INDIA AND THE EUROPEAN COMMON MARKET

BY MANMOHAN SINGH

A. EUROPEAN INTEGRATION AND UNDERDEVELOPED COUNTRIES

Western Europe is the largest tradmg area in the world and it is also the world’s second most important source of external assistance-both in capital and t e h c a l know-how-to the underdeveloped countries. It is therefore natural that the underdeveloped countries should closely watch the movement towards economic and political integration in Western Europe. If they have followed the progress of this movement with some misgivings it is because of the uncertainty about the hture economic relations of an integrated and therefore much more powerfbl Europe with the rest of the world. Given a sufficient awareness of the needs of the poorer countries on the part of European nations, economic integration in Europe could work to the benefit of all countries-rich and poor. Thus in so far as integration leads to an acceleration of the rate of economic growth in Western Europe; it wdl add to Europe’s capacity to import and also render economic assistance to the under- developed countries. In addition, accelerated growth in Europe d provide the right atmosphere for inducing the industrial countries of Europe to modify their industrial structure so as to provide for an increasing volume of imports of simpler manufactures &om the developing countries llke In&a : the social and economic costs involved in a reallocation of domestic resources in a given country tend to be less keenly felt in a growing economy than in a stagnant one.

If the underdeveloped countries still fear the consequences of Euro- pean integration, it is because faster growth in Europe is not a sufficient guarantee that they would also benefit &om such an arrangement. By now it is a commonplace that in so far as the bulk of exports of the underdeveloped countries consists of food and raw materials, economic growth in the advanced Western countries is unlikely to lead to a sigtllficant rise in the latter’s imports &om the underdeveloped countries (cxcept &om those whch are fortunate enough to export raw materials like oil, the demand for which is expectcd to grow with the growth ofincomes in advanced countries). The reasons for such a development are also well known.2 First, the composition of output in the industrial countries is shifting &om those industries whch have a high content

E 263

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of imported raw materials to those with a smaller import content. In addition, at a higher stage of economic development, the share of services in the national income also tends to rise. The result is that the import demand of the developed countries will rise less fast than the growth of their national income. Secondly, many agricultural com- modities, traditionally exported from the underdeveloped to the developed countries, tend to have a low income elasticity of demand at high income levels, so that faster growth in Europe may fail to have any significant beneficial effect on their consumption and therefore imports. Thirdly, in so far as faster growth in Europe is accompanied by an acceleration in the pace of techmcal progress, there may be an increasing tendency for synthetic substitutes being developed for natural primary raw materials. Thus to the extent that the techcal progress in the developed countries affects their consumption of natural raw materials exported by the underdeveloped countries, faster growth in Europe may well harm the prospects of economic development of the latter: because a bias in techcal progress against natural raw materials is likely to result in sluggish export earnings and a deteriora- tion in the terms of trade of the underdeveloped countries. Unless, therefore, the industrial countries suitably modifjr their industrial structure so as to import more of those manufactured goods in which the underdeveloped countries are likely to have a comparative advan- tage, accelerated growth in Europe is unhkely greatly to benefit the poorer countries, and some of them may suffer in the wake of European integration in so far as the outlook for their exports may become bleaker.

It is generally to be expected that the removal of restrictions on intra-European trade will lead to an improvement in Europe’s balance of payments with the rest of the world. On a static plane, both the ‘trade creating’ and the ‘trade diverting’ effects of a customs union3 d l normally ensure that the demand of European countries for goods from one another wdl rise faster than their demand for goods from the non-member countries. From a dynamic point of view, the faster growth of productivity will further strengthen the competitive ability of European industry in relation to its competitors fiom the outside world-both in the European market itself and also in world markets outside Europe. In so far as some of the activities carried on in countries of the European Economic Community happen also to be the export products of some underdeveloped countries, part of the improvement in the European balance of payments will be at the expense of the poor and underdeveloped countries.

