Advantages and drawbacks of EU membership - the structural dimension

Trade liberalization is often considered a sufficient prerequisite for inducing desirable structural adjustment. Entry of transition economies (TEs) into the European Union (EU) should induce structural adjustments at the firm level to move trade and production profiles closer to the EU's patterns. At the macroeconomic level this should manifest itself in a rise in intra-industry trade based on horizontal product differentiation. Trade liberalization in TEs to date provides little empirical support for such a process as there are strong signs of persistent interindustry trade and vertical product differentiation. This may have come about because of the minimalist role of government in TEs. But also restricted access to foreign capital, information asymmetries, and the persistent lack of well-functioning markets provide strong arguments in favor offormulating industrial policies to strengthen the competitiveness of manufacturing firms rather than the regional approach that is more typical of the EU. The EU's legal framework leaves room for designing such a policy with subsidies, provided it is adjudicated as compatible with the EU's competition policy.