Trade and Foreign Direct Investment with Central and Eastern Europe: Its Impact on Spain

The increased integration of the economies of Central and Eastern Europe with the European Union (EU) as the Europe Agreements are progressively implemented, is projected to have a significant impact on trade flows with Spain, as exports and imports grow very rapidly, albeit starting from a very low base. In particular, the effect will be important for labour-intensive industries, which will confront export displacement in third (EU) markets and some foreign direct investment (FDI) diversion.Trade with Central and Eastern Europe is projected to increase, although it will still be a minor component of total Spanish trade or of EU trade with the Central and East European Countries (CEECs). The product composition of this trade will probably respond to the relative factor endowments underlying current trade patterns. Spain is likely to increase its exports of physical and human capital-intensive goods to the CEECs. An increase in Spanish imports of labour-intensive goods from these countries is also predicted. But the similarity of factor endowments with regards to the labour factor vis-à-vis the main countries in the EU, implies that some displacement of labour-intensive Spanish exports to the Union is going to take place.The evolution of trade flows will, of course, be contingent upon developments in FDI. Most FDI in Spain in recent years has been driven by a set of locational advantages which are unlikely to be replicated in the CEECs in the short and medium term (access to a large domestic market and to specialized resources such as pools of trained workers, suppliers, and infrastructure). The comparatively small part of FDI which has been attracted by relatively low unit labour costs (and tends to be geographically concentrated in the less developed regions of Spain) may be seriously affected by FDI diversion, however, since alternative locations in the CEECs provide lower cost export bases and a significantly better access to the main EU markets.