Of course, it may be asserted that since an improvement in Europe’s balance of payments will enhance Europe’s capacity to render aid to

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the underdeveloped countries, any possible loss in export earnings of the latter could be more than compensated by increased economic aid to them. Such a happy result is, however, unhkely to be brought about without a conscious governmental direction of international capital movements. If the triumph of the forces of laissez-faire were to lead to complete fieedom of international capital movements, European investors may find the U.S.A., Canada, Austraha, New Zealand, and South Africa offering more attractive investment opportunities than many underdeveloped countries. As is well known,4 private foreign investment in the post-war years has largely flown only to such underdeveloped countries as offer scope for the development of such raw materials as are needed by the metropolitan countries in growing quantities (for example, oil and mining products). Unfortunately, not all underdeveloped countries are so favourably endowed as to offer private investors &om abroad sufficiently large opportunities. Such difficulties as the lack of a well-developed infia-structure, the relative smallness of the domestic market-offering insufficient opportunities to exploit the economies of large scale, and the differences in want patterns between the developed and underdeveloped countries, tend to make the production for the local market also an unattractive field for private foreign investors. Even if European countries were to control international capital movements with a view to assisting the under- developed countries, it is quite possible that those countries whch have closer political and economic connections with European countries may absorb the entire amount earmarked for aid, whde those under- developed countries which actually suffer in the process of integration in Europe may receive inadequate attention.

When, therefore, countries hke India feel apprehensive, it is not because they are findamentally opposed to the idea of European integration, but because they feel that certain aspects of the arrange- ments for European integration suggest an inadequate appreciation of the needs of developing countries like India for higher export earnings for frnancing their development plans. These fears are not entirely imaginary but are based on India’s experience of the last decade. In the last few years, India has received large amounts of foreign aid fiom the U.S.A. and countries of Western Europe. W e India is grateful for this aid, the policies pursued by some countries in Western Europe, particularly some of the present members of the European Economic Community, have at least partly nullified the beneficial impact of this aid on India’s economy by their continued insistence on imposing stringent import restrictions on some of India’s most important export commodities. Of course, one may take the view that in so far as the common external t a r 8 of the Common Market is

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an arithmetical average of the existing separate taras of the indwidual members, it creates no new barriers for India’s exports.6 Even if one accepts the logic of this conclusion (and it is open to objections) the very facts that the common external tariff of the European Economic Community sets its seal of approval on the existing high tariff barriers to some of India’s principal exports, and also that there is no rigid commitment on the part of European countries to remove their stringent import restrictions on Indian goods, must cause anxiety in India. To see the force of India’s fears and objections, it seems useful to outline briefly the severity of her balance of payments problem.

B. INDIA’S BALANCE OF PAYMENTS PROBLEM

As the following table brings out, India has since 1951 been faced with an increasing gap between her import capacity as measured by the trend in her export earnings and her import needs as determined by the character of her development plans.6 AVERAGE ANNUAL VALUE OF INDIA’S EXPORTS AND IMPORTS

(Million A) First Plan Serorrd Plan Third Plafz (Expected) 195135 1956-60 1961-65

Exports . . .. 453’0 452‘7 5 5 5 ’ 0 Imports . . . ’ 543 ‘0 804.0 952.5

(%J 83’4 56’3 58’3 Export/Iinport Ratio

Source: India’s Official Statistics of foreign trade and the official docunient of India’s

Thanks to a liberal import policy adopted by the United Kingdom, India’s trade deficits with that country have been relatively modest. On the other hand, India’s trade balance with the six present members of the European Economic Community shows persistent and growing deficits. In 1955, India imported goods worth L83 d l i o n fiom the Six, while her exports to them were A43.3 nillion. In 1960, whde India’s imports from them went up to k138 d l i o n , her exports to the Six fell to L36.7 million.

The growing deficits in India’s trade balance have had to be financed first by large-scale withdrawals fiom the foreign exchange reserves accumulated during the Second World War; and secondly by the receipt of massive foreign aid fiom international agencies and fiiendly foreign governments. In spite of this aid, stringent import controls have had to be imposed which, by reducing imports to the bare essentials, have created a widespread under-utilization of the avdable industrial capacity. Thus accordmg to a conservative estimate by the M;nistry of Conmerce and Industry, about 15-20 per cent of the

Third Five-Year Plan (New Delhi, 1961).

