Trade and Foreign Direct Investment: Italy, Germany, and the New Europe

Over the last 10 years, Central and Eastern European countries (CEECs), the “New Europe”, have gradually increased their integration in world trade and in the international production networks, which distribute sequential stages of production across production sites in different countries. In the “new” scenario, with highly integrated global markets, these countries have nearly doubled their market shares on world exports, mainly as a result of increasing integration with other Western European countries (EU-15). To some extent these countries are now challenging China in its role of “world factory”. They have indeed replaced the “old” EU-15 countries in some sectors (or phases) of production, namely, textiles and apparels, leather and leather products, and motor vehicles. Furthermore, they have gained an increasing role in European Union trade, becoming privileged partners for intra-industry trade, which in the past was confined to industrialised countries, and for trade in intermediates. In this paper we describe trade and FDI dynamics between Italy and the EU-15 (Germany) on the one side and the “New Europe” on the other, providing some hints both at macro and firm levels. We also focus on the effects of the international fragmentation of production on imports, exports, and FDI, emphasizing the main differences in the roles of Italy and Germany.