Free Trade in the European Economic Community: Results From a Computer Simulation Analysis

by Robert J. Larson

31 May 1989

In partial fulfillment of the requirement for a Bachelor of Arts degree in the Mathematical Methods in the Social Sciences Program.

Introduction

The European continent is buzzing at present as it

prepares for the realization of the European Economic Community's

(EEC) newest project: the removal of all remaining non-tariff

barriers to trade by December 31, 1992. The Cecchini Report of

1988 is the first systematic attempt to deal with the possible

ramifications of the completion of the EEC's "internal market."

Cecchini first evaluates the costs of "European non-union" and

subsequently offers an analysis of potential micro- and macro-

economic gains to be reaped by the Community members. This paper

details the results of a project attempting to view the effects of

the completion of the internal market from a wider perspective. By

utilizing the GLOBUS world model, a large-scale simulation of

international economic and political process, it is hoped that

insights into the ramifications of 1992 for the world at large can

be gleaned. The author wishes to acknowledge here the generosity

of Dr. Harold Guetzkow, who provided unlimited access to the GLOBUS

model throughout the course of this project, as well as much-needed

support and encouragement.

Historical Background

A Brief History of European Union

The search for European union is well established in the

history of the continent. The evolution of Europe as a distinct

entity has been subjected to an alternation between unification and

stagnation for centuries. The underlying idea has always been that

Europe belongs together and should stick together. Early notables

such as Alaric and Theodoric recognized the existence of a Western

Civilization--a Res Romans—in which Latins, Celts, Greeks, and

1

Germans all had a share. Even though most of these men were not

educated enough to think in terms of "European union" they

recognized that it was worth defending from invading Huns and

Arabs. Though politically divided, medieval and early modern

Europe remained something of an informal community.

For those who travelled at all, frontiers were not in general a major obstacle. There were no immigration laws in the modern sense: if the local ruler liked you, he would let you stay; if not you had to move on. But if a man had a trade, or some education, or looked a likely soldier, the chances were he would be allowed to stay. Nationality was not a major consideration on the Continent at any rate; what mattered was allegiance to a king, bishop, or prince in return for a ruler's protection, and this did not involve the same complicated procedures as natural­ization does today.

But despite this seemingly peaceful framework, rulers

spent a great deal of time fighting amongst themselves, causing

large amounts of physical destruction. Subsequent recovery was

painfully slow due in part to the underdeveloped nature of the

economy and lack of efficiency. As an effort to combat this

periodic destruction of Europe, various thinkers proposed schemes

for a European confederation to establish peace among Western

kingdoms and act as a common defense against outsiders and each

other. These various theories were usually based on a principle of

independent states working together through some sort of federal

system "rather than any one ruler asserting his power over all the

rest who would never have allowed it--as has been proven repeatedly

whenever anyone has tried."

The Beginnings of Post-War European Union

As was typical the notion of the modern European Economic

Community arose out of the destruction of war. World War II

2

served to convince Europeans that they could only survive by

becoming united, or at any rate, more united than they were.

Additionally Marshall Plan aid from the United States arrived under

the condition that the receiving states set up a joint

organizational body to manage the resources thus made available and

to work out a common economic policy. This body took the form of

the Organization for European Economic Cooperation (OEEC, later

OECD), providing a context within which a more tightly organized

grouping could flourish.

Further moves toward integration were soon to follow.

With the new threat from Eastern Europe growing, defense concerns

were seriously addressed. The Brussels Treaty, signed in 1948, was

a mutual assistance pact among the United Kingdom, France, and the

Benelux countries and "in objective was a neat balance between the

perpetuation of the wartime alliance against Germany and the

realization of a newer threat from Russia." Denmark, Norway,

Portugal, Iceland, and Italy, along with the United States and

Canada joined the Brussels Treaty nations in the defense of Western

Europe with the signing of the North Atlantic Treaty in 1949.

The need to incorporate divided Germany into a fully

unified defense of Western Europe brought about the European Coal

and Steel Community (ECSC) by way of the Treaty of Paris in 1951.

France was particularly fearful of the prospect of a rearmed

Germany; the ECSC worked around this fear by integrating the coal,

iron, and steel industries of France, Germany, Italy, and the

Benelux countries under the supervision of a supra-national High

Authority. The underlying rationale for this move was that war

cannot be made without steel, and steel cannot be made without coal

and iron.

Establishment of the EEC

The early success of the ECSC established the credentials

of European economic union, and soon a new attempt at integration

was made. The Spaak Report of 1955 advanced the vision of a

"Western Europe which can win for herself a place in the world

comparable with that of the superpowers and which once again, has

the capacity to influence world events."6 The Treaty of Rome,

signed in 1957, created the European Economic Community from the

six nations that comprised the ECSC.

The treaty's immediate objectives were to get rid of all

obstacles to the free movement of people and resources among the

member states, and to promote economic growth throughout the

Communxty. This included the removal of customs duties, a

harmonization of external inports policy, and provisions for the

free movement of citizens, corporations, and capital across member-

state borders. Some of the Community's rules came into force at

once, i.e. "the freedom to work anywhere in the EEC; for others a

transitional period was provided, during which customs duties were

gradually abolished between the member-states and external duties

p were brought into line with [proposed standards]. "°

By 1968, the EEC had succeeded in eliminating customs

tariffs between members. But beneath the surface of the removal of

formal customs barriers rose a string of non-tariff barriers:

complex border post procedures, divergent technical standards, and

disparate excise tax rates/ Work toward dismantling these new

non-tariff barriers came to a veritable stop during the 1970s and

early 1980s, as the EEC turned its attention to other issues. The

Community began to add new members: Denmark, Ireland, and the

United Kingdom in 1973; Greece in 1979; and Portugal and Spain in

4

1986. Other primary issues included arguments about the size of

Britain's contribution to the EEC budget, and demands for reduced

spending on the Common Agricultural Policy. These political

distractions led the EEC away from continuing toward the objectives

set out by the Treaty of Rome.

The 1992 Program

The White Paper and the Single European Act

Before Jacques DeLors became president of the EEC at the

beginning of 1985, he toured the member states and tried on them

four ideas to push Europe forward: closer collaboration on defense,

development of the Community's system of government, another move

on the monetary front, or a renewed campaign for a proper European

q market. It was the last of these proposals that compromised

individual political sovereignty the least, and thus appealed to

members the most.

This goal of completing the internal market found its

detailed expression in a "White Paper" written by Britain's Lord

Cockfield in 1985. Cockfield compiled a list of 300 measures

needed for a wholly unified European market. He laid out a

fast-paced timetable that would have to be followed to get the

measures adopted by December 31, 1992 (the end of DeLors' term). "

In order for the process of adoption of the White Paper's

directives to begin, a legal barrier had to be removed. It had

been EEC legislative policy'to require unanimous approval of the

member nations in order to pass a piece of legislation which could

affect the "national interest" of one or more members. The Single

European Act of 1985, the only amendment to the Treaty of Rome,

removed this obstacle by imposing a system of majority voting on

5

1 1

member states.