INDIA AND THE EUROPEAN COMMON MARKET 267

industrial capacity was lying idle in 1960-61 for want of an adequate supply of imported components and raw materials.’ The foreign exchange reserves of the country having been ncarly exhausted, the Indian economy now faces a dismal prospect: even a minor dip in export earnings or a short fall in the expected amount of foreign aid can induce a magdied cut in industrial production and employment. The task of increasing India’s export earnings here and now therefore assumes a new urgency. Besides, although Incba cannot do without foreign aid for many years to come, there is often a great uncertainty both regardmg the magnitude of the aid that may be availablc and also about the terms on which it may be forthcoming. The Third Five-Year Plan (1961-65) has, therefore, been formulated on an assump- tion that action should be taken now so as progressively to reduce Incba’s dependence on foreign aid, and the objective is that by 1970 the economy should become ‘self-sustained’, which implies that India should be able to balance her foreign exchange budget without external assistance outside the normal inflow of foreign capital.

The realization of the objective of ‘self-sustained’ growth by 1970 is crucially dependent on a massive increase in India’s export earnings over the present decade. First, India’s import needs are bound to rise h t h e r from their present level, as hstory provides us with few instances where successful development has not been accompanied by a rising import bill. This means that India’s export receipts will have to rise not only to fill the present trade gap but also to finance the additional import needs of the coming years. Secondly, by 1970 India will have vast repayment obligations on account of loans she has already raised abroad and is planning to raise in the next ten years. Accordmg to a conservative estimate, repayment obligations on foreign loans and credits may well amount to between A225 and A300 million a year by 1970. This means that over 50 per cent of Incba’s present export earnings will have to be earmarked to honour India’s debt obligations to her foreign creditors. It is for these reasons that Sir Donald MacDougall recently suggested a minimum export target of A1,125 million for 1970 as a necessary condition of self-sustained growth by 1970.6 T h ~ s would involve a rise of well over IOO per cent in India’s export earnings over the present decade.

A doubhg of export earnings over a decade is not an easy task. It requires that India will have to exert her utmost to exploit the available export potential of her traditional exports-primary as well as manu- factured goods. It is with t h s end in view that cotton and jute textile industries are being fast modernized and efforts are being made to raise the output of such primary export products as tobacco, vegetable oil- seeds, and coffee. Nevertheless, it is obvious that India’s traditional

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exports offer only a limited export potential. Jute textiles, tea, and cotton textiles account for nearly 50 per cent of India’s total export earnings.. In none of these commodities are the prospects of any signi- ficant growth in world trade very bright. The progressive growth of techniques of bulk handhg and an increasing use of paper as a substi- tute packaging material have greatly reduced the market for jute goods in the industrial countries of the West. Thus in North America and Western Europe, together accounting for nearly 50 per cent of world jute consumption (outside India, Pakistan and the Sino-Soviet area), the consumption of jute goods in the post-war years has not risen above the pre-war level. The high income countries account for nearly 75 per cent of world imports of tea, and it is a well-obscrved fact that at high income levels habit rather than income and prices is the major determinant of the consumption of a beverage. While tea is not a popular drink in continental Western Europe and the U.S.A., in predominantly teadrinkmg countries like the U.K. and Australia the per capita consumption is already near saturation-point. The volume of world trade in cotton textiles has been static in the last decade, and without a further liberalization of imports by the industrial countries it may well fall in the present decade-cotton being an early favourite in the programmes of industrial development in thc newly- developing countries. The moral is that if In&a is to increase her export earnings significantly, not only must she fully exploit the opportunities offered by her existing exports, but also she must dcvelop many new lines of exports consisting of manufactured products. It is with t h s background that one ought to examine the role of the European Common Market in India’s fight against her grim poverty and stagnation.

c. THE EUROPEAN COMMON MARKET AND INDIA’S EXPORT PROSPECTS

The establishment of thc European Common Market may aff’ect India’s exports in three ways: first, the adoption of a common external tariff and the abolition of all restrictions on intra-European trade will place India at a relative disadvantage as compared with a member country in competing for the European market. Secondly, tlic pref- erential treatment accorded to imports fi-om the Associated overseas territories will also work to India’s disadvantage. Thirdly, if Britain joins the Common Market, the loss of Commonwealth Prefereiices and the resulting &scrimination against Indian goods will not only affect India’s chances of increasing her export earnings but may also result in a reduction in her present export receipts. Thus the policies of the European Economic Community are capable of fi-ustrating

INDIA AND THE EUROPEAN COMMON MARKET 269

India’s attempts at increasing her export receipts, both fiom primary as well as manufactured products.

