IP/05/1461

Brussels, 24 November 2005

Rising international economic integration: opportunities and challenges

Europe benefits from globalisation. It worked well for its people over the second half of the last century and the rapid global economic change we are now witnessing offers the prospect of further gains in living standards. The payoff could come through the same routes as in the past: lower prices for consumers and firms; enhanced international trading volumes; higher levels of productivity and real wages; enhanced and greater diffusion of technological progress; and a wider choice of product varieties. However, the EU, being inextricably linked to the world economy, needs to be proactive in tackling the challenge from globalisation. The debate should focus on how to realise the opportunities that globalisation affords. But it must also be about well-designed policies, matching flexibility with fairness, which help to equip people with the skills, support and incentives they need to succeed in a changing world.

These are the main conclusions from the EU Economy Annual Review, which this year is devoted entirely to the recent trends in economic globalisation and its impact.

“Europe must move up the value added chain in the emerging new international division of labour. We must enhance our ability to create new activities and jobs, and find new and better ways to support people adjust to a process that is beneficial for both the poor and the rich worlds. In other words, to reap the benefits that globalisation affords, we must ensure that the renewed Lisbon strategy, with its focus on employment and productivity, is fully implemented”, said Joaquin Almunia, the Economic and Monetary Affairs Commissioner.

Conservatively estimated, about one fifth of the increase in real per capita income in the European Union over the past 50 years is the result of our integration in the world economy. We have the potential to reap additional benefits if we reform the structure of our economies, in particular by completing the European single market. With the integration of the world economy everybody wins, as evidenced by the substantial progress in poverty reduction. A successful Doha round can further reinforce this dynamic.

EU consolidates N°1 trading position

The report shows that upon closer inspection many of the concerns about globalisation are not supported by the evidence. Not only has the EU maintained its overall share of world trade, it has also consolidated its position as the number one global trading power. Recent UN figures give a world market share of close to 16% for the pre-2004 enlargement EU countries, substantially higher than that of the US at 10%. The evidence also shows that these EU countries invest mostly in each other’s markets or in the United States. Over the period 2000-2003 extra-EU FDI amounted to less than 3% of EU GDP, and only one tenth of this sum went to the new Member States, China and India. More recent figures would tend to confirm these trends.

This means that while the emergence of China on the world trading scene has certainly been a decisive event, especially in low technology / labour intensive areas of production, the overall impact in terms of high technology segments of the market should not be overly dramatised. China’s rising exports of high technology products are based on their importation of almost all of the high value-added parts and components which go into the production of these goods. Trade in services has also grown, but outsourcing of business services has largely been matched by rising exports as well. In fact, the EU has a healthy overall trade surplus in business related services, equivalent to ½ % of GDP in 2003. Thus, overall, the net effect on employment is estimated to have been negligible, and there is no evidence at the aggregate level that countries with a higher degree of openness suffer from a higher rate of unemployment.

But in order to realise the potential gains from globalisation, production structures need to shift into new areas of comparative advantage. At the moment the EU is particularly strong in a range of medium-high technology sectors, most notably cars, pharmaceuticals and specialised machines. Looking to the future, policy makers should bear in mind that China’s comparative advantage is likely to remain in labour intensive products for many years and that the EU has a relatively high share of its exports in these product groupings. Given these twin developments, it will be crucial for the EU not only to consolidate its position in the medium-high technology sectors but that it also steadily acts to address its weaknesses in a range of high technology market segments, most notably ICT (i.e. information and communication technologies).

But not everything is positive. This structural transformation process may hit certain sectors or regions that rely on sectors employing low cost and low skilled labour. But even though adjustment can be a costly and uncomfortable business in the short to medium-term we should help people train and acquire new skills to move to other jobs, sectors, occupations, or regions. Resorting to protectionism and trying to shield jobs and industries from international competition would only reduce economic efficiency, income and employment opportunities in the long run.
For “The EU Economy: 2005 Review” go to:

http://ec.europa.eu/economy_finance/publications/the_eu_economy_review_en.htm