Intra-Industry Trade and Competitiveness of the New EU Member States - ebook

List of abbreviations

AT – Austria

BAFTA – Baltic Free Trade Area

BE – Belgium

BEC – Classification by Broad Economic Categories

BG – Bulgaria

CEE – Central and Eastern Europe

CEFTA – Central European Free Trade Agreement

CN – Combined Nomenclature

CZ – the Czech Republic

DE – Germany

DK – Denmark

EE – Estonia

ES – Spain

EEC – European Economic Community

EFTA – European Free Trade Association

EU-10 – Central European countries having joined the EU in two enlargement phases: in 2004 (the Czech Republic, Estonia, Lithuania, Latvia, Poland, Slovakia, Slovenia, Hungary) and in 2007 (Romania and Bulgaria)

EU-15 – all members of EU before the 2004 enlargement

EU – European Union

FDI – foreign direct investment

FI – Finland

FR – France

GB – Great Britain

GDP – gross domestic product

GHM – index measuring the share of particular types of IIT in overall trade developed by Greenaway, Hine and Milner

GR – Greece

GVC – Global Value Chains

HightTech – high technology products

H-O – Heckscher-Ohlin’s Theory of International Trade

H-H – the Herfindahl–Hirschman index

HU – Hungary

IE – Ireland

IIT – Intra-industry Trade, also known as TT

IMD – International Institute for Management Development

IRS – Increasing Returns to Scale

IT – Italy

LowTech – products with low technological advancement

LT – Lithuania

LU – Luxemburg

LV – Latvia

MidTech – medium technological advancement products

NCC – Ireland’s National Competitiveness Council

NL – the Netherlands

NMS – New Member States, see: EU-10

OECD – Organisation for Economic Cooperation and Development

PGE – Polska Grupa Energetyczna

PL – Poland

PT – Portugal

R&D – research and development

RCA – Revealed Comparative Advantage index

SE – Sweden

SK – Slovakia

SI – Slovenia

SITC – Standard international trade classification

Rawlab – raw-material and labor-intensive products

RO – Romania

TNC – transnational corporation

TT – two-way trade, see: IIT

UN – United Nations

USSR – Union of Soviet Socialist Republics

WB – World Bank

WEF – World Economic ForumIntroduction

Intra-industry trade – is this only a statistical phenomenon or a real factor enhancing the analysis of structural competitiveness and influencing decision and policy making? Do we analyse the IIT indexes only to improve the research of foreign trade structure or to supplement the discussion on GVC?

This publication presents the results of research attempting to identify relationships between two vital issues in the modern economy: the intensification of intra-industry specialisation in foreign trade and changes in the competitiveness of economies undergoing structural adaptation. The empirical study covered the group of the EU-10 countries.

Economic competitiveness and intra-industry trade

Significant considerations in the study were to enhance and add to the knowledge on the international competitive positions of countries in foreign trade and to bridge the gap in existing investigations, e.g. by emphasising the role and importance of intra-industry trade in shaping the competitive positions of economies in the process of economic integration and trade liberalisation. Importantly, competitiveness theories as well as intra-industry trade theories are open in nature – scholars have not even yet fully developed acceptable definitions of the phenomena concerned, playing an increasing role in both practice and theory. Intra-industry trade indices may rank among the most significant quantitative measures of the competitive position and major factors reflecting the degree of real adjustments to the requirements of the single market. Intra-industry trade also seems to allow the measurement of the scope of structural changes triggered by the liberalisation of foreign trade.

The literature shows that these issues attract interest from economists worldwide. However, the existing international studies tend to focus on developed countries, frequently excluding CEE and other economies in transition. Neither do the available analyses answer the question whether intra-industry trade is more or less resilient to negative factors (the global economic crisis) in the external environment or do they take any account of the effects of accession (the elimination of barriers in the single market) on intra-industry trade. The presented analysis may allow to bridge those important gaps in prior research investigations.