Primary Exports Tea, tobacco, vegetable oils, hides and sluns (tanned), and coffee are

some of the important primary products whose exports fiom India could be affected by the emergence of the European Economic Com- munity in its present form. Together, these commodities accounted for about 32 per cent of India’s total export earnings in the late fifties.

Tea. Tea accounts for nearly 20 per cent of India’s export earnings and earned about +34 d o n of foreign exchange for India in the late fifties. The six present members of the EEC are not very important consumers of tea. During 1958-60 their average annual net import of tea was only 19,000 tons, while the correspondmg figure for the U.K. was 232,300 tons.e Tea is not grown in Europe, and the present Afiican Associates of the EEC produce only insignificant quantities of tea. The former Belgian Congo is the only producer worth mentioning, and her production at present is only about 4,000 tons a year. Thus the Community’s existing common external tariff of 18 per cent and the preferential treatmcnt of imports from the African Associates could hardly make any significant &fference to India’s export prospects for a long time to come. These prospects would become somewhat less bright consequcnt on Britain’s entry into the EEC if the present duty- free imports into the U.K. &om India and Ceylon were to be subjected to the common external tariff, and if in addition countries of British East Africa were to accept the status of Associates. However, since the Six have agreed to Britain’s request for a nil common external tariff on tea in an enlarged European Community, India’s exports would not suffer consequent on Britain’s entry into the EEC.

This is a welcome development, but it is necessary to place &IS

concession in its proper perspective. At high income levels, tea tends to have a negligible price elasticity of demandlo so that the consumption of tea in the U.K. would not suffer even if the import of tea were subject to a duty of 18 per cent. By the same logic, the abolition of import duties on tea by the Six would not lead to any significant rise in their consumption and therefore imports of tea; even with the existing import duties tea is still the cheapest beverage and, as argued earlier, at high income levels habit rather than income and prices is the major determinant of the consumption of a beverage.

Kcnya, Uganda and Tanganyika are important producers of tea in Africa, and if they were to accept the status of Associates, Inha’s exports to the EEC would be at a relative disadvantage. However, Afiican exports are s d l very small (35,000 tons); and Afiica being a

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relatively low-cost producer, physical limitations would be the most important detcrminant of the future growth of production and exports even in the absence of protection offered by thc common external tariff of the EEC. In any case, these countries are rcluctant to accept the status of Associates. This means that the Community’s willingncss to abolish its tariff on tea is not such a big concession to India as is sometimes made out.

Tobacco. Tobacco accounts for over 2 per cent of India’s export earnings. The bulk of India’s exports of unmanufactured tobacco (valued at k11.3 d i o i i a year during 1950-60) are directed to Western Europe. These exports are likely to be severely affected by the common external tariff of the EEC. In the Common Market, Italy and Greece are net exporters; France and West Germany are sigruficant producers; and in due course Turkey, another net exporter, will also probably get the status of an Associate. hiports from India into the EEC which will be subject to an import duty of nearly 3 0 per cent will, therefore, be greatly handicapyed.11 This is all the more unfortunate because India has been making special efforts in the last few years to grow tobacco particularly suited to West German tastes. All these efforts w d now prove bt less . Both the U.S.A. and the Sino-Soviet area being net exporters of tobacco, India could increase her export earnings fiom tobacco only by exporting more to Western Europe. Ths may now become increasingly difficult.

One may take the view that since India’s exports consist largely of the Virginia, flue-cured variety, which is not extensively grown in Europe or in Afiican Associated countries of the EEC, consumer tastes would protect the present Indian markets in Western Europe. But considering that European tobacco, not having to pay an import duty of 30 per cent, will be cheaper than the imported tobacco, con- sumer tastes may be modified in the long run. Besides, Afiican Associates of the EEC may well increasingly take to the cultivation of the Virginia variety in the future. Furthermore, if the Federation of Rhodesia and Nyasaland, a very important exporter of the Virginia variety, were to get the status of an Associate consequent on Britain’s entry into the EEC, Incla’s export prospects in tobacco would be indeed very dismal.

