46692 EU10 October 2008 In Focus: Trade Dynamics and Patterns in the EU10 The EU10 have integrated remarkably well into the global marketplace since the start of transition, and particularly in the last decade. While their share in global trade was largely constant in the late 1990s, the share increased from about 2 percent in 2000 to over 3.6 percent in 2007, a Figure 23. Share of the EU10 in World Trade, 1995-2007 period of strong expansion in global trade (Figure 23). EU accession, markets 4 liberalization, improvements in 3.5 regulation and governance, investments 3 in infrastructure, and the low cost of 2.5 skilled and unskilled labor represent the combination of factors that explain this 2 outstanding performance. Large inflows 1.5 of foreign direct investment (FDI) have 1 underpinned the surge in capacity and 0.5 helped enhance the competitiveness of the region. Growth in exports and 0 imports is weakening during the ongoing 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 turmoil in international financial Source: Eurostat, World Bank staff calculations. markets and slowdown in global economic expansion, but should resume at a more buoyant pace once the threat is dealt with. Within the EU10, the degree of trade openness continues to vary substantially across countries, with the early reformers having integrated more effectively into the global commerce. Hungary, the Czech Republic and Slovenia, but also Slovakia, have seen exports rise to about or more than 70 percent of GDP (Figure 24 and Figure 25. There seems to be no obvious correlation between the size of the economy and the level of trade flows. Both large countries (such as Poland and Romania) and small ones (such as Latvia and Lithuania), have low, though expanding, trade shares in GDP. Growth in exports has largely kept up with growth in imports in recent years, but trade deficits have gradually widened in Bulgaria and Romania, reflecting a combination of surging imports of investment and consumer goods. Figure 24. Exports to GDP, 2000 and 2007 Figure 25. Imports to GDP, 2000 and 2007 (in percent) (in percent) 90 90 2000 2007 2000 2007 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 iaralguB hce cibl a y ai ai ai ar tv ak La hce cil ainot yr ani aivt dnal a ai ani en Cz epuR onitsE dnal ungH uanhtiL Po ainam Ro ainevoSl ovlS iaralguB Cz pubeR Es ngauH uahtLi La Po moR ovlS aikavo Sl Source: Eurostat, World Bank staff calculations Source: Eurostat, World Bank staff calculations The process of trade integration into the EU has substantially deepened throughout the region and the share of commerce with Western Europe is already comparable to that of the intra-EU15 trade (Figure 26 and Figure 27). The process of EU accession has played a key role in the reorientation and growth of the EU10 15 trade, with the expansion firmly anchored into the EU production and distribution chains. The gradual removal of trade barriers with the EU15 and among the EU10, together with important advances in addressing structural challenges, have considerably improved the attractiveness of EU10 as destination for global investment. The region has become a target for the relocation of companies in search of cost reductions mainly in production, but also in innovation. Figure 26. Exports to the EU Relative to Total Figure 27. Imports from the EU Relative to Total Exports, 2000 and 2007 (in percent) Imports, 2000 and 2007, (in percent) 100 100 2000 2007 2000 2007 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 iaralg hce cibl aitv ai y a a y a a an ar dnal aina ai ai ai en ak aivt ani Bu Cz pueR ainot Es La hutLi nguH Po Rom ovlS ovlS garluB hce La Cz licbupeR tonisE uanithLi gar unH andolP omR enivolS aikavo Sl Source: Eurostat, World Bank staff calculations Source: Eurostat, World Bank staff calculations The EU10 have become a noteworthy partner of EU15 in terms of trade volumes. Exports from the EU10 to the EU15 have constantly increased this decade, tripling from about 70 billion in 2000 to more than 200 billion in 2007; the latter is equivalent to 14 percent of total EU15 imports (Figure 28). Similarly, exports from the EU15 to the EU10 currently exceed 250 billion, or 18 percent of total EU15 