In answering the question why analyses of intra-industry trade are conducted it must be pointed out that the phenomenon is significantly linked with the processes of trade liberalisation, regional integration and structural economic reforms in countries in transition. As demonstrated by the main approaches to the fundamentals of economic competitiveness theory, intra-industry trade indices rank among vital quantitative measures of the competitive position (Misala, Pluciński 2000). The modern world economy facilitates structural changes and competitiveness improvements when countries implement policies of economic liberalism and the opening up of economies (Ozawa 1992). Trade liberalisation triggers structural transformations, whereas intra-industry trade measures the scope thereof. Such structural changes seem to be relatively less costly when trade flows created are intra- rather than inter-industry in nature (Balassa 1966). It may reflect the crucial importance of two-way trade as an indicator of the degree of necessary structural transformations in trade liberalisation (Bijak-Kaszuba 2003). The intra-industry trade index may also be a major factor reflecting the degree of real adjustments to the requirements of the single market (Molendowski 2007). Furthermore, analysing the types of intra-industry specialisations, thus the price and quality structure of IIT (of vertical and horizontal trade), may help assess the competitiveness development stage of an economy (Porter 1990).

In recent years, the base for the development of foreign trade has shifted towards IRS and advantages in production costs of differentiated goods in conditions of factor mobility (Bożyk, Misala 2003). The share of IIT in total trade can be treated as an empirical determinant of the prevailing type of trade, within the meaning of the H-O theory or in accordance with IRS. In addition, IIT indices can be used to measure the development level of countries engaged in two-way trade.

Intra-industry trade has considerably gained in importance in industrialised countries since the phenomenon was described by B. Balassa (1966) and P. Verdoorn (1960) for the EEC countries in the 1960s. Therefore, it seems vital to observe the processes of the adaptation of the NMS (the EU-10) to the internal single market of the EU with regard to the intensification of the intra-industry division of labour. This is of importance, as there is a relationship between the intensity of the participation of the economy of a country or a group of countries in the international division of labour measured by the level of intra-industry trade and the efficiency of allocated factors of production. Exports and imports based on the complementarity of economies (RCA) may impose natural self-limitations on the development of mutual trade and, consequently, may be the main cause of the opportunity cost in the enlarged EU market. Greater substitution expressed in the intensification of IIT should strengthen the positive effects obtained by the countries involved in the most advanced stage of integration. It may also be conductive to increased competitiveness of their economies, thus to improved social welfare, wealth and the comfort of living in those countries.

It seems important to examine to what extent trade linkages between the NMS and the EU-15 resulted from the development of intra-industry specialisation. The intra-industry trade indices reflect changes in the competitiveness of economies in transition as well as in the level of adjustments of countries to the requirements of the global market. Therefore, it seems crucial to attempt to analyse the changes in the structure of trade of the NMS with the EU-15 in 2004–2015 on the basis of those indices. Such an analysis may help assess the pace and nature of adjustments with regard to the structural competitiveness of the EU-10 economies in the EU market observed in the countries covered after EU accession and their preparedness to operate and compete in that market. Intra-industry specialisation is also characteristic in the context of the future place of those countries in production and trade integration. Further, the analysis should allow to identify the benefits available to the countries concerned on account of the international division of labour in the EU structures: whether only those arising from the free trade area and the customs union or perhaps those related to integration at the internal market level.

The EU market is not homogeneous in terms of structural competitiveness, therefore the observation of intra-industry competitiveness by industry within individual economies of the NMS in relation to the EU-15 and in mutual trade should be a significant addition to the analysis and may be helpful in the indication of possible areas for intensification of trade with specific EU members, distinguishing between selected industries as areas of particular importance to the development of intra-industry trade. Such an examination points to another practical merit in comparison with averaged indicators for the EU as a whole.

In the context of further enlargements of the EU, it remains crucial whether the other South-Eastern European countries, currently outside the EU structures but permanently involved in the processes of regional integration and trade liberalisation, drawing on the EU-10 experiences, can shape their participation in the intra-industry division of labour in a similar manner.

The dominant element of the presented study is considered to be an analysis of changes in the intensity of the intra-industry trade of the NMS in 2004–2015, in relations with the EU-15, in mutual trade and in trade with third countries. The novelty of the investigation is mainly the focus of the analysis on the ten economies of the EU-10. This will substantially contribute to the development of prior research on the phenomenon of the intra-industry trade and adjustment processes of the NMS and the candidate countries to the requirements of the single market. Furthermore, it seems that placing greater emphasis on IIT as an additional measure of competitiveness may help make relevant comparative analyses more real and contribute to defining and implementing more accurate policies shaping the economic reality as well as to designing better business development strategies in such an economic environment.