Vegetable Oils. Western Europe accounts for over 70 per cent of world net imports of vegetable oilseeds and oils. The present structure of the common external tariff of the Community is such that whde oilseeds will generally enter the EEC Gee of import duty, vegetable oils will be subject to varying import duties whose incidence will generally increase with the extent of processing undergone by an oil. Thus the Community’s common external tariff would discriminate

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against thc development of even the simplest processing industries in the underdeveloped countries. Presumably, the authors of the Trcaty of Rome werc out of sympathy with a keenly-felt desire in many underdeveloped countries to alter the composition of their exports so as to include more of processed articles. They still visualized the exchange of crude raw materials of the underdeveloped countries with thc manufactured products of the developed countries as the only natural basis of mutually profitable international exchange. The treat- ment accorded to imports of the simplest processed articles llke vege- table oils into the EEC is bound to encourage the suspicion of the underdeveloped countries that the EEC policies may militate against the industriahation of poorer countries. As is well known, France has actively discouraged the growth of an oilseeds crushing industry even in its own colonies. Senegal’s efforts to crush increasing quantities of her groundnut crop were frustrated by French import restrictions on groundnut oil.

In the last few years, India has been malung special efforts to increase her exports of groundnut oil by encouraging the cultivation of ground- nuts and also by inducing the Iiidian industry to use more of cottonseed oil in lieu of groundnut oil so as to release the latter for export. The EEC’s common external tariff of 10 per cent on crude groundnut.oil and 15 per cent on the refined groundnut oil will lead to considerable discrimination against Indian exports to the Community. Of course, India’s exports to the EEC will not be severely handicapped in the short run. The immediate prospects of a rapid growth of production of groundnuts in the Associated countrics are not very good as nearly all the suitable land for the cultivation of groundnuts has already been brought under cultivation. In the long run, these h t a t i o n s could be overcome, and to that extent India’s exports would be handicapped.

Co$e. Under the Treaty of Rome, the Community’s common external tariff was fixed at 16 per cent. The new Convention is now reducing this element of discrimination in favour of African Associates by two-fifths to 9.6 per cent. Nevertheless, the production of coffee in the Associated countries may still expand, particularly if the produc- tion subsidies are not eliminatcd at an early date. When other under- developed countries express concern at the preferential treatment accorded by the EEC to imports from its Associates it is not that they are opposed to the economic development of the latter. But it is well known that but for large subsidies provided in the past by French consumers, the production of many agricultural crops (especially coffee and bananas) in the Associated countries would be clearly uneconomic- their production costs being above prices &g in the world markets. While this ardicial stimulus to further production acts to the relative

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&advantage of other underdeveloped countries producing the com- peting crops, and will hrther add to the downward pressures in world markets for commodities hke coffee, it is by no means obvious that the system works necessarily to the long run advantage of the Associ- ates themselves. Although they gain in the short run, their already excessive dependence on a single crop economy will be firrther in- creased. It is therefore encouraging to note that the new Association Convention aims at ultimately eliminating the subsidies to production so as to provide increasing amounts of aid in the form of general purposes developmcnt aid. Nevertheless, even in the new Association Convention, out of the total promised aid to the Associates of $780 d o n over a period of five years, $200 million are to be used as subsidies to help uncompetitive growers.

Manufactured Products Nearly 50 per cent of India’s exports already consist of manufactured

goods, and it is on a successful development of new manufactured exports on a large scale that thc future of India’s balance of payments is greatly dependent. As the GATT Declaration on promotion of trade of the less devcloped countries adopted by the contracting parties in 1961 explicitly recognized, ‘if the needs of the less devcloped countries for enlarged and diversified export trade are to be met, these countries must develop trade in other than traditional products’.’a Of course, a part of the ncw manufactured cxports fiom countries like India will find their markets in the neighbouring underdeveloped countries, but as the GATT Declaration pointed out, ‘the governments of the major industrialized areas, on whose markets the less developed countries must necessarily largely depend, recognize a particular responsibility in this respect’.13

On this point, the past record of the present members of the EEC is far &om encouraging. Despite their growing prosperity and the strength of their balance of yaymcnts, countries like France and West Germany already greatly restrict the import of some of India’s major industrial exports, hkc cotton and jute textiles, through tariffs and import quotas. The total import quota of the six countries of the EEC for the Far Eastern cotton fabrics was only about 6,000 tons in 1960 (as against their total imports of cotton fabrics of 69,100 tons in 1960). Most of the present members of the EEC heavily protect thcir jute industries by imposing high tariffs and import quotas on Indian jute goods. Thus France and Italy practically allow no imports of jute goods &om tndia, while Western Germany allows only a small import quota. No wonder that thc EEC is a net exporter of jute textiles. Similarly, exports &om India of such simple manufactures as sewing

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machmes, toys, table ware, and coir manufactures are also subject to import controls in countries llke Western Germany.