As the White Paper expresses it, "the completion of the

Internal Market will be achieved when the Community has done away

with physical, technical and fiscal barriers among the Member

States." The physical barriers refer to delays at customs posts

including passport controls, health checks, and shipping paperwork.

Technical barriers refer to divergent product specifications and

safety standards among nations, making it impossible for a producer

to export the same model of a product to all member nations.

Fiscal barriers include the lack of an accepted common currency and

wide variations in excise tax policies among nations. In brief, it

is the hope of the EEC that removal of these non-tariff barriers

will create an even playing field for trade in goods and services.

The Cecchini Report

A 1988 EEC publication entitled The European Challenge:

1992 is the first systematic attempt at assessing the effects the

removal of trade barriers might have on the Community. The report,

authored by Paolo Cecchini, Special Advisor to the Commission of

the European Communities, details the costs of European "non-union"

in terms of the above-mentioned physical, technical, and fiscal

barriers. Cecchini goes on to make micro- and macro-economic

estimates of the gains to be afforded by 1992.

The microeconomic approach assesses the impact of

removing non-tariff barriers in terms of which individual actors

will benefit.

Highlights of the 1992 picture include a susbstantial gain for consumers ('consumer surplus') as prices drop and product choice and quality increase under the impact of open competition. Producers face a more mixed outlook. In the short term, profits

( p a r t i c u l a r l y t h o s e r e s u l t i n g f rom m o n o p o l y o r p r o t e c t e d p o s i t i o n s ) may be s q u e e z e d . But i n t h e l o n g e r r u n , b u s i n e s s a s a w h o l e i s e x p e c t e d t o r e s p o n d t o t h e new c o m p e t e t i v e c l i m a t e by m a k i n g v a r i o u s a d j u s t m e n t s - - e g . s c a l i n g up p r o d u c t i o n ( ' e c o n o m i e s o f s c a l e of p r o d u c t i o n ' ) , g a i n i n g e x p e r i e n c e o f how t o p r o d u c e m o s t e f f i c i e n t l y ( ' e c o n o m i e s of s c a l e of l e a r n i n g ' o r ' l e a r n i n g c u r v e e f f e c t ' ) , e l i m i n a t i n g managemen t i n n e f f i c i e n c i e s ( ' X - i n e f f i c i e n c y ' t o t h e e c o n o m i s t ) , and by improved c a p a c i t y t o i n n o v a t e . G a i n s f rom t h e s e and o t h e r a d j u s t m e n t s , when n e t t e d o u t , l e a d t o an i n c r e a s e i n t h e Communi ty ' s ' n e t economic w e l f a r e . ' 1 ^

Table 1 i l l u s t r a t e s t h e s e g a i n s i n t e rms of Gross Domest ic P roduc t

(GDP) and European Currency U n i t s (ECU).

Tab le 1. P o t e n t i a l g a i n s i n economic w e l f a r e f o r t h e EC r e s u l t i n g from c o m p l e t i o n of t h e i n t e r n a l marke t

B i l l i o n s ECU % of GDP

Step I Gains from removal of barriers affecting trade 8-9 Step 2 Gains from removal of barriers affecting overall production 57-71

Gains from removing barriers (sub-total) 65-80

0.2-0.3

2.0-2.4

2.2-2.7

Step 3 Gains from exploiting economies of scale more fully 61 Step 4 Gains from intensified competition reducing business inefficiencies and monopoly profits 46

Gains from market integration 62*-107

2.1

1.6

2.1*-3.7

Total - for 7 Member States at 1985 prices - for 12 Member States at 1988 prices - mid-point of above

127-187 174-258 216

4.3-6.4 4.3-6.4 5.3

* This alternative estimate for the sum of steps 3 and 4 cannot be broken down between the two steps. Source: The European Challenge: 1992 by Paolo Cecchini, p.84. Notes: The ranges for certain lines represent the results of using alternative sources of information and methodologies. The seven Member States (Germany, France, Italy, United Kingdom, Benelux) account for 88% of the GDP of the EC twelve. Extrapolation of the results in terms of the same share of GDP for the seven and twelve Member States is not likely to over-estimate the total for the twelve. The detailed figures in the table relate only to the seven Member States because the underlying studies mainly covered those countries.

The macro-economic approach l o o k s a t how t h e s u p p l y - s i d e

shock caused by t h e removal of n o n - t a r i f f b a r r i e r s w i l l a f f e c t t h e

Community economy as a whole .

The p r o c e s s i s i n e s s e n c e s i m p l e . I t s t a r t s w i t h t h e l o w e r i n g of p r o d u c t i o n c o s t s and w i t h g a i n s i n p r o d u c t i v i t y w h i c h w i l l r e s u l t f rom EC m a r k e t i n t e g r a t i o n . The e n s u i n g p r i c e r e d u c t i o n s w i l l i n t u r n have an i m p o r t a n t k n o c k - o n e f f e c t on t h e main mechanisms of t h e macro -economy. They w i l l i n c r e a s e p u r c h a s i n g power ; change t h e c o m p e t e t i v e p o s i t o n s of i n d i v i d u a l EC c o u n t r i e s w i t h e a c h o t h e r and of t h e Community w i t h t h e o u t s i d e w o r l d ; t h e y w i l l p r o v i d e t h e b a s i s f o r a d u r a b l e a t t a c k on u n e m p l o y m e n t ; s t i m u l a t e demand y e t r e d u c e i n f l a t i o n ; i n s h o r t , t h e y w i l l p r o v i d e a n e n t i r e l y new o u t l o o k — a n d t r a j e c t o r y — f o r economic g r o w t h b e t w e e n now and t h e end of t h e c e n t u r y . 1 4

Table 2 d e t a i l s t h e p r o j e c t e d macroeconomic g a i n s a s p roduced from

t h e HERMES and INTERLINK economic mode l s .

Table 2 . Macroeconomic consequences of EC marke t i n t e g r a t i o n fo r t h e Community i n t h e medium t e rm

Customs P u b l i c F i n a n c i a l S u p p l y - T o t a l f o r m a l - p r o c u r e - s e r v i c e s s i d e Average S p r e a d i t i e s ment e f f e c t s 1 v a l u e

R e l a t i v e changes (%) Gross Domes t i c P r o d u c t 0 .4 Consumer P r i c e s - 1 . 0

Absolute changes Employment ( m i l l i o n s ) B u d g e t a r y b a l a n c e

(% p o i n t of GDP) E x t e r n a l b a l a n c e

(% p o i n t of GDP)

Source: The European Challenge, 1992 by Paolo Cecchini, p.98. Source of figures: HERMES (EC Commission and national teams) and INTERLINK (OECD) economic

Notes: '• 1 Based on a scenario which includes the supply-side effects estimated by the consultants, economies of scale in manufacturing industry and competition effects (monopoly rent, X-inefficiency). 2 The INTERLINK simulations have been carried out by the Commission departments. The OECD takes no responsibility for the use of the model.