Research objectives and hypotheses

The problems concerning changes in intra-industry specialisation and structural adaptation in the process of regional economic integration of the EU-10 as well as their impact on the economic competitiveness of the NMS served as the basis for determining the research objectives of the investigation presented. The main objective is an attempt to evaluate the role of intra-industry trade in shaping the economic competitiveness of the NMS of the EU. More details are provided by the following four ancillary objectives: identification of the substance of the phenomenon of intra-industry trade as a determinant of international economic competitiveness; empirical analysis of the main development trends in the intra-industry trade of the EU-10 with the EU-15 and assessment of their economic competitiveness in the SEM in terms of complementarity and substitution; indication of possible areas for intensification of trade by observing the intra-industry competitiveness of the NMS by industry; assessment of possible further development of the economic competitiveness of the other CEE countries (aspiring to EU membership) in the context of the experiences of the EU-10 in their adjustments to the internal single market of the EU.

The objectives are linked with the following research hypotheses:

The main hypothesis: changes in intra-industry specialisation in the trade of the new EU Member States reflect structural transformations influencing their economic competitiveness.

The ancillary hypotheses: structural economic competitiveness expressed as the share of intra-industry trade is important on account of real adjustments to the single EU market; the intensification of intra-industry specialisation in international trade, thus increased economic substitution, is set to grow in the internal single market as the advanced phase of economic integration; intra-industry trade is a major factor shaping the processes of further regional integration and trade liberalisation in the enlarged EU.

Research methods

The theoretical part (Chapters 1 and 2) mainly draws on secondary sources – books and articles published in both Polish and foreign journals, in Polish and in English. Therefore, the theoretical analysis focused on investigating available monographs, books, review articles and findings from studies concerning theoretical and practical aspects of intra-industry trade, competitive advantage, regional trade liberalisation and economic competitiveness.

For the purpose of illustrating trends in the foreign trade of the NMS in 2004–2015, Chapter 3 presents the results of the comparative analysis of the EU-10 economies. The following methods were employed: analysis of changes in dynamics (e.g. of internal demand, exports and imports); analysis of the geographic and product structure, its changes and the distance between structures of a certain type (the Euclidean distance, comparison in the breakdown into main SITC commodity groups, changes of shares in imports and exports of manufactured goods classified by factor inputs, examination of the structure of trade in final goods and intermediates); classification of countries by share in world trade; examination of the openness of economies (according to an indicator measuring trade as a share of gross domestic product); analysis of geographic and product concentration (the H-H, the share of the top five commodity groups in total trade); examination of foreign trade specialisation (e.g. analysing the structure of commodity groups in relation to the revealed comparative advantage index).

The main empirical analysis aims to examine basic development trends in the intra-industry trade of the NMS (Chapter 4), taking account of the role of particular industries (Chapter 5). The examination covers, inter alia, an analysis of changes of intra-industry trade intensity in the EU-10, an analysis of IIT in trade with the main groups of partners and an analysis of intra-industry trade indices in the trade of final goods and semi-finished products. The methods used in both analyses include an analysis of changes in intra-industry trade intensity (the Grubel–Lloyd index) and an examination of the price and quality structure of intra-industry trade, i.e. analysis of the specific types of two-way trade (horizontal intra-industry trade, and low and high quality vertical intra-industry trade, using the method developed by Greenaway, Hine and Milner – the GHM index measuring the share of particular types of IIT in overall trade).

Composition of the publication

Chapter 1 presents theoretical aspects related to the phenomenon of international economic competitiveness. Starting from the competitiveness theory fundamentals, the analysis is first based on considerations regarding the substance and importance of competitiveness in relation to the evolution of economic thought and theories. Those are followed by an examination of the interrelations between elements of international competitive ability. Another stage of considerations concerned the development of the definition of international competitiveness of countries and selected methodological aspects of competitiveness modelling as well as analysing the factors of competitiveness. An attempt is also made to classify and assess the main measures of international competitiveness and competitive positions of economies, with a special emphasis on the role of intra-industry trade measures.