It is hard to find a satisfactory justification of such severe import restrictions on Indian goods in the EEC countries. Import controls on Indian goods in Western Europe can hardly be justified for balance of payments reasons. Most countries of the EEC have greatly strengthened their balance of payments in the last decade, and in any case they have persistent trade surpluses with India. The only argument which is usually advanced in favour of these restrictions is that imports &om low-wage countries are in an ‘abnormal’ category, and should not be allowed to disrupt European markets. But even an elementary under- standing of the principle of comparative costs, on which generations of students in the advanced countries have been trained, would show that differences in factor endowments and therefore in factor prices are an essential condition of a mutually profitable flow of international trade bemeen different countries.

Of course, one can ready appreciate that too sudden and sharp a liberalization of imports may impose unduly severe hardships on those engaged in these activities in the EEC. Yct it is not true that t h i s transitional adjustment need be so severe as to block the liberalization of imports altogether. After all, the cotton industry in the EEC countries employs only a very small &action of total workers engaged in manufacturing in these countries. On average, in France 2.6 per cent of total wage and salaried workers in manufacturing were em- ployed in the cotton industry in 1959-60. The correspondng figures for other countries of the EEC are: Netherlands 4.4 per cent (includmg man-made fibres), Italy 4-4 per cent, Western Germany 2 . 3 per cent, and Benelux 1.5 per cent (only cott~n-spinning).~~ As the bulk of Indian and Pakistani output of cotton textiles consists of coarse varieties, there would be ample scope for the European cotton industry even after a considerable liberalization of imports by the EEC countries. Besides, in view of the expected shortage of man-power in Western Europe it should not be difficult to absorb the unemployed into other occupations. Yet the last decade did not witness any liberalization of imports &om India in the EEC countries, although under the Geneva Textile Agreement which came into force this year they have promised progressively to increase their import quotas of Asian cotton textiles from about 6,000 tons in 1960 to about 12,000 tons over a period of five years. As for jute textiles, even the employment argument looks extremely weak: in no European country does the jute industry employ more than a few thousand men. For example, in the mid-fifties, the jute industry in Western Germany employed 12,314 workers, that in Belgium 7,533, in France 12,679, and in Italy 10,300.15

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The common external tariff of the EEC is in effect consolidating the present high tariff walls on cotton and jute textiles in the mcniber countries. Thus jute manufacturcs will pay an import duty of 23 per cent on entry into the EEC, whilc cotton fabrics will bc subject to an import duty of 18 per cent. Besides, there is no hope that the present stringent quota restrictions on these goods will be relaxed in the near hture. Wh~lc the Treaty of Rome lays down a strict timetable for the elimination of the remaining quantitative restrictions on intra- European trade, there is no rigid commitment regarding the removal of quantitative restrictions on imports from the non-members. The proposals now being canvassed by European cotton and jute industries in respect of future quota restrictions in the EEC countries are already causing a serious concern in India. For example, the West German textile industry has proposed, with the support of textile industries in the other EEC countries, that global EEC quotas equivalent to I per cent of EEC production should be applied to the import of textiles from ‘abnormal’ countries (meaning low wage countries and Eastern Europe), with additional imports adrmtted only for reexport to countries outside the EEC. The French jute industry goes even further: it has suggested that global quotas for the import of jute goods from Asian countries should also apply to imports meant to be re-exported from the EEC. The pursuit of liberal import policies with regard to jute and cotton textiles by the EEC could greatly alter the export prospects now facing India and Pakistan. Unfortunately, so far there is no firm evidence that the EEC countries are planning any such liberalization. In addition to her traditional cxports of manufactured goods (tex-

tiles), India is greatly hoping to increase her export earnings from the products of her new manufacturing industries. But the treatment accorded to imports from Japan in Western Europe and the continued severity of import restrictions in the EEC countries on India’s existing manufactured exports suggest that the Common Market is unldcely to offer much scope for expanding India’s exports of industrial products. Besides, the close economic and political links between the Common Market and the Associated countries will further militate against increased exports of simpler manufactures from India to countries of Africa. Theoretically, the Associates are Gee to manage their own political and economic affairs.ls But it is a well-known fact that most countries in the formerly Frcnch parts of Africa are even now not Gee to follow independent fiscal and balance of payments policies. Thus their common monetary unit of account, the centralization resulting horn the existence of threc French-controlled banks of issue, their membership of the Franc Area, and their dependence on France for

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covering their budget deficits, form a very strong llnk between the former French colonies and France, and greatly reduce their ability to pursue their own independent economic policies. Their Association with the Common Market will hrther strengthen the economic hold of European exporters on their markets, to the obvious disadvantage of other exporters outside the EEC.

