The rise of emerging economies in the EU15 trade.

• Author: Gaulier, Guillaume
• Position: Report

Introduction

In the past two decades, developing and emerging economies (DEEs) have become major players in the world economy and in international trade. They have become the most dynamic exporters of manufactured goods and services, eroding the dominant position of the developed countries in world markets.

A common characteristic of the new comers is their relatively low level of income which shapes their position in the international division of labour and is expected to induce far reaching changes in the pattern of supply and demand. The global economic crisis which burst at the end of 2008 has strengthened even more the position of the large emerging economies which have proved remarkably resilient to the shock. Their growth prospects have raised the expectations that they could become the drivers of global demand, since recovery in advanced economies is highly uncertain.

Many studies have analysed how the advanced economies have coped with the rise of these new players. They focus on the consequences of the competition from the DEEs on the positions of the advanced economies in international trade. Our analysis focuses on the EU15 trade with the DEEs and considers that the new comers have also offered expanding markets. The paper examines how the DEEs have contributed to the global trade performance of the UE15 between 1995 and 2008.

Several questions are raised. In what the EU15 trade with the developing and emerging economies actually differ from its trade patterns with advanced economies (in terms of production stage, technology level, quality range)? What are the strengths and weaknesses of the EU15 in these trade relations? What are the dynamics of the EU trade with the different emerging areas which are highly heterogeneous? How the major European countries are positioned in these different markets and especially in the six large emerging markets?

In order to characterise the position of partners in the international division of labour our analysis of trade flows goes beyond the classification by industrial branches. We have used the following criteria to set up product classifications: stage of production (primary, intermediate, consumption and capital goods), price/quality ranges (down-market, middle-market and up-market goods) and technological levels. Combining all these different criteria provides an in-depth view of the evolution of the trade patterns between the EU15 and the emerging economies in the past decade.

The paper is organised as follows. The first section sketches out the rise of the DEEs in the world economy and in the foreign trade of the Triad (the EU15, Japan and the US). The second section examines how the EU15 trade with the DEEs differs from that with high-income countries and is influencing its specialisation. The third section focuses on the analysis of the EU15 trade flows which were by far the most dynamic ones, i.e. with the DEEs located in Europe and its periphery and in Asia. The fourth section examines the trade relations between the four major European exporters (Germany, France, the UK and Italy) and the six largest emerging economies (Brazil, Russia, India, China, Mexico and Turkey).

1. The EU15 trade with emerging economies: 1995-2008

   1.1 Shifts in world production and trade

   The present study uses a definition of developing and emerging economies (DEEs) based on their income per capita. The DEEs are those which had a per capita in 1995 below the threshold set by the World Bank (9,386 US dollars in 1995 [see World Bank, 2009]). According to this definition, the present group is relatively large and heterogeneous, but it is however narrower than some other classifications (UNCTAD for instance) which include into the group of "emerging and developing economies" countries which have crossed the threshold decades ago (namely South-Korea, Hongkong, Singapore, Taiwan). In the present grouping, some countries have reached a GDP per capita which put them, in 2008, above the level of poor countries but are still well below the average level of high income countries.

   Developing and emerging economies are here assigned to four geographical areas: Europe & Periphery, Asia, America and Africa (see appendix A.1 for geographic classification). Within the group of DEEs we have also distinguished six "large emerging economies" (LEEs) defined as those accounting for more than 1% of world GDP in 2008 (in current dollars): Brazil, Russia, India, China, Mexico and Turkey.

   Although the high-income country group retains a dominant position in the world economy, the DEEs have gained an increasing weight in the world GDP and trade (Table 1). Between 1995 and 2008, their share in the world GDP (in current dollars) rose from 19% to 31%, which still falls short from their population share (85%), and the gap with advanced economies in terms of income per capita is still huge (on average from one to seven). Their rise in world exports was even faster than in production (from 24% to 40%), and has significantly eroded the position of rich countries in world markets of manufactured goods. Their progress in world imports has also been significant (from 25 to 34%) although somewhat slower.

