How to make globalization work for Europe? edit

The ability to source and locate globally is one facet of the ongoing process of integration of world markets. Like globalization, relocation offers important opportunities to our companies who can cut costs and improve quality. The increased efficiency enables them to improve their competitive position in world markets. It also offers benefits to consumers, through lower prices for goods and services and access to a wider range of choice.

-->However, many doubt whether this brave new world is equally enticing for our workers. Many fear the impact delocalisation and outsourcing may have on employment, especially on those with lesser skills. And increasingly, even those with advanced skills fear being exposed to competition, as developing countries move up the value chain and into services.

These concerns have given rise to a vigorous debate. This debate occurs in a context of considerable uncertainty. Taking stock of the available evidence and analysis, this note assesses what role - if any - policy can play in addressing potential concerns and challenges.

Notwithstanding the problems of accurately defining and measuring the phenomena, data so far suggest that delocalisation and outsourcing appears to be limited in size, especially as compared to other shocks that affect the European economy, such as technological change. However, from this low base it is growing and more forward-looking surveys suggest that firms intend to use it extensively in the years to come. Moreover, services are increasingly tradable. This opens the prospect that parts of the services sector will become more subject to relocation. Indeed, there are signs - notably in research and development - that the more advanced developing countries are becoming increasingly popular as a location for some high-end activities.

Consistent with its as yet limited size, the overall size of adjustment associated with outsourcing and delocalisation so far also appears to be rather limited, with related job losses representing a minor part of overall labour market turnover. Nevertheless, those with fewer and lesser skills appear to be more exposed to adjustment, either through lower wages or more unemployment.

Despite its as yet restricted size and impact, there are several reasons why relocation should be taken seriously. These relate broadly to the European context within which delocalisation and outsourcing occur. While on average the EU seems to defend its position on world markets, there is also some evidence that the EU is not ideally positioned to fully realise the potential gains from deeper international economic integration.

First, the EU economy is vulnerable to the shocks created by globalization. Recent trends suggest that the competitiveness of the EU is undermined by poor productivity growth related to a lack of specialisation in high growth areas. In several high-tech and high-growth products, such as Information Communication Technology (ICT), the EU is lagging behind. Moreover, although the EU's trade balance in high-tech sectors is improving, the EU's trade performance is mainly due to sectors characterized by intermediate skills and/or upmarket products. This exposes many European workers to delocalisation and outsourcing, as other countries are increasingly moving into this arena.

Second, the EU is not sufficiently exploiting the opportunities offered by new fast growing markets. The new Member States score highest on the list of sites for relocation for EU firms. Although enlargement offers important near-shoring opportunities, so do other fast growing areas like China.

Third, the EU is not sufficiently attractive as an area to locate. The EU has fallen behind in terms of attracting foreign and own investment. As China offers access to large markets and a huge base of well developed and lower priced human capital, it attracts an increasingly larger share of new FDI. Also with respect to R&D investments, the EU is losing its attractiveness relative to the US and China.

Finally, there are signs that Europe is not adjusting as well as it could to the shocks that are imposed on its economy. There are significant obstacles to reallocation from declining activities to new activities where Europe can enjoy a comparative advantage. This locks resources into inefficient use for lengthy periods of time.

In view of the above, the EU is facing challenges in terms of (i) attracting new investment (ii) exploiting the advantages world markets offer in terms of opportunities for sales and efficiency enhancement and (iii) handling the shocks from globalization.

Policy can contribute towards addressing these challenges. Policy should not attempt to manage globalization, let alone limit it. The European economy is inextricably linked to the world economy. The real challenge is to improve the European economy so that globalization and delocalisation are no longer a threat to jobs, but an opportunity for growth in the EU. To achieve this, the European economy needs to improve its adaptive capacity. Policy should therefore have two goals: (i) improving competitiveness and (ii) facilitate transition.

Providing the framework conditions for competitiveness: the first set of policies focus on the ability of the EU economy to adapt without generating net losses, by creating new activities and jobs, and to shift resources from declining sectors to sectors where Europe can sustain a comparative advantage. This set of policies is not specific for dealing with the shocks from globalization and delocalisation in particular. It contains policies to deliver a truly dynamic Single Market across manufacturing and service sectors, research and development policies, but also policies that ensure the right framework conditions for firms to be innovative, such as competition policy to ensure open markets and intellectual property rights regimes. Labour market regulations, training and education policy, immigration and tax policies can all be brought on board to improve the EU's adaptive capacity. Finally, trade policy has a key role in ensuring an open fair trading system.

Facilitate transition and adjustment to shocks: short-term negative effects on employment are inevitable, as in practice labour market rigidities are always present, particularly in Europe. This is why policies are needed to facilitate the transition. Restructuring assistance to temporarily cushion the income impact, should be designed so that incentives remain for developing new activities. The Member States' endorsement at the December European Council of the Commission's proposal to establish a European Globalization Fund aimed at assisting workers displaced by trade to find a new job is a useful instrument in this respect.

The policy instruments outlined above should be part of a coherent and consistent policy approach requiring coordination across the different policy areas and policy levels (EU and Member States). It matches efficiency with fairness, enabling Europe to benefit more from globalization while those who are affected negatively by it are assisted in remaining active parts of the more global economy.