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Brussels, 17 February 2014
2013 EU industrial structure report highlights challenges and opportunities of EU re-industrialisation
The "EU industrial structure report 2013: Competing in Global Value Chains" indicates there are signs of a tentative recovery although many sectors have still not regained their pre-crisis level of development. Manufacturing sectors have been hit more severely by the crisis than services: manufacturing, as a proportion of economic output, has declined significantly; however, there are significant differences between sectors. For example the pharmaceuticals sector has experienced sustained growth since the start of the financial crisis, while high-technology manufacturing industries have, in general, not been impacted to the same extent as other industries. In parallel, the interlinkages between manufacturing and services are growing, as products are becoming more sophisticated and incorporate higher services content.
EU countries together account for a significant proportion of global FDI flows (around 22 % of inflows and 30 % of outflows), but both inflows and outflows have been badly hit by the crisis. The fact that intra-EU outflows fell more sharply than those to the rest of the world, indicates that EU enterprises are more positive about external opportunities than those available within the EU.
Furthermore, the EU is still the world leader in terms of global trade. The EU has comparative advantage in two-thirds of its exports. The EU needs to build upon its strengths to help reverse the trend of a declining contribution of manufacturing to national income, thus confirming the need to facilitate the internationalisation and the integration of EU firms in global value chains.
The industrial outlook has improved but recovery remains fragile
Following the financial crisis, EU manufacturing seemed to recover from the beginning of 2009. The recovery came to a halt in the third quarter of 2011, and since then manufacturing growth rates have again declined. The data for the first and second quarter of 2013 indicate a slow recovery of industrial production in the EU. However, the most recent data demonstrate the fragility of this recovery, as production declined again slightly in the third quarter of 2013.
Level of manufacturing output in 2013, compared to 2008, by EU member state
Figures and graphics available in PDF and WORD PROCESSED
Data on EU manufacturing output shows significant differences between Member States. Strong recoveries can be seen in Romania, Poland, Slovakia and the Baltic States, for example, which all have regained and exceeded their pre-recession peaks.
There are also significant differences between sectors. Industries producing consumer staples such as food and beverages, and pharmaceuticals, have fared relatively better than others since the outbreak of the crisis. Also, high-technology manufacturing industries have, in general, not been impacted to the same extent as other industries. Overall, services have been hit less badly than the construction, manufacturing and mining industries.
Better performance for high-tech manufacturing and industries producing staple goods since 2008 (vertical axis - % change in output)
Figures and graphics available in PDF and WORD PROCESSED
Services are important for the competitiveness of manufacturing
The growing share of services in GDP is explained by higher income elasticities of demand for services, which tend to shift final demand towards services, as incomes grow over time. Falling relative prices of manufacturing compared to services due to higher productivity growth in manufacturing also tend to reduce the relative share of manufacturing in nominal terms. With respect to employment, the sectoral shift is even more pronounced, due to the fact that services are more labour intensive and typically have lower productivity growth.
The inter-linkages between manufacturing and services are growing. Manufacturing firms’ use of intermediate services has increased across almost all industries since 1995. Manufacturing is changing from being dominated by machine operators and assembly line workers to a sector which relies more and more on service occupations and service inputs. This shows up in the increased share of employees with services-related occupations, including activities such as R&D, engineering design, software design, market research, marketing, organizational design and after-sales training, maintenance and support services.
The increased interdependence between manufacturing and services implies that manufacturing provides a ‘carrier function’ for services that might otherwise have limited tradability. A good example is the marketing of "smart" mobile phones which require the use of other services such as software applications (commonly known as "apps"), to maximise their usefulness. The app service providers would have a much smaller market without the access given by manufacturers of the app using devices. This carrier function also stimulates innovation and qualitative upgrading for service activities.
Through these linkages higher productivity growth in manufacturing can spill over to service sectors. This is particularly important in view of the fact that, in the period 2001-2010, employment grew only in the service industries. Hence, a strong manufacturing sector can help mainstream competitiveness gains across other sectors of the economy.