exports (Figure 29). The trade balance remains though tilted towards EU15, which record a yearly surplus of close to 50 billion. Figure 28. Exports from the EU10 to the EU15 Figure 29. Imports from the EU10 to the EU15 % of EU-15 % of EU-15 Exports NMS Exports, EUR Imports (line) NMS Imports, EUR (line) 250 16.0% sn 300 20.0% onsilliB 14.0% 18.0% 250 200 llioiB 16.0% 12.0% 200 14.0% 150 10.0% 12.0% 8.0% 150 10.0% 100 6.0% 8.0% 100 6.0% 4.0% 50 50 4.0% 2.0% 2.0% - 0.0% - 0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Eurostat, World Bank staff calculations Source: Eurostat, World Bank staff calculations The volume of high technological exports from the EU10 to the EU15 has increased threefold since 1999, but its share in total EU10 exports does not appear to have gone up visibly. Hungary and the Czech Republic account for the largest share of high tech exports, although Poland and Slovakia are gradually picking up. Evidence suggests that, as labor costs increase, countries steadily move up the value added chain, but lower tech exports still record important expansions (Figure 30 and Figure 31). This is explainable by the fact that unit labor costs in the EU10 remain well below those in the EU15, and countries in the region appear to remain competitive in labor-intensive areas. Large inflows of FDI and the accompanying import of technological and management know-how, are key contributor to the remarkable export performance. Cumulative FDI inflows to the region have increased threefold since 2000, exceeding 350 billion at the end of 2007 (Figure 32-Figure 34). Hungary, Poland and the Czech Republic have historically been the main beneficiaries, but Slovakia, Romania and Bulgaria have registered record inflows in recent years. Evidence indicates a positive correlation between FDI inflows into manufacturing and the substantial advancements in gross value added in the sector, with positive impact on exports. Imports of machinery and equipment account for a large share of total imports (larger than 30 percent in all countries, exceeding 50 percent in Hungary). 16 Figure 30. EU10 High Tech Exports, 1999-2006 Figure 31. Share of High Tech in Total Exports by (in millions of euros) Country, 1999-2006 (in percent) 30 35000 25 30000 25000 20 20000 15 15000 10 10000 5 5000 0 0 1999 2000 2001 2002 2003 2004 2005 2006 1999 2000 2001 2002 2003 2004 2005 2006 BG CZ EE LV LT HU PL RO SI SK BG CZ EE LV LT HU PL RO SI SK Source: Eurostat, World Bank staff calculations Source: Eurostat, World Bank staff calculations Figure 32. Inward FDI Stock in the EU10, 2000- Figure 33. FDI in industry as % of total FDI and 2007 (in millions of euros) GVA in manufacturing and energy as % of total GVA 400000 35 nda CZ 350000 SK ngi 30 RO SI 300000 urtca 25 BG HU PL LT 250000 nufa yg 20 EE m er 200000 ni en 15 LV 150000 AVG 10 of 100000 er 5 50000 haS 0 0 15 25 35 45 55 65 2000 2001 2002 2003 2004 2005 2006 2007 Share of FDI stock in industry (manufacturing and energy), 2006 CZ HU PL SK SI BG RO EE LV LT Source: Eurostat, World Bank staff calculations Source: Eurostat, World Bank staff calculations Conversely, deeper integration and alignment in trade composition with the EU15 also leave EU10 Figure 34. Share of machinery in total EU10 more exposed protracted to slowdown in the West imports, 2000, 2007, (in percent) European markets. The increased correlation of 60 business cycles and the higher share of intra-industry % 2000 % 2007 trade could, ceteris paribus, have adverse 50 implications for growth in EU10 output and exports. 40 In the early 2000s, for example, the impressive pick up in EU10 exports to the EU was associated with a 30 notable reorientation of the Western consumers 20 substituting locally produced labor intensive commodities with cheaper ones from the EU10, in 10 the context of the prolonged slowdown in the EU15. 0 This might no longer be the case in the current AI CI BL AIN RYA AIN D A AI A NIA economic context, pointing once more to the need of AR GL HCE O AIVT ANL M CZ LA PO VENO AKIV O pursuing further productivity and competitiveness BU EPUR EST UNGH HUATIL RO SL SL enhancing measures in the new EU members. Source: Eurostat, World Bank staff calculations 17