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| How is European Industry Coping with the New Patterns
of the International Division of Labour? |
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April-June 2005 |
Given the combination of substantial cuts in transport and communications costs, the opening-up of large economies with abundant cheap labour, as well as the scope for overseas subsidiaries of multinational corporations to employ this labour by using advanced technologies developed in the North, what is the future for European industry?
It is questionable whether the idea of comparative advantage and international specialisation as a “win-win” game remains valid under such new circumstances. The emergence of competitors with a very broad spectrum of comparative advantages in industrial activities, as exemplified by China, and sometimes in services too, as is the case of India, has therefore revived the issue of the future of manufacturing industry in industrialised countries, in the face of competition from low-wage economies.
Has Europe the means to hold on to its manufacturing sector? Or will it have to abandon its industrial base and instead become a major market for imported products and a producer of services?
For all the decline of manufacturing in total employment (“deindustrialisation”), industry continues to play a key role in Europe’s economy, when the statistics are adjusted to take into account the development of temporary work, the outsourcing of certain activities by manufacturers and the increasingly-blurred boundaries between services and manufacturing in many sectors. Moreover, the bulk of the relative decline of industry in terms of value added and jobs is attributable to price movements, reflecting industry's faster productivity gains and greater exposure to competition.(1)
Accelerating globalisation may, however, contribute to the decline of industry in a number of ways: specialisation according to comparative advantage, downward pressure on prices exerted by new competitors, the global reorganisation of firms, shifts in markets and therefore in the factories supplying them, etc. The scale of the emergence of international production processes, both as they now stand and as they are forecast to develop over the next fifteen years changes the situation completely. Until the mid-1990s, European integration saw intra-Community trade accounting for a growing share of world trade, peaking at 30%. That share has since fallen considerably, and will soon be down to only 20%. This trend contrasts with that observed for NAFTA. Meanwhile, new big players are appearing on the world scene, such as Brazil, India and China. These trends contribute to profound changes in trade patterns: while the European dynamics of integration was of an intra-industry type(2), a return to inter-industry trade and associated adjustment costs has been recently recorded.(3) The world economy is therefore facing a new phenomenon: big open economies, whose average standards of living will remain lower than in the old industrialised countries, for a long period of time, are playing an increasingly important role in the world economy.
Overall, the Southern countries are now major participants in the recent development of international trade. Whereas the North continued to drive world trade from 1995 to 1998, accounting for two thirds of the growth in world exports and over four fifths of the growth in world imports, the situation has since been reversed. The South now accounts for more than half of the growth in world exports and already more than 40% of the growth in world imports.(4) Owing to significant internal inequalities and the fluid movement of capital and technology at international level, these countries also enjoy comparative advantages in a wide range of goods.
There is a tradition at the CEPII of compiling trade data at the world level, using harmonised and stable trade classifications going back to the 1970s. As a result, the CEPII's CHELEM trade database is informative regarding the big shifts of countries' specialisation and the emergence of new competitors.(5) The period covered (1967-2003) allows the current changes to be placed in a medium term perspective, helpful for the analysis. Complementing this effort, the new database developed by the CEPII on the basis of COMTRADE data, BACI(6), makes it possible to break down world trade flows at the HS6 level (about 5,000 products) by quality level, transformation stage and by the technological content of the traded products. Last but not least, the development of a Computable General Equilibrium Model, named MIRAGE(7), which uses a detailed database of tariffs (MAcMap)(8) constructed in collaboration with the ITC (UNCTAD-WTO, Geneva), makes it possible to investigate further the effects of new competition in certain sensitive sectors.
The emergence of a global factory, exploiting cost differences throughout the value-added chain, across various locations, is beginning to have a very appreciable impact. It is based on the modularity of the products, on the fragmentation of the production process, and the specialisation of sites. Countries such as China are building their competitive advantage on such division of labour (9), which is reflected in the growing share of parts and components in world trade, as recorded by BACI. Besides, we are seeing a radical redistribution of comparative advantages between countries: whole sectors of industry are destined to leave the North. The traditional view of the North as specialising in recent industries and the South in traditional industries is in fact totally misconceived. With the global factory, the Southern countries are increasingly specialising their industrial apparatus in both areas of activity. Only a few industries - those involving processes which are intensive in capital or skilled-labour, cumulative technology or which face transport difficulties - are able to buck these underlying trends, e.g. aeronautics, electronic components and the automobile sector.(10)
The problem of Europe's performance is essentially a problem of sectoral adaptation: EU products are out of step with trends in world demand. A detailed analysis shows that Europe has missed the technological boat of the 21st century: Europe’s second fastest growing export is pork and poultry fat; another fast growing export is ships... for scrap. We are therefore a very long way from exporting products that would make Europe a player in world technological competition and the information society. That said, Europe retains an advantage for high-end products for which the competition is the lowest, thanks to the vertical differentiation of products, as shown by BACI.(11) The low dollar is nevertheless a challenge for European industries. Europe’s exposure to dollar competition occurs vis-à-vis the whole dollar zone on the export side as well as on import side, and in third country markets. An estimate for the manufacturing sector suggests an average exposure of 12.4 %, varying from 2 % for printing products, to 33 % for TIC.
