The Eastward Enlargement Effects on Trade and FDI

Abstract

The process of international economic integration has been continuously reinforced over the past decade. Such phenomenon is especially visible at the regional level, with the increase of Regional Integration Agreements (RIA), such as Mercosur, ASEAN, NAFTA and the project of European Union (EU) Eastern enlargement. Trade and Foreign Direct Investment (FDI) flows are generally recognised as the two main channels of economic integration. Consequently, the most relevant issues in the debate on RIA relate to trade creation, trade diversion and to the possible reallocation of FDI and the respective economic effects. Since the beginning of the negotiation process for the Eastern enlargement of the EU, trade and FDI have played an important role in the approximation of member states and applicants. CEEC' transition phase to a market economy may now be considered as completed, since the geographical reorientation of trade seems to have reached its limits. Industrial recovery and rapidly rising levels of productivity in these countries induced changes in the sectoral composition of output, which will in turn influence trade patterns. The flows of FDI to the CEEC and the establishing of subcontracting agreements with EU industrial firms have become substantial, and were crucial to the restructuring process of industrial production and of international trade. The implementation of production and distribution networks involving Eastern and Western European firms has contributed to a stronger integration of Eastern firms in the world economy, in spite of the fact that some forms of alliance have not generated the upgrade or the technological autonomy of these firms. In the context of the enlargement, there is a potential risk of generalization of such forms of industrial cooperation, contributing to an asymmetric integration of Europe. The CEEC' integration in the EU will promote a broad market liberalisation and a higher level of economic and monetary stability. The new competitive environment will reinforce the role of the market as a mechanism of economic adjustment and of efficient resource allocation. As a consequence, the process of industrial and entrepreneurial restructuring, and the sectoral and geographical reorientation of trade patterns of the countries involved will be reinforced.