In Discussion Paper No. 1006, Carmela Martín and Research Fellow Jordi Gual examine the impact of the CEECs on trade flows with Spain. They project that such trade will increase significantly, although it will still be a minor component of total Spanish trade or total EU trade with the CEECs. The product composition of this trade will probably respond to the relative factor endowments underlying current trade patterns. Spain is likely to increase its exports of physical and human capital-intensive goods to the CEECs. An increase in Spanish imports of labour-intensive goods from these countries is also predicted. But the similarity of factor endowments vis-à-vis the main EU countries, implies that some displacement of labour-intensive Spanish exports to the EU will take place.

The evolution of trade flows will, of course, be contingent upon developments in foreign direct investment (FDI). Most FDI in Spain in recent years has been driven by a set of locational advantages which are unlikely to be replicated in the CEECs in the medium term: access to a large domestic market and to specialized resources such as pools of trained workers, suppliers, and infrastructure. The comparatively small part of FDI that has been attracted by relatively low unit labour costs (and tends to be geographically concentrated in the less developed regions of Spain) may be seriously affected by FDI diversion, however, since alternative locations in the CEECs provide lower cost export bases and significantly better access to the main EU markets.

Trade and Foreign Direct Investment with Central and Eastern Europe: Its Impact on Spain
Carmela Martín and Jordi Gual

Discussion Paper No. 1006, August 1994 (IT)