0 . 5 - 1 . 4

1 . 5 - 1 . 4

2 . 1 - 2 . 3

4 . 5 - 6 . 1

( 3 . 2 - 5 . 7 ) ( - 4 . 5 — 7 . 7 )

2 0 0

0 . 2

0 . 2

350

0 . 3

0 . 1

400

1 . 1

0 . 3

8 5 0

0 . 6

0 . 4

1800

2 . 2

1 . 0

(1300-2300)

( 1 . 5 - 3 . 0 )

( 0 . 7 - 1 . 3 )

8

Fortress Europe ?

Representatives and citizens of the United States and

Japan have expressed dismay over the prospect of a united Europe.

As the remaining barriers to the free flow of goods, capital, and

people are eliminated, the member-states will have to agree on a

single external trade policy. The U.S. and Japan worry that it

will be a protectionist approach. This fear was strong enough to

prompt the Reagan administration to introduce a US Trade Bill to

counter the effects of the single internal market.

American and Japanese companies are already gearing up

for battle by attempting to position themselves in EEC nations in

case the gates do close. Direct investment in the Common Market

from the U.S., Japan, and non-EEC European countries has ballooned

-i n

since the mid-1980s. Rushing to become an insider, however,

will not automatically guarantee access to the new markets that

1992 will create. These include cross-border sales of services and

information — insurance, mutual funds, mortgages, TV programs—and

access to heretofore protected industries, such as telecommmuni-

cations.18

But regardless, American and Japanese companies are

expected to find tougher competition from a united Europe. Some

analysts predict that U.S. multinationals will have to pull out of

some product lines to sharpen their European competetive focus. "

For Japan, tough quotas imposed on autos by Spain, France, and

Italy will probably be abandoned by 1992, but a formal EEC-wide

quota of one million vehicles a year to go into effect when

individual quotas are lifted. At any rate, it is generally

feared that the completion of the EEC internal market will be

harmful to the U.S. and Japan.

Experimenting with 1992

"Epistemological" Purpose

The Cecchini report, since it only deals with the

potential gains of the EEC, does not address such issues and fears

of the United States and Japan as noted above, nor does it

incorporate politics into the economic picture. Obviously the EEC

does not exist in and of itself, but rather in the midst of

regional and global systems. By utilizing the technique of

computer simulation in the form of the GLOBUS world model, this

paper attempts to discern some possible international economic and

political effects the completion of the EEC internal market may

have.

Computer Simulation and a Brief History of Global Modeling

Simulation, as a social science technique, refers to the

"construction and manipulation of an operating model, that model

being a physical or symbolic representation of all or some aspects

of a socxal or psychological process." The use of computerized

simulation techniques in the study of international relations is

now three decades old. Early efforts, which combined computerized

elements with the behavior of human players, were undertaken by

Harold Guetzkow (Inter-Nation Simulation) in 1959 and Paul Smoker

(International Processes Simulation) in 1967. 2

All-computer models came into prominence under the

auspices of the Club of Rome in the 1970s.

These were genuine world models, interactive well above the level of nation-states, dealing mainly with population, food, energy, raw materials, and the deterioration of the environment, with time horizons extending through to the middle of the next century. They paid scant attention to price effects and they rigorously excluded politics. °

10

The m o s t n o t e w o r t h y of t h e m o d e l s g e n e r a t e d by t h e C l u b of Rome was

World 3, a u t h o r e d by J .W. F o r r e s t e r , D e n n i s a n d D o n e l l a Meadows a t

MIT. The b o o k Limits to Growth, w h i c h d e t a i l e d t h e i n f e r e n c e s made

f rom t h i s m o d e l , r e c e i v e d a g r e a t d e a l o f p u b l i c i t y a s i t p r e d i c t e d

a w o r l d w i d e c a t a s t r o p h e b e t w e e n 2030 a n d 2 0 4 0 .

The GLOBUS Model

The GLOBUS w o r l d m o d e l ( g e n e r a t i n g L o n g - t e r m O u t p u t s By

U s i n g S i m u l a t i o n ) was d e v e l o p e d b e t w e e n 1977 a n d 1987 a t t h e

W i s s e n s c h a f t s z e n t r u m i n B e r l i n u n d e r t h e d i r e c t i o n of S t u a r t

B r e m e r . The m o d e l i n c o r p o r a t e s many i m p o r t a n t m a c r o p o l i t i c a l a n d

m a c r o e c o n o m i c r e a l t i o n s h i p s w i t h i n a n d among 25 p r o m i n i e n t

c o n t e m p o r a r y n a t i o n s , d i s t r i b u t e d a c r o s s 4 r e g i o n s , ( l i s t e d i n

T a b l e 3) p l u s a r e s t - o f - w o r l d e n t i t y .

I t i s designed and used t o explore p o s s i b l e s o l u t i o n s t o l o n g - t e r m g l o b a l p r o b l e m s . The fundamenta l under ly ing assumptions a re t h a t t o unders tand cu r r en t and fu tu r e g l o b a l problems i t i s v i t a l t o see t h a t economics and p o l i t i c s cannot be d ivorced from one a n o t h e r , as t h e y u s u a l l y a r e i n t h e d i s c i p l i n a r y s t r u c t u r e of t h e s o c i a l s c i e n c e s , and t h a t n a t i o n s do not e x i s t i n s p l e n d i d i s o l a t i o n from one a n o t h e r , a b l e t o i n d e p e n d e n t l y d e t e r m i n e t h e i r own d e s t i n i e s . 4

T h i s i n t e r m i n g l i n g o f p o l i t i c s a n d e c o n o m i c s makes GLOBUS an

a p p r o p r i a t e medium f o r i n v e s t i g a t i n g w h a t r e v e r b e r a t i o n s t h e

c o m p l e t i o n o f t h e EEC m a r k e t m i g h t h a v e i n t h e i n t e r n a t i o n a l

s y s t e m .

The GLOBUS model consists of six submodels: Demographic,

Domestic Economic, Domestic Political, Government Budget,

International Economic, and International Political. The

interconnection among the model parts is illustrated in Figure 1.

The Demographic model exogenously sets growth rates for total

1 1

Table 3 . GLOBUS N a t i o n s and A s s o c i a t e d Regions

Nat ion Region Nat ion Region

Argentina Brazil Canada China Czechoslovakia Egypt West Germany France East Germany Iran India Indonesia Italy

South South West South East South West (Vest East OPEC South OPEC OPEC

Japan Mexico Nigeria Pakistan Poland South Africa Saudi Arabia Turkey United Kingdom United States Soviet Union Venezuela

West South OPEC South East South OPEC South West West East OPEC

Source: The Globus Model by S t u a r t A. Bremer, p . 3 5 .

