 0 12556 412 0 260 265 536 (4) 21 1. .3441. .- + 725319-132 1 19+420-255 32 0 51 +157+1536 233442+188 4 39 (9) (2 Together.74422 550 imports.8160 0 10476 475 225 285 570 1.Actual imports in area growth 1953-59.

. . . Commerci Co-operation 319 682 4.300 Foreign + Trade.5596. O. .061 706 5.558 1.061 706 5.729 15.487 767 933 2. .214 1. .4991 232 2.879 927 Actual imports 1959 | | 1959 in (In 1959 area 9. Development 1. .9768. (formerly 26. beverages beverages manufactures manufactures equipment . (3) - In 1965 imports. . 195-59.330 1. .595 27.069 5.346 (3) 9. .380182551 3.785 921 26. . . . . ._ - - + + thetc Differences -317 7 -213 +153 -629 -622 9 23-166 -111 (7) tive petiEffect.827 6. 4. .1478.039 9|.310154484 3. .116 2. All All All All less-developed Raw Raw FuelsFood.602 569 5. .661 6.104 634 (1) 5.713 737 4.716 666 989 prices. ." (5) - actual an 1965 and . . . imports. beverages. .0401.685 8 806 3. .3131.081 779 16.5 prices.031 -102 -114 1 (5) 2.+ -183 1. .1967] TRADE CREATION AND TRADE DIVERSION 21 0 07 0 6 73715 3 2 0 to to + + + 8 8 8 + 4 1 Statistique Sources: 72 des 07 7.+ + .346 1. |In Actual (continued) 1965. .446 26.2591. . growth 1965 1958-1965. .337 1.349 6.595 26.330 Table 27.hypo- + + .4603.189 (2) 8.491 1.""Com(3) al between (5) - Bulletins. .8271. FuelsFood.).2502 217 2. .3374. .2894. above above for Communautes materials materials commodities . . .E.873 2.150 774 4. .873 5.971 25. . equipment. .193 and Exterieur. . .+ + -171 70 563 1933 -568 +229 -101 +164 (8) "Price (4) Effect.5105.+ .723 1. + +(6) 32 -249 +285+317 1 1 15 +727 -109 39 - Effect. 5 3 2 0 0 0 6 07 7371 to to + + + + 8 8 8 4 1 Other 72 Extra-area 07 07 07 8.2894. . Economic tobacco tobacco Europennes. .229 +103-312 +325 +1.443 1953-59.776 1.201 4 1. .183 1.008 2.5596.952 2. +242+285 72+884+952 -376 43 -1. .069 5. . .""Com(2) Market (4) 1565mon Statistical . .E.203 8. commodities.770 693 1 95 1. of Other of Other total Tropical Organization Tropical Transport Transport Chemicals Chemicals Machinery Machinery countries . 27.008 2.183 1. + +804+944 31+383-779 +705 -140 +375 -210 +439 1953-1965.046 -656 1267 +173 +329 Office -515 -375 7 43-148 14 +273 -140 -510 54 (9) Toehr (2) Together.334 rates imports period Hypothetical APPENDIX of for I prices) calculated the at imports |1959-65.460 1. beverages. . .C. extra1 (4) 9. .002 9 9.

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