18 The two newcomers are competitors of Hungary in some key areas. It was therefore considered useful to compare the two countries' export performances in specific sectors with that of Hungary. For this purpose we use **Balassa's** Revealed Comparative Advantage2 (RCA), which, as a proxy for comparative advantage, measures the relative share of an industry's exports of one country in the total exports of that country to the share of the same industry's exports worldwide to world exports as a whole. We computed the indices for Spain, Portugal and Hungary for the years 1986-87 in relation to the markets of the EC10. Trade data were disaggregated at the SITC four-digit level (see Annex I Table A3). As might be expected, the RCA overlap between Hungary and Spain includes a number of agricultural exports which are restricted in the EC, such as meats, fruits and juices, vegetables and wine. Other major Hungarian exports (over SlOm) to the EC for which Hungary and Spain display a similar comparative advantage in the EC-10 are: gasoline, hydrocarbons, footwear and prepared p-rts of footwear, wood manufactures, rubber tires and tubes, various iron and steel products, unwrought aluminum, domestic electrical equipment, furniture, and fur clothing.

Hungary's overlap with PortugalIs RCAs has almost no agricultural products, except wine. However, it is heavily skewed in the direction of very sensitive items in the EC, namely, various textile, clothing and footwear items. Other overlapped products where Hungary's exports exceed $10 million are animal materials n.e.s., hydrocarbons, nitrogenous fertilizers, other wood manufactures, and leather clothing.

# B. Second challenae: The integration of the GDR in the Eurooean Community

The integration of the former GDR into the Ecunder German unity will inevitably affect Hungary, but the effects can already be assessed tentatively. First, by the GDR leaving the CMEA and adopting the EC's Common Trade Policy new barriers on trade between that part of Germany which previously constituted the GDR and Hungary will affect a number of aoods, e.g., footwear and travel goods, which were part of Hungary's exports to the GDR. It is impossible to say if the substitution of Hungary's undertakings to buy given quantities of (mainly) industrial products from the GDR under the CMEA system for GATT-approved tariff rates under the EC's Common External Tariff will ihinder or promote more exports to the GDR.~ See Balassa (1965). If the ratio or index is greater than unity this is generally interpreted to mean that there is comparative advantage for the industry/country in question, arid comparative disadvantage if the ratio is less than unity. However, some care is needed in interpreting these RCA indices. Yeats (1985) points out that the RCA index has neither cardinal nor ordinal properties. This means it iB eBsentially binary -- an RCA greater than 1 implies that the exporter has comparative advantage in the sector for which the index number is computed and does not have comparative advantaqe in other sectors. One cannot say that a country has greater comparative advantage in sectors for which the index number is higher, nor can one say that a country has greater comparative advantage in a single sector than in another country which has a lower index number (that is still greater than one). This means, for example, that we could replace the values in Annex Table A3 with a binary variable, such as 1/0 or Y/N, where 1 or Y indicates comparative advantage and 0 or N indicates no comparative advantage.

**3** In some cases, the entry of the GDR in the EC could have a very detrimental effect. For instance, the GDR has an agreement with Hungary whereby the latter endeavors to buy all its buses from Hungary, something the EC has already announced must be discontinued. The Economist, March 31, 1990.

While the EC seems to accept that there is a political imperative for reunified Germany to take over the legal obligations of the GDR to the USSR at