Figure 1. Interconnections between GLOBUS Model Parts

Demographic Conditions

Domestic ~ Economic ^^

Conditions

International "^ Economic

Relations

Domestic Political ^~ Condtions

Government Budget

International "^ Political

Relations

S o u r c e : The Globus Model by S t u a r t Bremer, p . 1 7 .

population, labor force, and urban population. The Domestic

Economic model portrays national economies as producing, consuming,

and exchanging six goods: agricultural goods, primary energy, raw

materials, manufactures, armaments, and services. The Domestic

Political model focuses on how support for and opposition to

government varies in response to changing political economic

behavior. The engine by which all decisions concerning spending

and taxing are made is provided by the Government Budget model.

12

The p r o c e s s e s by which b i l a t e r a l t r a d e i s c a r r i e d ou t a r e mimicked

by t h e I n t e r n a t i o n a l Economic model . The I n t e r n a t i o n a l P o l i t i c a l

model f o c u s e s on t h e r e l a t i o n s h i p s between b i l a t e r a l f lows of

c o o p e r a t i o n and h o s t i l i t y .

The GLOBUS model , i n i t s t e c h n i c a l m a n i f e s t a t i o n ,

c o n s i s t s of a sys tem of d i f f e r e n t i a l e q u a t i o n s , i n i t i a l i z e d f o r t h e

y e a r 1970 w i t h e m p i r i c a l l y - d e r i v e d i n i t i a l v a l u e s and

t h e o r e t i c a l l y - d e r i v e d p a r a m e t e r s . The s i m u l a t i o n i s t h e n s e t i n

mot ion t h r o u g h t h e y e a r 2010. The v e r s i o n of GLOBUS used i n t h e

p r e p a r a t i o n of t h i s p a p e r was MICROGLOBUS ( v e r s i o n Sigma) , which

runs on t h e IBM-PC.

I n t e r n a t i o n a l Economic Model

The work ings of t h e I n t e r n a t i o n a l Economic Model a r e

e s p e c i a l l y r e l e v a n t t o t h e e x e c u t i o n of t h e EEC s c e n a r i o , and a r e

t h u s d i s c u s s e d h e r e i n d e t a i l . The a u t h o r s of t h e GLOBUS model

have chosen a demand-d r iven , g r o s s - b i l a t e r a l d e s i g n f o r

i n t e r n a t i o n a l t r a d e . The l o g i c of a g r o s s b i l a t e r a l t r a d e model

p o r t r a y s t r a d e as a t w o - s t e p p r o c e s s .

Being demand d r i v e n , t h e f i r s t s t e p s e t s t o t a l i m p o r t demand i n e a c h economic u n i t (a c o u n t r y o r a r e g i o n ) . Q u i t e commonly, t h e i n d i c a t o r of a g g r e g a t e demand i s some m e a s u r e of i n c o m e , s u c h a s G r o s s N a t i o n a l P r o d u c t . G iven t h e volume of i m p o r t demand f o r a s p e c i f i c c o u n t r y , t h e s e c o n d s t e p i s t o d e c i d e how t h i s t o t a l demand i s t o be s h a r e d o u t among p o t e n t i a l s u p p l i e r s . By u s e of a s h a r e m a t r i x , t h e n , n a t i o n -l e v e l t o t a l demand i s c o n v e r t e d i n t o b i l a t e r a l f l o w s . 2 5

Looking a t s t e p 1, we f i n d t h a t i n most t r a d e mode l s , t h e

t o t a l demand fo r i m p o r t s (M^) i s e x p r e s s e d a s : ° Mi = b e t a * D ^ * p ^ t ^ U )

where beta = a scalar D' = the level of national, aggregate economic activity

13

mu = the responsiveness of national imports to aggregate demand

Pj_* = domestic prices relative to foreign prices tau = the responsiveness of import demand to relative

prices (In the notation used in this paper, i=importer, e=exporter, and s=sector)

In GLOBUS, it is assumed that total import demand does

not adjust instantaneously to changes in the factors which shape

that demand. Thus the above formulation is incorporated into

GLOBUS as desired total import demand (DIMPSi s ) : 2 8

DIMPSi s = constant * DEMDi smui,s (2)

* [(PRCSi/S * DOLRXi/dolrxii)/EE(IMSHRi^e?s * XPRICe>s)]

taui, s

where tau and mu are as in (1) DEMD^ s = aggregate national demand for a commodity PROS' _ * DOLRX'/dolrxi^ = the sectoral price index for

X f o _L X J"

a nation converted to real 1970 U.S. dollars IMSHR^ „ = the share of national imports from another i, e, a

nation (an integral... see equation 6) XPRICe s = the price index of national exports by

commodity

The change in total import demand (IMPS'^ s) is then

taken to be a function of the actual level of import demand, the

annual growth rate in Gross Domestic Product (GDPRAG^), and the

ratio between the desired level of total imports and the actual

level of imports:

IMP S ' i f S = ( I M P S i / S * GDPRAGi) + [ a d j s p d ± * In(DIMPS.j_ s / I M P S i f s ) ] (3 )

where ad j spd^ = t h e mean l a g t i m e of t h e e q u i l i b r i u m - s e e k i n g p r o c e s s

IMPS' „ = an integral which measures the current level of ± r a

import demand as a function of the initial (1970) level and all changes between the initial and current periods

14

These equations are iterated throughout the 40-year run of the

model.

Step 2 involves the determination of trade shares. The

Of]

customary approach to this problem is a basic Armington equation:0"

Mie/M± = hiesi^mai * (Pie/Pi*)~

sigmai (4)

where M^e/Mj_ = the share of total imports given to an exporter

bj_si<^mai = the trade share in the initial period l e J-

Pj_e/Pj_* = relative price

sigma' = the elasticity of substitution between any two

trade partners

Again, GLOBUS uses this formulation to express desired

import shares (DIMSH^ e s ) : 3 1

DIMSHRi>e?s = cimshrife^s * WPRICES * (XPRICe^S/PREFER±^e)signup (5)

where cimshr' , 0 = the trade share in 1970

WPRICES = the reciprocal of the aggregate world trade

price PREFERj_ e = a trade partner preference term which takes

into account the level of cooperation with an exporter (from the International Political Model) and that nation's export capacity

Again, the change in import shares (IMSHR'^ e s) is used

as an adjustment mechanism to represent the continual movement of

09 actual shares around changing desired shares: I M S H R ' i / e / S = t r a d j i * ( D I M S H ^ ^ g - I M S H f t i / e # s ) (6 )

where tradj^ = the speed of adjustment

IMSHRj_ e s = an integral which measure the current import

share as a function of the initial share (1970) and all changes between the initial and current periods

Together these two steps provide the central mechanisms

of the International Economic Model. In addition to this

15

mechanism, several peripheral functions are performed within the

International Economic Model. These include: foreign aid flows,

trade accounts, capital accounts, trade indicators, balance of

payments adjustments, and exchange rates.

