8 Table **6:** Share of **'subcontracting' In total** exports of the EU M%) 1980s (when it varied beiWeen 0.4 and 0.6, **sec** Nevci, 1990). Much of the East-Wcst intraindustry trade is with Germany and the EU's Southern members (Neven, 1994).

||**1939**|**1993**|
|---|---|---|
|Bulgaria<br>CSPR<br>lHungary<br>Romania|4.4<br>_5.1_<br>16.4<br>9.1<br>12.9|13.7<br>12.6<br>20.2<br>18.6<br>30.1|
|CEEC<br>FSU|10.4<br>**0.8**|17.9<br>1.9|

The rapid increase in intra-industry trade has implications for adjustment costs and market has mpliatios fo adjstmet cots ad makeLPoland access opportunities in the futuire. Adjustment costs abroad are likely to be lower in an intraindustry trade context becanse jobs lost due to import penetration may be offset by jobenhancing expansion in demand for imports from the foreign partner for simi:ar goods. The political opposition to liberalizing and expanding intra-industry trade is generally much more muted than in instances where trade flows are predominantly of the inter-industry type.'6 to obtain mnarket access, as trade policy in the EU tends to be less restrictive for processed goods reflecting a perception that it allows high cost industries located in the r U to subcontract labor-intensive parts of their production process to third countries, thereby allowing them to remain in business. Duties on goods that are reimported after processing are usually based on the value added abroad, not on the gross value of the goods. The Europe Agreements eliminated tariffs on such trade (Naujoks and Schmidt, 1994). However, it may also reflect imperfections in the policy and/or regulatory environment in the processing country. Subcontracting can allow foreign partners to trade with local finns without having to establish production facilities. Of course, this is only the case insofar as technologies are not such that control through equity investment (FDI) is required. The reach of such subcontracting is therefore limited to relatively 'low-tech' activities. Subcontracting can nonetheless do much to employ local factors of production and transfer general foreign know-how and management practices.

Intra-industry trade can also be a mechanism through which transfers of technology occur. The Europe Agreements with the CEECs have increased the incentives for EU su'npliers/retailers to engage in so-called outward processing trade, where raw material or components are exported for assembly in lower wage countries and then re-imported. Outward processing has been used intensively for sectors such as gannents, electrical machinery and furniture. Importers provide designs, insist on quality control, take care rf mnarketing, etc. This is a good way for firms in partner countries to reduce the costs and risks associated with development of export markets, while at the same time obtaining know-how from suppliers. Outward processing trade can be seen as a form of non-equity foreign direct investment.

Export under outward processing arrangements accounted for about 18 percent of total CEEC exports to the EU in 1993, up from 10 percent in 1989 (Table 6). Most of the processing occurs in leather/footwear, clothing, electrical machinery, precisic **i** instruments and fumiture. All of these activities are labor intensive.'

# 4. Expanding and Declining **Products**

The combination of expansion in the product line' exported to the EU and the decline in the relative importance of 'traditional' exports has led to the establishment of a more diversified export base in the CEECs. This Section Outward processing trade may be driven by a variety of forces. It may be used as a way