Apart from exposure, industries' sensitivity to exchange rate movements fluctuates. Combined effects show that the mechanical industries are the most affected by any fall in the dollar.(12)
Depending on both the sectoral and geographical distribution of their external trade, European countries have reacted differently to the fall in the dollar. Generally, speaking Northern countries (including Ireland) are more affected than Southern countries (including Austria and France), Germany and Italy being in a median position.
How the current multilateral trade negotiations are expected to impact on European industry depends crucially on the reduction of tariff peaks at the world level, but all in all, the overall impact on European industry will remain limited when compared to agriculture.(13) Certain industries are however potentially sensitive: the textile and clothing sector given the remaining tariff peaks; and the automobile sector, where firms have spread production capacities over the world, very often to circumvent significant border protection.
For these two industries, specific studies have been conducted. Regarding textiles and clothing, a study published in 2002 pointed to the concentration of the gains by China and India, while the small developing countries were losing out.(14) More originally, it may be asked what conditions the regional division of labour among the EU and its Mediterranean and small Eastern neighbours would be able to survive such new competition. Wage costs are only one component of the value added chain, since design, distribution and transport costs (including time for delivery) also play an important role.
The differentiation of products and the pace of innovation are key elements in explaining world competition in the automotive industry. European countries are divided into three groups: net importers (such as the UK and Belgium), net exporters of high value cars (such as Germany and to a lesser extent France) and net exporters of lower value cars (Italy and
Spain). Competition from emerging countries will come from the low value segment of the market and from accessibility to these markets. As shown by recent simulations with MIRAGE, full liberalisation will bring major impetus to Japanese and South Korean industries, while a scenario of regionalisation benefits the Latin American countries most, given their preferential access to the US market. In all cases, the European car industry misses out on the bulk of the gains of liberalisation as regards its European locations, and profits will have to be made in the fast-growing emerging markets in Asia, by the means of a local presence.
All in all, what is the future for European industry? The answer of course very much depends on the policies adopted in Europe. Protectionism to isolate the European market from new competitors would, in the long run, be detrimental to efficiency and welfare, while entering into head-to-head price competition would be hopeless. Innovation – both in terms of creativity and high technology - and positioning of the top end products would, on the contrary, reinforce the traditional advantages of Europe, in addition to allowing it to benefit fully from the potential of a regional division of labour. Last but not least, the situation of the losers out to globalisation must be addressed internally, by providing simultaneously a macroeconomic and institutional environment favourable to job creation and a satisfactory safety net.
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(1) FONTAGNÉ, L. & LORENZI, J.-H. " Désindustrialisation, délocalisations", Rapport du CAE N°55, 2004
(2) FONTAGNÉ, L. , FREUDENBERG, M. & PERIDY, N . "Trade Patterns Inside the Single Market" Report for the European Commission, CEPII Working Paper N°1997-07, April 1997
(3) FONTAGNÉ, L., FREUDENBERG, M. & GAULIER, G. "Disentangling Horizontal and Vertical Intra-Industry Trade" CEPII Working Paper, Forthcoming 2005)
(4) CHEPTEA, A. GAULIER, G. & ZIGNAGO, S. "The World Market: Market Shares and Export Performances" La Lettre du CEPII N°234, May 2004
(5) CHELEM: Harmonised Accounts on Trade and The World Economy
(6) GAULIER, G. & ZIGNAGO, S. "BACI : An Analytical Database on International Trade"
(7) BCHIR, H., DECREUX, Y., GUÉRIN, J.-L. & JEAN, S. "MIRAGE, a Computable General Equilibrium Model for Trade Policy Analysis" CEPII Working Paper N°2002-17, December 2002
(8) BOUËT, A., DECREUX, Y., FONTAGNÉ, L., JEAN, S. & LABORDE, D. "A Consistent, Ad-Valorem Equivalent Measure of Applied Protection Across the World: The MAcMap-HS6 Database" CEPII Working Paper N°2004-22, December 2004
(9) LEMOINE, F. & ÜNAL-KESENCI, D. "China in the International Segmentation of Production Processes" CEPII Working Paper N°2002-02, March 2002
(10) FONTAGNÉ, L., FOUQUIN, M., GAULIER, G., HERZOG, C. & ZIGNAGO, S. "European Industry's Place in the International Division of Labour: Situation and Prospects" Report for the European Commission, 2004
(11) FONTAGNÉ, L. & GAULIER, G.. "Measuring Quality of Traded Products with BACI" The CEPII Newsletter N°23, 4Q 2004
(12) BÉNASSY-QUÉRÉ, A., FONTAGNÉ, L. & FOUQUIN, M. "The Happy Dollar" La Lettre du CEPII N°225, July 2003
(13) FONTAGNÉ, L., GUÉRIN, J.-L. & JEAN, S. "Market Access Liberalisation in the Doha Round: Scenarios and Assessment" CEPII Working Paper N°2003-12, September 2003
(14) FOUQUIN, M., MORAND, P., AVISSE, R., DUMONT, P. & MINVIELLE, G. "Mondialisation et régionalisation : le cas des industries du textile et de l'habillement" CEPII Working Paper N°2002-08, September 2002
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