29 January 1999 • Impacts of an EU Enlargement on Austria's Manufacturing. Eastern Opening Stimulates the Austrian Industry • Gerhard Palme

The still favourable foreign trade perspectives in case of EU enlargement are expected to cause positive production and employment effects for Austria's industry. Certain adjustment problems in poorly competitive industries will have been overcome before the accession of CEE countries.

The upheavals in eastern Europe have opened up new markets, thus favouring the manufacturing sector in particular. Industry covers a major portion of the greatly risen exports to Central and Eastern European countries. Due to growing exports to 4 CEECs (Poland, Czech Republic, Slovakia, Hungary), Austria's industry raised its net production value by around ATS 14 billion, or 0.6 percentage points annually, between 1989 and 1996, more than it would have been able to do without these newly opened eastern markets. It is assumed that approximately 20,000 production workers have worked on these additional exports to the 4 CEECs. This estimate does not include the indirect effects of inputs required by export firms. On the other hand, import growth has resulted in a number of domestic production workers being crowded out. There are no reliable estimates as to the extent of displacement. And import competition has not been fully effective as a number of "sensitive industries" (e.g., chemicals and plastics, textiles, clothing, iron and steel, food) have been excluded from free trade between EU and CEE countries in a transitional period in an attempt to protect western European industry. Taking into account such displacement effects, we may assume that Austria's manufacturing jobs have grown by an additional 0.2 to 0.5 percentage point p.a. owing to additional foreign trade. The politico-economic transformation of Central and Eastern European countries has affected more the east and south of Austria than its western Länder. The latter exploit additional export opportunities more indirectly through their close interlinkage with the – also profiting – German economy, whereas the east has received major incentives for enhanced internationalisation.

In the years till EU membership of the CEE countries, the liberalisation of the sensitive sectors of trade between the EU and the CEECs will accelerate sectoral change within Austrian industry. The respective special regulation has expired in 1998 for imports to the EU and is still applicable till 2000 for imports to the CEECs. This signifies that in the years to come import competition will increase on the road to specialisation in central Europe. The CEECs' accession as such will no longer trigger any serious adjustment shock for Austria's industry. Due to their comparative location disadvantages, the labour and energy intensive production sectors will come under enhanced displacement pressure. The respective jeopardised industries are more prevalent in the east and south of Austria than in the west.

Based on realistic assumptions regarding the future trade volume, the production and employment effects of EU enlargement will outdo the ones experienced in the wake of eastern opening. Without import competition, industrial jobs would move up by 25,000 to 53,000 by 2004 because of export growth to the 5 CEECs (Poland, Czech Republic, Slovakia, Slovenia, Hungary). There won't be very great displacement pressure on domestic production as it will mostly be trade with varieties of products (intra-industrial trade) that will expand. Its focus will result from the vertical work sharing within subcontracting networks. In addition, there will be a tendency towards growing specialisation in finished products if CEE countries continue to catch up economically and have their foreign trade structure approximate the EU average. Industries around major cities and in the highly centralised areas of the Länder are well-positioned to exploit increasing returns to scale. The extent to which the Länder are differently affected by these developments will become smaller the greater the integration of CEECs. Industry in the less developed Länder of Carinthia and Burgenland, as well as in Salzburg, has to reckon with somewhat reduced export stimuli.