The effects of EU enlargement on the Spanish economy: productive structures and trade flows

Esther Gordo ()

Economic Bulletin, 2004, issue JUL, No 3, 85-96

Abstract: On 1 May this year the European Union took a far-reaching step in its project to achieve a single European market, with the accession of ten new members: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Some figures help illustrate the scale of this enlargement. The population of these countries accounts for 16.3% of the enlarged EU, while their weight in real GDP stands at around 4%. The disparities in terms of per capita income between the new and existing members are substantial, and only Cyprus, Slovenia and Malta are close to the less developed States of the EU-15. The demographic and economic significance of the ten new members is very uneven, since Poland, the Czech Republic and Hungary alone account for 80% of their GDP. The geopolitical dimension of this fifth enlargement has momentous implications for the workings of the EU, in both the political and institutional domain. But the development gap between the new and existing members also confers special characteristics on this process since, given the circumstances, adjustments in the financial framework and the redistribution of trade flows and of productive factors could prove greater than those recorded in previous enlargements. Among the numerous implications of the enlargement, one of the areas arousing most interest is its impact on international trade and foreign direct investment flows. Since the late 1980s, when most of the enlargement countries began the transition towards a market economy, trade ties between the existing and new EU members have stepped up notably, in keeping with the progressive lifting of barriers stipulated in the European Association Agreements. Initially, the increasing trade with the enlargement countries was more favourable for the EU-15, since the dismantling of the protectionist barriers of the future members started from higher levels of protection. Nonetheless, in recent years imports of products from these countries have been gaining notable momentum. The enlargement will undoubtedly bear on the Spanish economy not only via direct trade exchanges between the two areas, but also because Spanish exporters to the EU-15 market may be indirectly affected. The possibility of Spanish products being displaced by those from the new members will depend on the degree of similarity between their productive and trade structures, and also on their respective competitive positions. In this respect, it should be borne in mind that the growing presence of foreign capital in the eastern European economies – lured by the availability of highly-skilled labour at a comparatively low cost and by the geographical proximity of these countries to the major EU markets – is proving a crucial factor in the modernisation, opening up and transformation of the enlargement countries. This paper focuses on the assessment of this latter aspect. In particular, through analysis of the productive and trade specialisation patterns the new members are pursuing, it is sought to ascertain whether the enlargement will entail, in addition to a heightening of Spanish trade with these countries, a sectoral or geographical restructuring of our industrial output and of our foreign trade flows. The analysis focuses primarily on manufacturing industry, since it is here where the effects of economic integration are most intensely perceived. The time span for the analysis is the period between 1995 – when these countries may be considered to have left behind the recession in which they were immersed following the transformation of their productive systems – and 2002, the latest year for which information is available. During this period, the opening up and integration of the enlargement countries into European markets was very intense. Indeed, a free-trade area for the exchange of industrial products was already practically in place in 2002, though certain restrictions on so-called “sensitive” products persisted. Consequently, the transformation of productive structures and trade flows witnessed since 1995 provides valuable information on the costs and benefits enlargement may have entailed for the Spanish economy, and it allows certain future developments to be anticipated. The paper is structured as follows. After this introduction, the second section compares the productive and trade specialisation pattern of the new members with that of Spain and of the EU as a whole. The third section attempts to analyse in greater depth the degree of substitution of the new members’ tradable goods for those of Spain, using an approximate measure of product quality. Finally, the main conclusions are drawn.

Date: 2004
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