Of course, the EEC is an evolving entity and it is still not too late for the Community to allay the fears of poorer countries like India. Since the Six were a party to the GATT Declaration of 1961, it was felt that they had now a better appreciation of the needs of the under- developed countries than at the time when the Treaty of Rome was first drafted. However, the terms offered to India and Palustan on Britain’s entry to the Common Market suggest that such hopes were premature. At present, Indian exports of cotton textiles enjoy a preference of 17.5 per cent in the U.K., and the latter has in recent years become the largest market for Indian cotton fabrics, accounting for over 20 per cent of India’s total exports. The disappearance of the present margin of preference and the imposition of the EEC’s common external tariff of 18 per cent on Indian exports of cotton textiles to the U.K. are bound to affect India’s export earnings severely. Of course, the provisional agreement does provide for remedial action whenever exports of cotton textiles fiom India or Pakistan to the enlarged Community decline below an agreed minimum as a result of the application of the common external tariff by Britain. Yet t h s agreed floor is no higher than the average of Indian and Pakistani exports in 1959 and 1960 (29,000 tons in case of In&a and 4,300 tons in case of Pakistan). In view of India’s urgent need for growing export revenue, the offer to maintain the volume of Indian exports of cotton textiles at their present level can hardly be considered a generous response by the Six. Indeed, apart fi-om h s commitment, the whole emphasis of the provisional agreement is on preventing Indian textile exports to Europe fi-om rising. Thus the proposed time-table for the adjustment of British tariffs to the common external tariffs of the EEC is much more strict for cotton textiles than for other goods imported into the U.K. &om India and Pakistan.17 The reason for t h l s stricter time-table for cotton textiles is that the Six fear that too large a tariff discrepancy between them on the one hand and Britain on the other could lead to a situation where it would become commercially more attrac- tive to import Indian textiles into the Six via Britain. This danger is considered by the Six to be much smaller for other goods where the quantities involved are not very large so that they can afford to be magnanimous.

Spealung in the House of Commons 011 November 7, 1962, the

276 J O U R N A L OF C O M M O N MARKET STUDIES

Lord Privy Seal, Mr. Heath, referred to a solemn obligation by the Six to India and Pakistan to ‘develop mutual trade for the purpose of maintaining and as much as possible increasing the level of foreign currency receipts of those countries, and in general facilitating the implementation of their development plans’.lS The offer of com- prehensive trade agreements by the end of 1966 is considered a step in that direction. It is yet to be seen how the EEC interprets its solemn obligation. The provisional agreement, however, does not contain even the obligation to maintain India’s overall export earnings conse- quent on Britain’s entry into the EEC. The only firm commitment is to maintain the volume of textile imports from India to the enlarged Community at its 1959-60 level. But it may well be that as a result of the application by Britain of the common external tariff, India’s exports of coir manufactures, tanned hdes, hand-htted carpets, etc., will also suffer. On thc nil tariff items requested for India and Pakistan by Britain, the Six have agreed only to import polo and cricket equipment fiee of duty. India can only hope that when the time comes to negoti- ate the comprehensive trade agreements, the Six wdl show a much greater awareness of India’s urgent needs for rising export earnings. Without a significant rise in her export earnings, India’s capacity to carry out a programme of rapid economic growth will no doubt be greatly affected. But without a generous European liberalization of imports of those commodities which are of direct concern to India, the latter’s capacity to repay the massive foreign loans now being granted to her will also be in serious doubt. And if India’s failure to honour her debt obligations should admmster a severe jolt to international confidence, the blame must largely rest with the industrial countries.