   The LEEs has played a crucial part in this progress. While China has accounted for a large chunk of it, the other five countries have also recorded an increase in world production (excepted Brazil), exports and imports. Besides the six LEEs, the other emerging economies have also been on a fast track, with economic and trade performance substantially above the world average. Their shares increased in world GDP (from 10% to 14%); in world exports (from 16% to 22%) as well as imports (from 17% to 20%). Emergence has thus not been circumscribed to the largest economies.

   1.2 The DEEs have overtaken high-income countries in the EU15 trade

   Several studies have shown how Europe has faced the challenges of globalisation and coped with the rise of new players [Fontagne et alii, 2008; Havik and Mc Morrow, 2006; Denis et alii, 2006; Curran and Zignago, 2009]. They conclude that, up to the mid-2000s, the EU has resisted better to the competition from low-income countries than the USA or Japan did. They explain this resilience by the EU15 specialisation in up market products: although the DEEs have considerably diversified their exports, they are mainly positioned in down-market products and have not directly threatened the EU15 strong positions.

   These studies mainly focus on the consequences of the competition from DEEs on the positions of advanced economies in international trade. Our analysis focuses on EU15 trade with DEEs and considers that these new comers have also offered expanding markets and have been new partners in the international division of labour. The paper examines to what extent trade with the DEEs has contributed to the global trade performance of the UE15 between 1995 and 2008.

   Two major trends stand out from Figure 1. First, since the end of the 1990s, there has been an outstanding rise of the DEEs in the foreign trade of the Triad in manufactured products (2). Second, compared with the two others, the EU15 has kept a relatively stronger trade orientation towards these new players, which accounted for 61% in its exports in 2008, much more than in Japan's exports (45%) or in the US exports (42%). From 1995 to 2008, two-thirds of the EU15 export growth came from developing and emerging markets (half in the case of the US). This is part of a traditional "geographical specialisation" which has been a structural characteristic of European trade [Cheptea et alii, 2008]. In the EU15 imports, the rise of emerging economies has been outstanding (gaining 22 percentage points) and in 2008, they accounted for two-thirds of the EU15 imports (without intra-EU trade), that is in substantially more than in the case of Japan (54%) and of the US (47%).

   In 2008, the DEEs have overtaken the high-income countries in the EU15 external trade and account for more than 60% of the EU15 exports and imports.

   [FIGURE 1 OMITTED]

   Symmetrically, Europe holds a relatively strong position in the foreign trade of the DEEs and is both their largest market and supplier, far ahead of the US and Japan. Since the mid-1990s the DEEs have rapidly switched the direction of their foreign trade away from the Triad (Table 2). The US and Japan were hit relatively more than the EU15 by this movement.

   In 2008, the share of the EU15 in the DEEs trade is still larger than its share in global trade. The difference measures the relative intensity of the EU15 trade with the DEEs, which is high both on export and import side (ratio 1.4). The relatively intensity of trade with the DEEs is lower in the case of the US (0.9 and 1.1 respectively on exports and imports) as well as in the case of Japan (1.0 and 1.2 respectively).

   During the period, trade between the DEEs themselves and especially between the LEEs expanded at an accelerated pace.

   1.3 In what does this trade differ? Intra- versus inter-industry trade

   In the present section, we consider the foreign trade pattern of the EU15 taken as a single entity (excluding intra-EU15 trade) and examine how trade with the DEEs has influenced the recent evolution its overall trade pattern. In order to provide an in-depth analysis of the EU15 trade during the, we have constructed a data base covering the period from 1995 to 2008, derived from Comext. The Comext data at HS 6digit level have been aggregated into industry groups and industries, classified by production stages and by technological levels. We have also calculated indicators for types of trade (one way trade, horizontal and vertical two way trade) and classified the trade flows according to price/quality ranges.

   In order to characterise EU15-DEE trade, it is helpful, first, to consider the relative importance of the different types of trade (see appendix A.5): one-way trade (inter-industry trade), two-way trade (intra-industry trade) in...