Experimental Design

The EEC is not explicitly modeled in GLOBUS; thus any

experiments involving the EEC must be conducted with the individual

nations that comprise it. In addition, only four of the twelve

member-states are represented (United Kingdom, France, West

Germany, and Italy), as part of the West region. However these

four nations account for 79% of the GDP of the EEC twelve. Thus

extrapolation of results should not distort the picture that would

be generated were all twelve nations represented in GLOBUS. In

fact, Cecchini's analysis, as stated in the note to Table 1, only

covers seven nations (the above four plus the Benelux countries) ,

but generalizes to the EEC as a whole.

Additionally, the non-tariff barriers which are the

target of the White Paper's directives are not explicitly modeled

in GLOBUS. The model's macro-structure does not allow for such

specialized effects. Therefore it is necessary to think of the

dismantling of non-tariff barriers from a different angle. The

assumption is thus made that the removal of these barriers can be

accomplished in full by 1992, so as to make "complete free trade"

the condition to be modeled.

Pollins and Brecke offer an example of how free trade can

be modeled with GLOBUS in their chapter on the International

Economic model. The scenario described therein entails the

granting of preferential tariffs to the South nations by the IVest

16

•3 -3

nations on the order of a 20 percentage-point reduction. Because

the model is in equilibrium in the initial 1970 period, the trade

share equations "embody" many factors including the level of

protection. The reduction of protectionism is thus implemented by

reducing the trade prices for the appropriate country-pairs by 20%. In other words, as a West group importer surveys the prices offered by all exporters in the system, the prices they see from the South group exporters will be 20% lower...than in the reference run. All other parameters and relationships in the model are identical in the two runs. 4

Thus "freer" trade is modeled by a reduction in the level

of protectionism. In order to model free trade in the EEC, it is

necessary to find the "particular" percentage-point reduction in

trade prices that each member must grant every other member to

sufficiently remove the non-tariff barriers. Since it is difficult

to compute a precise tariff equivalent of non-tariff barriers, and

since no publications could be found which attempted to measure

this, the "particular" percentage point reduction must be based on

other factors or perhaps on effects to be achieved.

As a test run, a 20 percentage-point reduction in the

trade prices of the appropriate country-pairs at time 1993 was

chosen. This turned out to be an acceptable choice based on a

resultant increase in EEC Gross Domestic Product of 5.5% by 2003.

This figure falls into the high end of the total spread of GDP

increase for the medium term as calculated by Cecchini (Table 2).

The decision was made here to stick to the 20% figure for the sake

of manageability, thus sacrificing some rigor. A more systematic

analysis would "sample" results from varying percentage-point

reductions (say 10%, 30% and 40%). However experience in working

with GLOBUS led to the conclusion that varying the percentage

17

reduction in protection would primarily alter the magnitude of the

resulting behavior, and only slightly, if at all, the resulting

behavior pattern.

Presentation of Results

Framework of Analysis

The term "reference run" will be used here to refer to

the results generated by executing the GLOBUS model in its raw

form, with no adjustments to parameters or equations. The term

"EEC free trade run" will be used to refer to the results generated

by lowering XPRIC (see equation 2) by 20% for the appropriate

country-pairs, with all other model parts the same as in the

reference run.

Brian Pollins outlines a framework for dealing with the

effects of protection, and this is the structure from which the

results of this experiment will be analyzed. The framework can be

summarily outlined as follows:

1. Trade Flow Effects - level of imports and exports - direction of trade - composition of imports and exports - exchange rate implications of changing flows

2. Growth and Welfare Effects - changes in terms of trade - changes in market share

3. International Diplomatic, Political Effects - changes in patterns of conflict and cooperation - reciprocal action-reaction dynamics

Trade Flow Effects

The EEC free trade run generates a higher volume of

imports and exports at the world level (where exports = imports)

than in the reference run. The simulated data show a steady

18

increase in overall trade after 1993: increases over the reference

run of 9.5% at 19*8, 10.5% at 2003, and 11.7% at 2008. Breaking

this observation down to a regional level (Table 4) we can see that

most of this increase is due to an increase in imports and exports

by the West region. The West displays sharp and constantly

increasing levels of imports and exports beginning in 1993. The

effects of the EEC internal price reduction are felt in the rest of

the world's nations as well. Initially East, South, and OPEC

nations experience small decreases in exports and increases in

imports. But there is only a temporary decline in these regions'

trade balances; the longer-term trend shows modest increases in

exports and decreases in imports on the part of the non-Western

nations.

Table 4. Percentage changes from the reference run in regional exports and imports effected by the EEC free trade run

EXPORTS

Regions

West

East

South

OPEC

IMPORTS

Regions

West

East

South

OPEC

In order to address the fears of the United States and

19

1993

3.8

-0.4

-0.5

-0.3

1998

12.9

-2.7

1.3

-0.8

2003

13.8

1.1

2.8

0.4

2008

14.8

4.1

4.0

2.5

1993

3.5

0.6

1.7

1.1

1998

19.3

-2.0

-6.0

-1.5

2003

21.5

-6.1

-7.0

-5.0

2008

22.8

-6.7

-6.5

-5.9

Japan that EEC market integration will harm their international

trade, it is necessary to look at thw West region on a country-by-

country basis. Figures 2 - 8 graphically show the percentage

changes from the reference run in imports and exports effected

under the EEC free trade run for the 7 West nations. Since the

price reductions are taking place in the EEC nations only, it is

not surprising to find that the United States, Canada, and Japan

behave in much the same fashion as the non-Western regions: an

initial increase in imports/ decrease in exports followed by

increses in exports/ decreases in imports, although overall still

less than in the reference run. This behavior primarily occurs

because the 4 EEC nations import from and export to each other

first (because of lower prices), leaving less left over for the

other nations of the world. Thus from this nation-level approach,

it is easy to see that the majority of the increase in world trade

is due to the importing and exporting practices of the EEC

nations. All 4 nations show significant increases on both counts,

as much as 99% in the case of French imports in 2009 (Figure 6).

20

Figure 2 . Change i n U.S. e x p o r t s and imports e f f e c t e d by t h e EEC Free Trade Run

<*> - 6

usa-exp usa-imp

1990 2000 1

2010 2020 Year

Figure 3 Change in Canada exports and imports effected by the EEC Free Trade Run

Ru

n

• •

1

0) 0 " 0

a 0) M <D - 2 -

A - 4 " •P

8 • 14-1 - 6

& . 5 - 8 -o dp

- i o H

- M - M \ — r

r

rfO-cT ™*

• • i

c a n - e x p

c a n - i m p

1

1990 2000 2010 2020 Year

21

Figure 4. Change in Japan exports and imports effected by the EEC Free Trade Run

10

a Pi

<D O G 0> u 0>

>H 0>

s u <D Cn a n) si o

-10 -

-20

-Q j p n - e x p - • j p n - i m p

1990 2000 2010 Year

2020

Figure 5. Change i n United Kingdom e x p o r t s and imports e f f e c t e d by t h e EEC Free Trade Run

0) o C d) M 0)

>U 0)

50

g 3 40

30 "