Analysis of trade in services indicates that the EU has a comparative advantage in almost all sectors except construction and travel. By comparison, the US economy has a comparative advantage in relatively few sectors (financial and insurance services and travel). Russia and China specialise in construction services, as does Japan. India is highly specialised in computer and information services, while Brazil exhibits high RCA (revealed comparative advantage) values in other business services.
Productivity gains are concentrated in high-tech industries
In the aftermath of the latest crisis, EU manufacturing managed to reduce labour costs and increase productivity. In particular, high-tech industries have been the main engine of growth. They have been more resilient to the negative effect of the financial crisis thanks to higher productivity and limited dependence on energy.
The specialization in high-tech and low energy intensive industries is crucial for the strategic positioning of industries in the global value chain. This translates into above-average contributions to overall productivity growth and thus to real income growth. However, data on patent applications show that many high- and medium-tech industries in the EU still perform relatively poorly compared to the world aggregate and, in particular, the US. This lack of innovation threatens future gains in productivity.
The EU remains a leader in global trade
The importance of the EU single market to global trade figures is illustrated by export figures. Exports originating in EU-271 countries, including intra-EU trade, accounted for 37% of total world exports in 2011, whilst a quarter of total world exports took place within the EU-27. Trade among EU countries represented a quarter of world manufactured trade in 2011. By comparison, intra-regional trade in Asia reached 17 % of world trade and in North America 4 %.
The EU is also the world's largest trading bloc. In 2010, EU exports to countries outside the EU accounted for 16% of world trade. The EU has also a large share of world trade in manufactured goods: exports originating in EU-27 countries (including intra-EU trade) accounted for 37% of total world exports in 2011. In 2012 the EU, Asia and North America accounted for 78 % of total world goods exports.
World trade flows mostly involve developed countries
Most high‑income countries’ trade takes place with other high‑income countries. In all manufacturing sectors except textiles, paper, machinery, electrical equipment and basic metals, half or more of EU-27 exports are to high‑ income countries. The EU has largest world market shares in all industrial sectors (at the 2-digit level) except for computers, textiles, clothing and leather (where the leader is China).The highest market shares for EU manufacturing industries are in printing and reproduction of recorded media, tobacco, beverages, pharmaceuticals, paper and paper products and motor vehicles.
Some fast growing economic competitors are still dependant on high tech inputs from other countries
China has comparative advantages in both high-tech and low-tech manufactures. However, while China has exported proportionally more technology-intensive goods in recent years, much of the content was imported from developed countries. Data on trade in value added confirms that the share of imported high-tech inputs is still higher in China than in the EU, especially for high-tech products.
Global value chains can strengthen EU competitiveness
Globalisation has fragmented firms’ ‘value chains’ and led an increasing number to establish cross-border networks. As a result, world trade, investment and production are increasingly organised in global value chains (GVCs). The internationalisation and the integration of EU firms in global value chains is a means to increase their competitiveness and ensure access to global markets in more favourable competitive conditions.
Investment has fallen sharply and still focuses on finance and real estate
Industry needs investment. Increasing global trade flows have been accompanied by even stronger growth in global capital flows, including foreign direct investment (FDI). Stocks of inward and outward EU FDI are concentrated in the financial and real estate sectors. Financial intermediation, real estate and business activities represent about three‑quarters of overall outward stock and about two thirds of inward stock.
EU countries together account for a significant proportion of global FDI flows (around 22 % of inflows and 30 % of outflows), but both inflows and outflows have been badly hit by the crisis. In 2010, EU FDI inflows were approximately a third of their 2007 level and outflows had fallen even further. Most of the fall in EU FDI inflows was due to a sharp drop in intra-EU flows.
The full report "EU industrial structure report 2013: Competing in Global Value Chains" can be found here: http://ec.europa.eu/enterprise/policies/industrial-competitiveness/competitiveness-analysis/eu-industrial-structure/index_en.htm
Excluding Croatia, as it was not part of the EU during the study period of the report.