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Change in the Service Trade Regime with CEE Countries

Author

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  • Peter Mayerhofer

    (WIFO)

Abstract

The further opening up of markets will create a potentially high demand also in the services sector, and domestic providers should be able to exploit it due to their closeness to these markets. However, the boost in liberalization tendencies will result in a keener competitive environment for labor cost intensive service activities, with border areas being affected more. Already now the services trade with the neighboring reform states contributes to alleviating Austria's current account problems despite still existing trade barriers: at ATS +12.6 billion (0.52 percent of GDP), the balance of service transactions with these countries is decidedly positive; without the contribution made by tertiary trade with the closest transition countries, Austria's current account deficit would have been by around 30 percent higher. EU enlargement will greatly change the trade policy regime of Austria vis-à-vis these countries in key areas of the service portfolio: especially with regard to cross-border shopping, services rendered through business establishments in the host country and cross-border inroads made by foreign providers on domestic markets, eastern enlargement will signify a substantial trade policy opening. Whereas domestic providers should find new opportunities under the freedom of establishment due to the low competitiveness of CEE states in the respective tertiary sectors, cross-border shopping and cross-border service provision are expected to create greater import competition. In general, CEE countries are focusing on traditional consumption-close services in their attempts to catch up on western countries. With more complex production-close services, the CEEC 5 providers have so far been hardly able to accumulate company-specific competitive advantages. Especially in terms of supply differentiation and quality they are still far from western European standards. Concerning further expansionist drives of domestic providers, this poor competitive ability in higher-quality services in conjunction with growing demands generated by the catch-up process will open up favorable perspectives for market enlargement. In terms of possible import competition, the present scenario implies that in the near future CEEC providers will hardly be in a position to derive competitive advantages from higher product quality or greater diversity in the range of services offered. Their expansion will be concentrated on partial markets in conjunction with pure price competition where they can exploit existing factor cost advantages. According to WIFO estimates the wage levels and/or cost structures of domestic service industries with approximately one third of all service employees are such that they may become vulnerable to low-wage competition. If we also take into account that any cross-border services (shopping tourism, cross-border inroads on Austrian service markets) are economically meaningful only across limited distances, the percentage of potentially affected service workers will be down to around 17 percent of all service workers (11 percent of dependent workers). A dual strategy seems to be appropriate in preparation for EU enlargement. Selective defensive policies ought to avoid any overstraining of the companies' capability to adapt to the currently necessary structural changes, while active structural policies have to be stepped up with the aim of enhancing the competitive strength of domestic service providers and thus enabling them to really use the potential advantages of enlargement.

Suggested Citation

  • Peter Mayerhofer, 1998. "Change in the Service Trade Regime with CEE Countries," WIFO Monatsberichte (monthly reports), WIFO, vol. 71(11), pages 771-779, November.
  • Handle: RePEc:wfo:monber:y:1998:i:11:p:771-779
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    Cited by:

    1. Markus Marterbauer & Ewald Walterskirchen, 1999. "Determinants of the Rise of Unemployment in Austria," Austrian Economic Quarterly, WIFO, vol. 4(2), pages 115-123, April.
    2. Mayerhofer, Peter, 2002. "Austrian border regions and eastern integration: A low competitiveness - high growth paradoxon," HWWA Discussion Papers 202, Hamburg Institute of International Economics (HWWA).

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