20 " 8 M

<D

a * 10 o

Q u k g - e x p

• ukg- imp

1990 2000 Year

2010 2020

22

Figure 6. Change in France exports and imports effected by the EEC Free Trade Run

c 81

0 a ID M 0)

4-1 d)

0 XI

g 0 M

4-1

n) X! n <*>

LOO "

80 "

60 "

40 "

20 "

0 "

•"P

i

f rn-exp

frn-imp

1990 2000 2010 2020 Year

Figure 7. Change in West Germany exports and imports effected by the EEC Free Trade Run

80

a ei

8 60

a <u M <D

4-1

§ u

4-1

a; tn C n)

XI O

dP

40 "

20

1990 2000 2010

f rg-e:-:p

f r g - i m p

2020 Year

23

Figure 8. Change in Italy exports and imports effected by the EEC Free Trade Run

80

c

8 60

a <D U M-l

40 1 e o u

<u o tn c 20 £ u dp

ita-exp

ita-imp

1990 2000 2010 2020 Year

The differences observed between the reference run and

the EEC free trade run in real interregional flows of imports

(Table 5) show that trade becomes decidedly focused on the (Vest by

the year 2003. All regions export more to West nations and West

nations export more to all other regions. Additionally the flow of

imports to non-iVest regions from non-!Vest regions uniformly

declines. A weak inference can be made via analogical reasoning

that within the IVest region, most of this focusing of trade will be

on the EEC nations, and that the U.S., Canada, and Japan exhibit

behavior similar to that of the non-Western regions (This

analogical reasoning with the above discussion of imports and

exports was not tested).

24

Table 5. Percentage changes from the reference run in real inter-regional flows of imports (Year 2003)

EXPORTER

West

East

South

OPEC

Rest-of-Wo eld

West

19.1

21.7

0.3

3.3

22.2

IMPORTER East

23.3

-15.6

-18.2

-12.1

-10.6

South

2.8

-14.5

-15.1

-16.5

-8.9

OPEC

1.0

-11.8

-12.8

-11.5

-6.6

ROW

23.6

-12.5

-14.8

-14.6

-9.4

The increase in world trade can also be broken down into

its effects on the six sectoral markets of GLOBUS. The size of the

service sector shows the largest increase over the reference run at

15.3%. Increases are also observed in the manufactures sector

(12.1%) and the agricultural goods sector (3.6%). Slight decreases

occur in the armaments sector (-1.0%), raw materials sector

(-0.9%), and the primary energy sector (-0.5%). All figures are

observed at the year 2003. Looking at the service and manufactures

sectors for each nation, all nations in non-West regions exhibit

variant behavior which would need to be dealt with on a case by

case basis. But looking at the nations in the West region, it is

easy to see that the EEC nations primarily exhibit large increases

in exports and imports of services and manufactures, while the non-

EEC West nations show small decreases or no change in both sectors

(Figures 9 and 10). This leads to the inference that the large

increase in the size of the service and manufactures markets is due

primarily to the EEC nations trading these goods amongst themselves

at the expense of the other West nations.

25

Figure 9. Change in sectoral exports effected by the EEC Free Trade Run—West (2003)

50

r! 3 a a) o

u <n 4-1 4) a 8 0 M m d) l-n a m 43 O

40 "

' 30 "

. 20 "

• 10 -

0 "

-10

USA CAN UKG FRN FRG ITA JPN

Countries

Figure 10. Change in sectoral imports effected by the EEC Free Trade Run—West (2003)

-20 USA CAN UKG FRN FRG

Countries

ITA JPN

Exchange rates simulated from 1993 - 2010 add little new

information; they simply reinforce what has already been inferred. *

26

The behavior patterns show strong increases in the value of EEC

currencies against the U.S. dollar; all other nations exhibit

varying degrees of decline against the dollar. One can only

speculate that were the values of currencies measured against some

neutral standard rather than the U.S. dollar that the dollar itself

would show explicit signs of declining value, rather than the

constant value of 1.0 as portrayed in GLOBUS.

Growth and Welfare Effects

GLOBUS computes two terms of trade indicators during the

course of a model run: net barter terms of trade (the ratio of the

export price index to the import price index) and the purchasing

power of exports (net barter terms of trade multiplied by an export

quantum index). Table 6 shows national rankings for the year 2003

under both the reference run and the EEC free trade run. As the

table shows, the United Kingdom leaps from fifth to first under the

EEC free trade run (a 19.7% increase in net barter terms of trade).

Italy and West Germany also climb significantly in the rankings;

France drops a notch despite the fact that it enjoys a 3.1%

increase, due in part to the magnitude of Italy's leap (21.4%) and

in part to the fact that the United States and Japan were

originally much farther ahead. The EEC's rise comes at the expense

of all the world's nations (not just the non-EEC West nations),

however only the top nine positions exhibit serious movements in

rank.

27

Table 6. National rankings according to net barter terms of trade for the 25 GLOBUS nations (plus ROW) under the Reference Run and the EEC Free Trade Run

Reference Run 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

Soviet Union Saudi Arabia Japan United States United Kingdom West Germany France Re st-of-World Italy Canada Egypt Argentina Iran Czechoslovakia China Nigeria India Brazil Turkey South Africa Venezuela Mexico Poland East Germany Pakistan Indonesia

EEC 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

Free Trade Run United Kingdom Soviet Union Saudi Arabia West Germany Italy United States Japan France Re st-of-World Canada Argentina Egypt Iran Czechoslovakia China Nigeria India Brazil Turkey South Africa Poland Venezuela Mexico Indonesia Pakistan East Germany

Similar effects are witnessed in observing the purchasing

power of exports. All four EEC nations enjoy substantial increases

in purchasing power in the EEC free trade run: United Kingdom--45%,

France--49%, West Germany—54%, and Italy--53%. This increase is

complemented by decreases in the purchasing power of the non-EEC

nations, with three exceptions: Argentina, Saudi Arabia, and the

Rest-of-World entity. This seeming anomaly, that one South nation,

one OPEC nation, and the ROW entity should enjoy increases in

purchasing power when all other non-EEC nations do not, can be

explained by noting what they all have in common. All three of

these nations exhibit substantial increases in exports in the

enlarged service and manufactures sectors; they share this trait

28

with many other nations (Figure 11). But what sets these three

apart from the rest of the GLOBUS nations is the fact that they

exhibit slight increases in imports in these sectors (Figure 12)

Figure 11. Change in sectoral exp the EEC Free Trade Run

30

a

-10

Manufactures

£3 Services

or ts effected by —Assorted Nations (2003)

BRA ARG SAF TUR EGY IND NIG SAU ROW

Countries

Figure 12. Change in sectoral imp the EEC Free Trade Run

10

a Pi

<u o a <i> M 0)

<u d) P5

B o M

<H

<D Cn G (0

J3 O

-20

Manufactures

0 Services

or ts effected by —Assorted Nations (2003)

i i i i i i i i

BRA ARG SAF TUR EGY IND NIG SAU ROW

Countries

29

Hence their export quantum indices serve to counteract

the effects of declining net barter terms of trade, whereas it

serves to reinforce the effects in other nations. Argentina enjoys

the smallest increase (0.7%, versus 1.5% for Saudi Arabia and 4.0%

for the Rest-of-World entity) since it exhibits a decrease in

service imports along with its increase in manufactures imports.