Chapter 2 aims to present the phenomenon of intra-industry trade in the light of international trade theories. The starting point is an analysis of the intra-industry trade theory fundamentals and describing the causes of the intensification of two-way trade. Next, the chapter presents the benefits of IIT development and outlines the main methodological aspects of measuring intra-industry trade (traditional, dynamic and complementary measures related to types of IIT). Further, it attempts to characterise the linkages between regional liberalisation of trade and intra-industry division of labour. The focus is on issues such as the description of IIT development within regional economic communities, structural transformations resulting from intra-industry specialisation in conditions of liberalisation and the importance of two-way trade to the convergence of integrating economies. The considerations conclude with a review of the most important and recent studies regarding the intra-industry trade of the CEE.

Chapter 3 presents the findings from a comparative analysis of the merchandise trade of the EU-10 in 2004–2015. It starts with a description of the major changes of the conditions of EU-10 foreign trade arising from accession to the single EU market. Next, it presents the results of empirical studies confirming the growing role of foreign trade in the economies of the countries covered. The following part discusses the findings from an analysis of changes in the value, dynamics and structure of imports and exports. Next, there is a description of the examination results concerning the structure of foreign trade by main commodity groups and factor inputs as well as changes in similarities between structures of EU-10 imports and exports. In conclusion, the chapter describes the findings from an analysis of the specialisation and concentration of foreign merchandise trade.

The analysis presented in Chapter 4 mostly aims to empirically study the main development trends in the intra-industry trade of the NMS and to assess the level of their economic competitiveness in the single EU market in terms of complementarity and substitution of their economies. The examination covers changes in the intensity of the intra-industry trade of the EU-10. The chapter also characterises significant changes in the intra-industry trade of the EU-10 in trade with the main groups of partners. In conclusion, it analyses the intra-industry trade indices of final goods and intermediaries.

The analysis described in Chapter 5 aims to answer the following research question: after more than ten years since the most extensive enlargement of the EU, what was the product structure of the intra-industry trade of the EU-10 in particular manufacturing industries and in trade in primary commodities? The examination also attempts to answer the question whether the changes in the structure of IIT in the EU-10 in 2004–2015 followed patterns similar to those observed in the EU-15 and whether they had a positive structural dimension. It begins with an analysis of the intra-industry trade in three manufacturing industries: machinery and transport equipment, other manufactured goods and chemicals. Next, it presents changes in the structure of two-way trade in manufactures broken down by technology intensity, with a special focus on horizontal trade and high-quality vertical trade in medium- and high-technology products (also referred to as “MidTech” and “HighTech”, respectively). The chapter concludes with a description of the analysis results concerning the structure of intra-industry trade in primary commodities in three industries: food, beverages and tobacco, energy products and raw materials.

The analysis concludes with Chapter 6, recapitulating the most important research findings, with a special focus on the achievement of the adopted objectives and on the verification of the research hypotheses put forward. The conducted study allows to corroborate the main hypothesis as well as all the ancillary hypotheses.

Data source

The application of the research methods described in the introduction and employed in the presented analysis encountered a number of limitations. Those can be listed i.a. into the following categories: source of data; level of data aggregation; result calculation methodology – research techniques and methods; time series; adopted simplifications.

The main source of primary data for the statistical analysis described in the empirical part of the thesis was the European Statistical Office (Eurostat). That analytical body of the EU operates on the basis of the principles, rules and guidelines established under the Single European Act in 1987. The authority prepares forecasts and statistical analyses concerning the EU Member States and the EFTA, which are vital for making decisions by the Community authorities, coordinates and monitors activities of national statistical offices in order to unify the survey methods used by them, and consolidates national statistics of Member States. The powers of the Eurostat also comprise analysing and forecasting development trends in the EU.

The Brussels data portal of the Eurostat publishes the online database EasyComext (http://epp.eurostat.ec.europa.eu/newxtweb), which served as the fundamental source of data for the main statistical analysis, i.e. the examination of changes in intra-industry trade intensity (the Grubel–Lloyd index) and the study of the price and quality structure of intra-industry trade, i.e. the analysis of particular types of two-way trade (GHM indices reflecting shares of specific IIT types in total trade).

