EU enlargement and environmental policy

result from a fall in the market price as tariffs are abolished. Trade creation implies a lower
price of some goods and necessarily leads to higher consumption. On the contrary, trade
diversion implies a higher real price of some goods and results in lower consumption. The
welfare impacts of the mentioned effects depend on existing substitution possibilities.
Assuming that the price elasticities are positive for all goods, both shifts will be accompanied
by inter-commodity substitution. Therefore, welfare implications are ambiguous (Lipsey
1960). Under the single market the traded goods (EU imports from the CEEC as well as the
CEEC imports from the EU) become duty-free, i.e. the existing trade barriers between those
two regions will be abolished. Furthermore the usual trade costs stemming from the existing
physical and technical barriers (e.g. border controls, different technical standards) will be far
lower. The welfare effects from higher imports from the EU (as well as vice versa) will be
captured by the trade creation effect. Its magnitude depends on the size of adjustment costs in
the CEEC industries and distributional effects emerging from changes in factor prices. On the
other hand, the availability of lower price imports from the new members of the customs
union might cause trade diversion from the former supplier to the new member countries
(Keuschnigg, Keuschnigg and Kohler 2000).

Pro-competitive effects of trade liberalization

Perhaps more important then the static allocation effects are the pro-competitive
effects of trade liberalization (Francois and Roland-Holst 1997). These are trade effects
emerging from the existence of scale economies and imperfect competition. The pressure of
increased competition forces firms with market power that set prices (P) above marginal costs
(MC) down to competitive pricing. The pro-competitive effects may relate to increased
economies of scale, the falling of the production costs (lowering the mark-up) and the
increase of product varieties (the expansion of output). This effect is comparable to the gain
that could be achieved in a closed economy by eliminating the monopoly distortion. It adds to
the usual comparative gains from trade. The pro-competitive (product expansion) effect is
decomposed into two effects (Markusen 1995):

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