The other two show gains in both sectors.

Figures 13 and 14 present the changes in the regional

shares EEC's and the "non-member West"'s import market for

Figure 13. Regional Shares in th e EEC Import Market for Manufactures ( 2003)

EEC FREE TRADE RUN

REFERENCE RUN

OPEC 0.1%

manufactures at the year 2003, respectively. Figure 13 shows that

the EEC gains a 1.8 percentage point share in its own import market

for manufactures over the reference run. This gain comes primarily

at the expense of the "non-member West" nations (-0.8%) and the ROW

entity (-0.7%), and secondarily at the expense of the South

(-0.3%). Figure 14 shows the EEC gaining a full 4 percentage point

share in the "non-member West" import market for manufactures,

30

primarily at the expense of the U.S., Canada, and Japan (-2.8%).

Additionally the ROW entity suffers a -1.0% loss, with the South

incurring a small -0.2% loss. Although these changes are small

they do reinforce the notion that the focus of trade after 1993 is

shifting toward the EEC.

Figure 14. Regional Shares in the Import Market for Maun

"Non-Member West" factures (2003)

EEC FREE TRADE RUN

OPEC. 0.4%

East 1.8%

REFERENCE RUN

International Political Effects

Under the EEC free trade run, the world as a whole is

both slightly less hostile and slightly less cooperative than in

the reference. At the point of greatest variation, cooperation

declines by -0.7% (2000) and hostility declines by -0.9% (2003).

The model is unable to detect discernable patterns of cooperation

and hostility at the regional level, as it is with trade. At the

national level, the pattern for a great majority of nations closely

mimicks that of the world as a whole. One might expect that the

level of hostility sent to EEC nations from non-members would

increase with the EEC free trade run, but the simulation does not

31

bear this out. The most interesting behavior is exhibited by the

EEC nations in relations with each other, as the results are

counter-intuitive--showing an initial increase in hostility and

decrease in cooperation. A brief discussion of the International

Political Model and the role of bilateral trade in it will make it

easier to understand this behavior. The political behavior between

the United Kingdom and France will then be examined as an

illustration.

The International Political Model attempts to replicate

the flow of cooperative and hostile behavior among nations. The

model portrays cooperation and conflict as two separate dimensions

of foreign behavior, as opposed to a conflict-cooperation

continuum. Levels of cooperation and hostility are measured as

interaction indices, consistent with Edward Azar's Conflict and

Eeace Data Bank (COPDAB), which serves as the basis for the model's

initialization. The model is primarily an action-reaction system

with the "black box" partially opened to allow for some forms of

goal-seeking activity (Figure 15). Crises and wars are not taken

into consideration since these situations can vary from day to day,

Behavior Received

Figure 15. Conceptual framework driving the International Political Model

Context

1 Reactivity Policy

Institutionalized Predisposition

Desired Behavior

Bureaucratic Inertia

Behavior Sent

32

which does not fit the focus of a long-term, macro-model like

GLOBUS.36

In the International Political Model, bilateral trade

ties affect the flows of cooperation and hostility. The share each

nation holds in each other's trade is incorporated as a

determinant in each nation's reactivity to flows of cooperative

behavior. Specifically the larger the share which one nation holds

in another's trade, the more cooperative will the second nation be

"37 • . . .

toward the first. Bilateral trade ties affect international

hostility as well as cooperation; a trade imbalance term is

incorporated in each nation's reactivity to flows of hostile

behavior. If a nation is carrying an overall trade defecit with a

partner, it will increase its flow of hostile actions toward that

nation.

The intutive approach to the notion of increased intra-

EEC trade reads as follows. The lowering of trade prices with

these nations is a cooperative act--a significant concession. The

resulting increase in trade among EEC nations would be expected to

promote further cooperation, which in turn would lead to more

trade...a positive feedback loop. But in reality this would cause

the system to spiral out of control, without ever again approaching

equilibrium--hence, the trade imbalance mechanism in GLOBUS serves

as a counter-balance to this feedback loop.

33

Figure 16. Levels of cooperation sent from the U.K. to France under two different runs

G 0 •H •P 0 Hj U 0) •P G H

V > •H 4J (0 n a; a o o o

180

170

160

150 "

140

130

120 19

-a Coop Sent (EEC) -• Coop Sent (REF)

80 1990 2000 2010 2020

Year

F i g u r e 1 7 . L e v e l s o f c o o p e r a t i o n s e n t from F r a n c e t o t h e U.K. u n d e r two d i f f e r e n t r u n s

0) v a H

a o •H •U O m M 0)

a

> •H •U 10 u V a o o o

200

190 -\

180

170 "

160 "

150

140 "

130

-G Coop Sen t (EEC)

- • Coop Sent (REF)

1980 1990 2000 2010 2020

Year

34

Figure 18. Levels of hostility sent from the U.K. to France under two different runs

« XS a H

a o •ri +J o m u <u a H

•H 4J to 0 a

120 "

no -

100 -

90 "

80 "

70 -

60 ~

50 "

Host Sent

Host Sent

1 '

(EEC)

(REF) f~*~*^

1 1 1 '

1980 1990 2000

Year

2010 2020

'ig-

•d a M a o •H •P O

u (1)

e

<D

•H 4J 03

0 SB

are 19

220

200

180

160

140

120

100

80

L e v e l s of h o s t i l i t y s e n t from France t o t h e U.K. under two d i f f e r e n t runs

1980

-o Host Sen t (EEC) -• Host Sen t (REF)

1

1990 2000

Year

1

2010 2020

35

Figures 16 - 19 show the levels of cooperation and

hostility the U.K. and France send to each other in both the EEC

free trade and reference runs. The initial decrease in the flows

of cooperation relative to the reference run is a third order

effect of the reduction in trade prices. The trade price term is a

determinant of a nation's expenditure for imports from another

nation. In the first year after the price reduction these

expenditure levels are significantly reduced because of this.

National expenditure for imports constitutes the numerator of the

trade share variable; hence the levels of each nation's trade

shares decline (see Figures 20 and 21). Finally the decrease in

trade shares causes a decrease in the levels of cooperation.

Figure 20. U.K. share in France trade in two different runs

U a!

CO

<D •0 (0 U H

7 "

Share of UK in FR (EEC)

Share of UK in Fr (REF)

1990 2000 1

2010 2020

Year

After the initial downward surge, each nation's national

expenditure for imports begins to recover as each nation's exporter

capacity increases to take advantage of the higher paced market.

