Reconsidering the adjustment costs of the Europe agreements

The paper argues that vertical intra-industry trade (IIT) should be separated from horizontal IIT to have a better judgement about adjustment costs of a trade liberalization, contrary to the assumption in the literature that all IIT changes are costless. A simple method to decompose IIT is presented. Using this method, it is seen that, contrary to expectations, after the Europe Agreements, share of vertical IIT has not increased much between Germany and Central and Eastern European countries. However, when adjustment costs are analysed, it is seen that the resulting labour displacement has been substantial, explaining partly the EU's reluctant approach in these agreements.