Commission report highlights changing competition from China
Source : Commission Européenne (europa.eu.int)
Actualité du 25/11/04 à 15:28
The European Commission has published its 2004 European Competitiveness Report. The European Competitiveness Report is an annual publication that covers topical issues for Europe’s competitiveness. The 2004 Report focuses on three themes: China, the automotive industry, and the role of government policies in influencing competitiveness. The analysis of government policies includes specific studies of research policy and of efficiency concerns in healthcare provision.
Günter Verheugen, Commission Vice President, noted: “The Report points to the need to enhance competitiveness and innovation in the EU to respond to the challenge of countries such as China, which is turning itself into a low-cost competitor in high-skill industries. One of the priorities of this Commission will be to face this challenge in the framework of the Lisbon agenda.”
The competitive challenge of China
The analysis of China in the Report concentrates on recent changes in China’s trade with the EU, as well as the role of industrial policy and foreign investment in forging structural change.
Import competition from China used to focus on labour-intensive goods and low-skill industries. At present, China’s active industrial policy is turning the country into a low-cost competitor in high-skill industries.
Owing to China’s gradual opening to the international economy, exports from China have grown by more than ten per cent per year since the second half of the 1990s. Today, China is the fourth largest exporter of merchandise goods in the world; in 2003, exports accounted for 31 per cent of China’s GDP. For the EU, China is the second largest trading partner after the US. The manufacturing trade balance of the EU-15 with China moved from surplus in 1995 into a deficit of € 10,373 million in 2002.
China’s industrial policy has selectively attracted foreign direct investment (FDI) in technology intensive industries in order to benefit from foreign technology and organisational know how. At the same time, Chinese authorities have actively promoted domestic companies (‘national champions’) which are regarded as having the potential to compete in world markets. These have contributed to the rapid upgrading of China’s industrial structures.
Foreign direct investment flows into China soared from a very modest level in the early 1990s to reach USD 52,700 million in 2002. This is almost twice the level of FDI inflows into Central and Eastern Europe and 15 times more than the FDI inflows into India. The largest investors into China are the overseas Chinese community in Hong Kong and Taiwan. Some ten per cent all FDI flows into China come from the EU-25. Early European FDI into China was primarily motivated by the low costs and went into exporting industries. Currently, an increasing share of FDI is motivated by the desire to produce for the growing Chinese market.
In the production of information technology goods – telecommunication equipment and computers – foreign invested enterprises account for 60-70 per cent of output. These two industries are among the top three exporters into the EU and have increased their exports at annual rates of some 20-30 per cent. The overall share of high-skill industries in China’s manufacturing exports to the EU-15 has already risen above 20 per cent, which is twice as high as the share of high-skill industries in the exports of the ten new EU Member States to EU-15.
The rapid growth of skill-intensive imports from China represents a challenge to the EU, for which China traditionally was a supplier of low-skill goods. Continued efforts in innovation and productivity growth are needed to maintain EU competitiveness. At the same time, the high growth of the Chinese market – GDP has grown at an annual average rate of nine per cent in the past 25 years – and market-oriented reforms, including the accession to the WTO in 2001, have opened major trade and investment opportunities to European companies.
The Report contains industry-specific analyses of China’s competitiveness in telecommunications, textiles, engineering and chemicals.
Competitive position of Europe’s automotive industry
The Report points to the success of the European automotive industry which, despite increasing competition on a world-wide scale, has maintained a strong position in exports and global sales. The strong bond between Europe’s vehicle manufacturers and the sophisticated customer base in the largest car market in the world constitutes a prominent competitive advantage, while the notable presence of European producers in emerging markets, such as China and the Russian Federation, offers a potential for future growth and profits.
EU enlargement created new opportunities for the European automotive industry. The combination of expertise, affordable labour and the proximity to the large European markets has led to the emergence of a very dynamic cluster in the new Member States – especially Poland, the Czech Republic, the Slovak Republic and Hungary.
However, many challenges remain:
The EU automotive industry lags behind the US and Japan in terms of productivity. Labour productivity in the EU-15 is 25 per cent lower than in the US and 30 per cent lower than in Japan.
Labour costs per hour worked in the EU-15 are comparable to those in the US, but more than ten per cent above those in Japan and almost three times as high as in Korea (data for 2001, converted using purchasing power parities). Annual working time in the automotive industry in EU-15 is more than 20 per cent shorter than in the US (in 2001).
There are major technological challenges ahead, most prominently the fuel cell. Competition and innovation will be key determinants of the viability and strength of Europe’s automobile industry.
With regard to public policies, the Report emphasises the need for efficient competition on the home market, trade liberalisation and progress in international standardisation and intellectual property rules. Regulation plays an important role in affecting innovation. The development of new technologies can give a first mover advantage to EU industry in the world market. The regulatory process should leave scope for the industry to decide how to meet societal requirements, including the need for environmentally friendly technologies.
The fragmentation of the car market in the EU prevents the industry from exploiting economies of scale, and contributes to significant variations in pre-tax prices within the Internal Market. Reducing the large differences in taxation applying to the acquisition, ownership and use of cars would enhance the ability of the car industry - and European consumers - to reap the benefits of operating within a single market.
Government policies influence competitiveness
The public sector has an important bearing on competitiveness, not least because of its size: in the EU Member States, between 11% (the Netherlands and Germany) and 32% (Sweden) of all jobs are in the government sector. Government expenditure ranges from 34% (Lithuania) to 65% (Czech Republic) of GDP.
The Report finds no direct link between government size and productivity among the EU countries. For example, Luxembourg and Ireland have small public sectors and high productivity, while Belgium and France combine a large public sector with high levels of productivity.
Government money, when spent efficiently in areas such as education, research and infrastructures can have a large effect on boosting national competitiveness. An efficient functioning of public administrations, including a high quality regulatory environment, is another key determinant of competitiveness.
The Competitiveness Report discusses in more detail two areas of government action: research policy and the healthcare sector.
The analysis of research policies focuses on the importance of research and development (R&D) carried out in the public sector, as well the effects of government support to private R&D. The Report provides comparative data on the level of tax incentives and direct government support to R&D in selected EU Member States. The results suggest that public spending on research does not crowd out private research; on the contrary, increasing public spending on R&D leads to increased R&D in the private sector.
In 2002, the EU spent roughly 2 per cent of GDP on research and development, the US 2.5 per cent, and Japan (in 2001) 3 per cent. Public sector R&D in the EU is comparable to the levels in the US and Japan, while business sector R&D in the EU lags significantly behind our competitors. The EU target, set at the Barcelona summit, of raising R&D expenditure to 3 per cent of GDP in by 2010 is motivated by this weak R&D effort in the EU and the need to boost innovation and growth.
The Report provides an overview of the national healthcare systems in the EU and the US.
The health sector’s output is about 7 per cent of EU-15 GDP and, consequently, its efficiency is ultimately reflected in the aggregate productivity data. Current healthcare systems in the EU countries are characterized by diversity in both the funding and delivery of healthcare. The rise in expenditures in health care provision calls for new ways to raise the efficiency of the sector. A principal challenge for healthcare reforms is the reconciliation of the objectives of higher efficiency, securing the benefits of improved technology, and ensuring fair access for all citizens.
Although there is a general recognition that providing greater incentives may enhance efficiency, experiences of the US health care sector are not supportive of unfettered competition and deregulation. In particular when equity issues are taken into consideration, the weaknesses of the US health care sector become apparent.
The European Competitiveness Report 2004 can be downloaded from:
europa.eu.int
Source : Commission Européenne (europa.eu.int)
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