10 May 2000 • Specialisation of European Manufacturing • Karl Aiginger

The process of European Integration (the Single Market Programme as well as the Monetary Union) provides us with an opportunity to investigate the consequences of integration on the specialisation of countries. In contrast to previous studies, this article contains data on the six years following the completion of the Single Market Programme (1993-1998). Specific interest in this question has been raised since specialisation in U.S. regions is much higher than in Europe.

The main findings are as follows:

• The empirical data show a weak tendency for a rise in the specialisation indicators for production in a majority of countries. Its strength varies between countries. Portugal, for example, is broadening its production structure and its exports, while Ireland is enjoying high and increasing specialisation.

• Secondly for most countries export specialisation is decreasing. It is not surprising that – during the process of integration – production specialisation increases towards the (higher) level of export specialisation. However, this does not explain the decrease in export specialisation. In several countries, increasing production specialisation (higher shares of important industries) co-exists with decreasing export specialisation. Finish pulp and paper, the machinery industry in Sweden, and the chemical industry in the U.K. are examples of this trend. Some tentative explanations – among them the impact of multinational firms spreading production from an expanding headquarter are offered.

• The fastest decline in specialisation is shown by the indicator of revealed comparative advantage (RCA), which summarises information on exports and imports. A decline in the standard deviation of the net-RCA indicator demonstrates that both large surpluses and large deficits are decreasing. One component contributing to the reduction of imbalances is increasing product differentiation and – related to this – a higher share of intra-industry trade. The overall speed of change in the degree of specialisation over the past 15 years has not been dramatic. Trends in aggregates are often weak, so that the choice of the indicator, the exact time period, or the level of aggregation can yield different pictures; firm specific effects determine development in specific countries and industries. The speed of change seems to have increased during the 1990s, i.a., due to the effects of the Single Market Programme. Theories do not unambiguously predict rising or declining specialisation and the data are in line with the presence of overlapping forces, partly pushing towards specialisation and partly towards de-specialisation.

• The main policy conclusion is that fears of extremely fast and disadvantageous types of specialisation are therefore not substantiated by the data. Extremely large imbalances in trade are evening out. If anything, from the efficiency standpoint, there is still not enough structural change in Europe. Productivity is still considerably lower than in the USA; the process of catching up in productivity has temporarily come to a halt, since growth in manufacturing has been higher in the USA during the last several years.