1 Of course, not all economists would readily agree that integration must always lead to an acceleration of the pace of econonlic growth in all the member countries ofthe Common Market. For a sceptical view of the effects of the European integration on the rate of economic growth of the present members ofthe European Economic Community see an article by A. Lamafalussy, ‘Europe’s Progress: Due to Common Market?’, Lfoyd’s Bank Review, October 1961.

* The various factors at work have been beautifully analysed in R. Nurkse’s Patterns of Trade and Development; Oxford: Blackwell, 1961.

a Cf. Jacob Viner, The Customs Union Issue, New York, 1950. 4 See a U.N. study, International Flow ofPrivate Capitaf-1946-52, New York, 1954, and later

editions of the same publication. 6 In case Britain joins the EEC, Indian exports to Europe will face new barriers in so far as the

present system of Commonwealth Preference will have to be replaced by the common external tariff of the enlarged European Community.

These deficits are not a result of economic mismanagement. Given a very narrow industrial base, the structure of demand in the process of economic development changes ahead of the stiucture of output, thus giving rise to higher import requirements. On the export side, although it can be shown that India has not fully exploited the available export potential, a detailed study by the present writer brings out that even after a considerable export effort, India’s export earnings could not be incrcased fully to finance the growing import needs of the economy. Basically, a major difficulty on the export front arises out of an unfortunate composition of Indian exports in so far as the bulk of her export earnings is accounted for by those commodities in which world trade shows no strong rising trend.

I N D I A A N D T H E E U R O P E A N C O M M O N M A R K E T 277

’ Cf. Report ofthe Import and Export Policy Committee (Gout. of India), New Delhi, 1962, p. 9. See his article, ‘India’s Balance of Payments’, Biilletin of fhe Oxford Uniuersify Institute OJ

Calculated from the F A 0 Trade Year Books. Statistics, Vol. 23, pp. 153-177.

lo Prof. Stone’s study, Mensurement .f Consumers’ Expenditure and Behaviour in the U.K. d w i q 1920-38 (Cambridge, 1954), supports the view of a low price elasticity of demand for tea at high income levels. He found an elasticity of -0.3 for the U.K. during 1920-38. The income elasticity of demand was found to be zero. (See pp. 145-46.)

l1 Originally, the common external tariff of the EEC was fixed at 30 per cent ad valorem. However, Italy did not feel satisfied with this level of protection. The Council of the EEC, therefore, in September 1960 modified the proposed common external tariff of 30 per cent and fixed instead a minimum of $29 per 100 kilograms and a maximum of $42 per 100 kg. as the new common external tariff of the EEC, subject to GATT negotiations. At the recent GATT negotiations in the Dillon round, the maximum has been reduced to $38 per 100 kg. while the minimum duty has been fixed at $29 per 100 kg. Thus it turns out that the relatively cheaper Indian tobacco will be taxed more heavily than the dearer American tobacco. The EEC seems to be so much preoccupied with the promotion of interests of its members that it does not care if this results in an unfair discrimination against a poor non-member country, to the benefit of the rich U.S.A.

1 2 GATT: Proceedingr of fhe Meetings Ministers, November 27-30, 1961. Geneva, 1%2, pp. 221-24.

l3 Ibid. lP Eniploynient figures in manufacturing have been taken from the OECD, Manpower Statistics

-1950-60, Paris, 1961. The correspondmg figures for the cotton industry have been taken from OECD: The Textile Industry in Europe-1960-61, Paris, 1962.

See OEEC, The Textile Industry in Europe, Pans, 1955, p. 95. 1 8 That in practice there may be limits on their freedom of action in political and economic

affairs is suggested by a recent report that Western Germany has proposed that those Associates which recognize East Germany should not be eligible for aid from the development fund of the EEC. (See the London Times, Saturday, November 24, 1962, p. 12.)

1 7 Thus for industrial goods other than cotton textiles coming from India and Pakistan, the following time-table has been laid down for Britain’s adjustment to the EEC tariff: 15 per cent when Britain joins; 15 per cent on January 1, 1965; 20 per cent on January 1, 1967; 20 per cent on January 1, 1968; and 30 per cent on January 1,1970. The corresponding timetable for cotton textile is: 20 per cent when Britain joins; 20 per cent 18 months later; 30 per cent another 12 months later; and 30 per cent when the present EEC members complete the adjustment of their national tariffs to the common external tariff-probably July 1, 1967.

** See the Weekly Hansard for November 7, 1962, col. 986.