The Covid-19 pandemic has not only sent the global economy into a tailspin, it also initially led to a collapse in global trade as the movement of people and goods came to a standstill when the world went into a collective lockdown. Since then the international flow of goods has recovered but the crisis has challenged our current “just in time” production model involving supply chains zigzagging the globe. It has been suggested that we should move on from “just in time” to “just in case”.
Covid-19 – the latest event undermining global supply chains
Covid-19 is not the only factor potentially driving the regionalisation of production though. Many observers have suggested that the recent rise of trade barriers across the world – most prominently between the United States and China – marked the end of globalisation as we know it a few years ago. And technology is also playing its part, with new production techniques allowing the “reshoring” of production closer to their markets in countries previously deemed to be too expensive given their labour costs.
EU’s neighbours – hardly integrated into its supply chains
Against this backdrop it seems obvious to ask who could be the winners and losers of such global developments. The countries in the European Union’s neighbourhood – Ukraine, Moldova, Georgia, Jordan, Tunisia and Morocco – see themselves well placed to benefit from these potential shifts of tectonic proportions. After all they are all close to the EU’s single market and some have already started deeper integration by aligning their standards and rules.
But being geographically close doesn’t seem to be enough. Despite offering significantly lower labour costs than EU member states, most of the value added embedded in EU exports to the rest of the world is generated in just a handful of member states. Indeed, it is remarkable how little value added comes from outside the EU – it just somehow doesn’t seem to fit our view of this highly integrated world. And as it stands, the EU’s neighbours play hardly any role in this value creation process.
What can the EU’s neighbours do to make them attractive?
If geographical proximity to markets isn’t enough, what then could make a difference? The eastern neighbours – Georgia, Moldova and Ukraine – all signed Association Agreements with the EU over the recent past, which gives them better sectoral access to the Single Market and improves investor protection – an important step towards improving the business environment. It can be expected that this will make a big difference over the coming years. The southern neighbours are not at that stage yet.
But even this might turn out to be not enough, with European businesses considering the relocation of production facilities from, say, Asia likely more attracted to the eastern EU member states that joined since 2004 than the EU neighbourhood. EU membership in itself is a competitive advantage.
To grasp opportunities, the neighbours need to raise their game
The challenge for the EU neighbours is to compete with these in-EU business locations: international business surveys show that the eastern member states generally offer a more attractive business environment than the countries in the neighbourhood.
To close the gap, the majority would benefit from improved governance in particular. Rule of law and predictability are the basis for attracting investment. In some cases, infrastructure or skills must also be improved. As for the EU, this means it should remain in dialogue with its neighbours so it can continue to demand and support better governance across projects.
Full version under https://www.bertelsmann-stiftung.de/en/topics/europe/europe/list-europe