But the subsequent increase in trade shares is not sufficient to *

36

Figure 21. France share in U.K. trade in two different runs

7.2

M X! to

7.0 "

6.8 "

6.6 " V m u H 6.4

6.2 "

6.0

— Share of Fr in UK (EEC)

-• Share of Fr in UK (REF)

1990 1

2000 I

2010 2020

Year

allow nations to return to previous levels of cooperation, since

reactivity acts as a counter-balance. Finally flows of

cooperative behavior resume the momentum pattern of oscillation

that is characteristic of the reference run, but at a lower level.

The initial increase in the flows of hostile behavior

between France and Britain can be understood by examining their

trade imbalances with each other. Figure 22 depicts each nation's

EEC free trade run imbalances plotted against each other,

independent of the reference run. For the sake of clarity, the

reference run trade imbalances can be described by a flat

horizontal line at level 1.

The hostility cycle can be described as follows. It must

be noted that the model's parameters make France much more reactive

to hostility from Britain than vice versa. After 1993, Britain's

trade imbalance term begins to decline relative to the reference

run (i.e. its trade balance with France is suffering), causing that

nation to slightly increase its flow of hostility towards France.

37

Figure 22. Trade imbalances of U.K. and France with each other in the EEC Free Trade Run

0 a n)

$

M

1 "

0 1990

-Q UK imbalance with FR

•• Fr imabalance with UK

T T 2000 2010

Year

2020

France then reacts strongly to the hostility sent by Britain, a

phenomenon which is compounded by its own decreasing trade

imbalance term. The flow of hostility between the two nations

begins to subside as their trade imbalances begin to converge after

1993. A subsequent pattern of oscillation of the two trade

imbalance terms, by giving some regularity to the system enforces a

pattern of slow and steady decline in the flows of hostility

between Britain and France. In the final years of the simulation

run these oscillations in trade imbalances start to spin out of

control, forcing sharp increases in hostility as regularity is

broken. This final observation may or may not be meaningful: the

wild behavior in the final years could just as easily be

interpreted as a peculiarity of the model's behavior rather than of *

38

the two nations being modeled.

Concluding Remarks

A disclaimer is in order at this juncture is in order.

The results of a futuristic simulation such as GLOBUS should not be

considered a tool of prediction. Its purpose is rather to see what

patterned effects some kind of intervention might have on the

momentum of the system, ceteris paribus. Many other intervening

factors may come into play over the course of time to interrupt the

momentum line of behavior. With that it mind, the results of the

EEC simulation run can be portrayed as "what could happen," within

the confines of the global system, as the result of the removal of

non-tariff barriers to trade within the EEC.

First total world trade could increase by as much as

10.5% within 10 years of the completion of the internal market.

Sectorally these increases would be greatest in manufactures and

services. Initially, increases in EEC trade would be detrimental

to the trade balances of the rest of the nation's of the world, but

in the medium- and long-terms these detriments give way to moderate

upward swings in trade balances across the board.

After 1992 trade on the whole should become more focused

on the Community. The increase in this focus is at the expense of

trade among non-EEC nations. As for the U.S. and Japan, they would

on the whole suffer from a more united Europe, but the losses are

not major and are also shouldered by most of the rest of the

world's nations.

Finally the world would become both a less hostile and a

less cooperative one with European union than without. In general

39

this trend is manifested in dyadic level diplomatic dealings in

much the same way as in the world at large. EEC nations, in their

dealings with one another, display counter-intuitive behavior in

flows of cooperation and hostility, but this can be understood by

realizing that increased trade fosters increased hostility as well

as increased cooperation.

Notes

1 Paolo Cecchini, The European Challenge: 1992. Aldershot [U.K.]:

Gower, 1988. p. xix.

2 Anthony J.C. Kerr, The Common Market and How It Works. Oxford:

Permagon Press, 1983. p. 1.

3 Kerr, p. 4 .

4 Kerr, p. 5.

5 Ali M. El-Agraa, The Economics of the European Community.

Oxford: Phillip Allan/St. Martin's, 1985. p. 12.

6 El-Agraa, p. 16.

7 Kerr, p. 7.

8 Kerr, p. 7.

9 "Europe's Internal Market," (survey) Economist. July 9, 1988.

p. 6.

10 "Europe's Internal Market," p. 6.

11 "Europe Gets Ready for 1992," Fortune. February 1, 1988. p. 82.

12 Jacques Perlmans and Peter Robson, "The Aspiriations of the Wite

Paper," Journal of Common Market Studies. Vol. 25, No. 3,

p. 185.

13 Cecchini, p. 72.

14 Cecchini, p. 72.

15 "Outsider's Guide to Europe in 1992," Fortune, October 24, 1988.

p. 121.

16 Richard Bailey, "New Beginning for the Common Market,"

Accountancy. August 1988. p. 82.

17 "Outsider's Guide...", p.121.

18 "Outsider's Guide...", p.122.

19 "Will the New Europe Cut U.S. Giants Down to Size?" Business

Week. December 12, 1988. p. 54.

20 "Europe Gets Ready...", p. 82.

40

21 Richard E. Dawson, "Simulation in the Social Sciences," in

Simulation in Social Science: Readings. Harold Guetzkow,

ed. Englewood Cliffs, NJ: Prentice-Hall, 1962. p. 3.

22 Harold Guetzkow and Joseph J. Valadez, Simulated International

Processes: Theories and Research in Global Modeling.

Beverly Hills, CA: SAGE, p. 335.

23 Karl Deutsch, "GLOBUS—The Rise of a New Field of Political

Science," in The GLOBUS Model: Computer Simulation of

Worldwide Political and Economic Developments. Stuart A.

Bremer, ed. Berlin: Campus Verlag, 1987. p. xi.

24 Stuart A. Bremer, "Introduction," in The GLOBUS Model: Computer

Simulation of Worldwide Political and Economic

Developments, p, 1.

25 Brian Pollins and Peter Brecke, "International Economic

Processes," in The GLOBUS Model: Computer Simulation of

Worldwide Political and Economic Developments., p, 468.

26 Stephen Magee, "Prices, Income, and Foreign Trade," in

International Trade and Finance: Frontiers of Research.

Cambridge: Cambridge Univeristy Press, 1975, p.178.

27 Brian Pollins and Peter Brecke, p. 475.

28 Brian Pollins and Peter Brecke, p. 475.

29 Brian Pollins and Peter Brecke, p. 477.

30 Paul S. Armington, "A Theory of the Demand for Products

Distinguished by the Place of Production," IMF Staff

Papers. Vol. 16, No. 1. p.172

31 Brian Pollins and Peter Brecke, p. 483.

32 Brian Pollins and Peter Brecke, p. 492.

33 Brian Pollins and Peter Brecke, p. 516.

34 Brian Pollins and Peter Brecke, p. 516.

35 Brian Pollins, "Assessing the Political and Economic Effects of

Protection Against Third World Exports," 27th ISA

Convention, Anaheim, CA, 1986. p. 12.

36 Dale Smith, International Political Processes," in The GLOBUS

Model: Computer Simulation of Worldwide Political and

Economic Developments., p. 569.

37 Brian Pollins and Peter Brecke, p. 518.

41