Additional data used particularly in the analysis of the main trends in the EU-10 foreign trade, with the results presented in Chapter 3, were retrieved from the Eurostat – Data Explorer (http://ec.europa.eu/eurostat/data/database).

Relying on the methodological guidelines described in sub-chapter 2.5 with regard to methods for the measurement of intra-industry trade and taking account of the scope and objectives of the analysis conducted, the study of intra-industry competitiveness (Chapters 4 and 5) was carried out based on IIT and GHM indices calculated on the basis of data regarding the value and volume of exports and imports at the level of 6-digit CN codes. It corresponds to the theoretical notion of an industry and satisfies the condition that only the deepest possible disaggregation of data ensures comparability of the same products and can establish the actual degree of matching exports and imports, i.e. the real level of intra-industry trade intensity.

Advanced Microsoft Office EXCEL formulas were used for the computation of IIT and GHM indices. The research methods and techniques necessary to appropriate data processing have been developed in the course of the author’s professional and scholarly experience gained in the implementation of analytical projects, in particular as part of research projects financed by the National Science Centre and analyses commissioned by the Ministry of Economy.

Factors such as the availability of data due to the selected source, their degree of detail as well as the complexity of the examination limited the possibility to quickly update the study results, therefore they affected the determination of the time series for the analysis. Most data were retrieved from the EasyComext database on 13 February 2017. Bearing in mind the data updating rules in the Eurostat database, the scope of available data covered the period from 2004 to 2015. That time series was adopted as the basis for the empirical analysis, the results of which are presented in Chapters 3, 4 and 5.

The study divided the EU Member States into the following groups: the new EU-10 (the Czech Republic, Latvia, Poland, Hungary, Slovakia, Slovenia, Romania, Estonia, Lithuania, Bulgaria)¹; the EU-15 (Germany, France, Belgium, Austria, the Netherlands, the United Kingdom, Spain, Italy, Denmark, Portugal, Sweden, Ireland, Finland, Luxembourg, Greece); the EU-28 – all the Member States of the EU in 2015, i.e. the EU-15, the EU-10, Cyprus, Malta and Croatia. In order to ensure proper transparency of the analysis and the comparability of the calculation results, the study is based on a certain simplification. The year 2004 was adopted as the initial year of the analysis for all of the EU-10, even though Romania and Bulgaria joined the SEM after their formal accession in 2007.

Data grouping, analysis and presentation based on the main categories of the SITC are a way for a clear analysis of the main branches of the economy within which the IIT exchange takes place. The author’s previous experience in analysing and publishing the results of research on IIT was focused on working with the CN classification. Here, however, we have as many as 21 sections of the CN. In comparison with the six major categories of the SITC, it is too much to clearly illustrate structural changes within the IIT exchange for such a wide range of national economies (EU-10 vs. EU-15). The source data from the EUROSTAT was based on six digit codes (CN6). Their aggregation, in accordance with the methodology of calculating IIT up to the level of 6 main SITC categories, was implemented by applying the UN Trade Statistics correspondence tables (https://unstats.un.org/unsd/trade/classifications/correspondence-tables.asp). The final and intermediate goods have been classified by the following methodology: BEC Intermediate Goods in Trade Statistics (https://unstats.un.org/unsd/tradekb/Knowledgebase/50090/Intermediate-Goods-in-Trade-Statistics).

The distinction in the analysis of four groups of products according to the level of technological advancement (Rawlab, LowTech, MidTech, HightTech) allowed to deepen the research. Particularly because of the importance that the technological advancement of industry has for further development and increase in competitiveness as well as because of the possibility of emerging from the medium income trap with the intensification of production technology. Data were grouped according to correlation tables: Product by technological categories (SITC Rev. 3 based on Lall (2000), http://unctadstat.unctad.org/EN/Classifications.html).

