Opening up International Trade with Eastern Europe

Abstract

Trade with Eastern Europe Carl B. Hamilton and L Alan Winters Previous economic policy in the Soviet Union and Eastern Europe sought to restrict international trade with market economies. Hence, liberalization and reform should now lead to a huge increase in such trade. This will have a major impact both on the reforming economies and on their new trade partners. First, we develop an empirical model of trade flows between existing market economies, and use this to forecast long-run trade flows as the former Soviet Union and Eastern Europe are reabsorbed into the world economy. Second, we provide a more detailed analysis of one key sector, agricultural trade. We compare and contrast three regime changes: reform in the East, admission of the East to the EC CAP and worldwide success on agricultural liberalization in the GATT. Third, we adduce evidence of high quality human capital in Eastern Europe and argue that this will tend to confer a comparative advantage in quite sophisticated products. We conclude by stressing that since trade cannot be permanently and profoundly unbalanced, Western market economies can enjoy potential gains from trade only if they allow market access to emergent producers from the former Soviet Union and Eastern Europe.