COMMENT: CEE versus China - a zero sum game or room for both?

By bne IntelliNews February 19, 2007

Matteo Ferrazzi of UniCredit Group -

Together with China, Central and Eastern European (CEE) countries have been among the best performers in world trade for the last decade. In just 10 years, CEE countries have been able to more or less double their market share in total world trade while similar impressive growth has been recorded in terms of their share in total imports of the "old" Europe.

Today, CEE countries supply around 8% of the imports of the EU-15 countries. CEE and China are clearly emerging as a key production arm for old Europe. In some sectors a sort of substitution prevailed during the last decade, with China and CEE producing what was previously produced in old Europe.

Among these sectors it is worth mentioning leather and textiles, machinery and equipment, automotive, rubber and plastic, and wood. In all these sectors, CEE and China gained market share in the EU-15 market at the expense of intra EU-15 trade.

What is interesting to note, is the complementary aspects between CEE and China. While China focuses its export activities in the EU-15 on some labour-intensive sectors like textiles and leather, and has also become strongly competitive in electronics (particularly in the production of computer components), the exports of CEE countries cover a wider spectrum, with medium-high tech sectors representing the lion's share.

Given such differences in the specialisation models, we believe that not even the impressive results achieved by Chinese producers who have managed to more than triple their international trade positions in a relatively short period of time are necessarily harming the growth opportunities of the CEE region. Such a positive performance, amidst increasing competition at international level, comes in the context of deep and successful structural changes. CEE countries have undergone relevant transformation in their international specialisation and production structures through the years, moving from more traditional sectors into new medium-high tech segments.

Comparatively higher

Since the mid-1990s, CEE countries have gained new comparative advantages in products constituting a relatively higher technological level, such as transport equipment (ie. automobiles and spare component production, ships, locomotives, etc.) and electrical and optical equipment (electric motors, radio/television equipment, optical and medical instruments, computers, etc).

These sectors have also clearly broken through at a domestic level, with their relevance in total manufacturing production increasing from 13% in 1995 to 23% in 2005 on average for CEE countries. Such developments have been particularly marked in Central Europe.

On the other side of the coin, more traditional sectors like food, textiles and leather have started to lose ground, together with increased competition from some low-cost emerging economies. Foreign investments have played a strong role in shaping these structural changes, enhancing the region's competitive advantages.

The sectors with the strongest foreign direct investment (FDI) are also those with the highest gains in terms of market share in international trade, so there is a clear correlation here, even if it is difficult to assess the direction of causality. As the CEE region continues to attract high levels of FDI, innovation in manufacturing sectors receives an additional boost.

The outlook for the coming years is quite positive. Strengthening overall competitiveness and moving from a low labour-cost specialisation model is the key challenge and also an opportunity for the future (already having been the main way forward for some Central European countries like the Czech Republic, Poland, Slovakia and Hungary during the last decade).

Growing relevance in terms of the dimensions of the local market (with rapidly increasing incomes), the proximity to the main European markets, an opportunity to build pan-European production centres and a very favourable and flexible business environment constitute the real appeal of the region and the driving forces for future CEE competitiveness. Working on a concept of wide-ranging competitiveness rather than just merely lower labour costs, which means strong investments in the business environment is the key to high and sustainable growth in the region going forward.

Matteo Ferrazzi is economist for UniCredit Group's CEE Economic Research department

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