In the case of the unprocessed products category, a small level of diversification may be a limitation for the application of the concept of measuring intra-industry exchange in the case of unprocessed products (agri-food products, fuels and raw materials). The focus on industrial products in IIT analysis seems obvious, as in 2015 this trade represented almost 90% of the total intra-industry trade in the EU-10 and EU-15 (89% for the EU-10 and 87% for the EU-15) and much more than 70% of total trade (72% for the EU-10 and 79% for the EU-15). But the development of intra-industry trade takes place not only within industrial products. The level of diversification of unprocessed products is growing, as the strength of the brand is growing, also in the market of basic goods and raw materials. What’s more, these are important economic sectors responsible for meeting basic social needs – including i.a. agri-food products and electricity. They provide many jobs (for example: Biedronka and PGE in Poland²), guarantee the development of competition at the SEM, require more and more investment expenditures in the development of competitive business models, of managerial staff and more efficient production, greater automatisation and investments in brands. The development of companies from these sectors within the SEM (especially from the EU-10) disrupts monopolistic competition in the markets of Western Europe (EU-15), and greater competition favours consumers and increases the level of prosperity of societies.

Contribution to scientific research

The contribution of the presented study to scientific research can be divided into categories related to the main functions of science. The scope of tasks executed in scientific research covers the theoretical (developing scientific theories) and empirical (carrying out studies) explanations and illustrations of reality. Such activities serve to perform all functions of scientific research

As regards the descriptive function of science, one added value of the conducted study was a broad statistical analysis of data concerning the intra-industry trade of the EU-10 as compared to the EU-15, conducted at a low level of aggregation (CN6) on a long time series (2004–2015). It is worth considering an attempt to apply similar analysis conditions for further studies into the phenomenon of the development of intra-industry specialisation in countries participating in trade liberalisation processes at various stages of economic integration. In a longer term, it should allow to ensure an appropriate level of comparability of the findings from particular studies. It offers a chance to improve the process of rebutting and corroborating inferences arising from theory, which may have a positive effect on the further development of the theory of intra-industry trade.

Another component of the contribution of the conducted study to scientific research is the enhancement of and addition to the knowledge on the international competitive positions of countries in foreign trade and bridging the gap in existing investigations in that regard, e.g. by emphasising the role and importance of intra-industry trade in shaping the competitive positions of economies in the process of economic integration and trade liberalisation. The presented analysis, both as a review of theoretical considerations and as empirical verification, connects the concepts of competitiveness and the development of intra-industry specialisation. Through the rationale for including IIT indices in the set of measures of the international competitive positions of economies, it may contribute to the explanatory function of economic theories.

As demonstrated in sub-chapter 6.1, describing and observing changes in the intra-industry specialisation of the NMS can be the basis for projecting further adaptation trends in their economic structures in conditions of competition across the SEM. Simultaneously, seeing IIT as a phenomenon allowing to measure the international competitive position may represent one of the elements of shaping and implementing long-term economic policies by the candidate countries and those aspiring to EU membership. It can be concluded that the analysis presented in the thesis will help to develop the forecasting function of the theory of intra-industry trade and of the competitiveness theories.

The presented findings from the study on the importance of intra-industry trade to the economic competitiveness of the NMS can be addressed to a wide group of recipients, inter alia: scholars, university teachers and students; policy-makers and decision-makers in government institutions and agencies, national and international statistical offices as well as think tanks and international consultancy firms providing analytical services to the aforementioned institutions; the business community: directors and managers for business development, sales and marketing as well as market research firms contracted by private enterprises expanding in international markets.Notes

1 The analysis excludes Malta and Cyprus; although they joined the EU in 2004, due to factors such as the size and nature of their economies as well as the geographical distance to the EU-10 those countries tend to be left out of similar investigations (cf. Kawecka-Wyrzykowska, Ambroziak, Molendowski, Polan 2017).

2 The largest employers in Poland in 2017. Ranking “Rzeczpospolita”: Place 2. Jeronimo Martins Polska S.A., Number of emplyees: 55,200. Sales income: 43.5 bln PLN. Place 3. PGE S.A., Number of emplyees: 38,500. Sales income: 28.1 bln PLN, http://biznes.onet.pl/praca/firmy-z-najwiekszym-zatrudnieniem/n281e3 .