By Anne Jolis
Of DOW JONES NEWSWIRES
BRUSSELS (Dow Jones)--The average European Union household's yearly income could increase by EUR5,000 through 2050 if the E.U. embraces the rise of China and India rather than trying to stop it, a new European Commission study argues.
If protectionist forces win out and E.U. countries insulate their economies, the average rise in household income could be 20% less, the study warns.
The Commission's Department of Economic and Financial Affairs produced the report at a sensitive time, following the recent collapse of talks between the six key Doha round negotiators aimed at relieving world poverty and freeing global markets.
The E.U. is split over whether to impose limits on the flood of goods coming from Asia, with euro-zone manufacturers of textiles, shoes and other products clamoring for protection and retailers fighting for cheap imports.
To be sure, the report, authored by economists Cecile Denis, Kieran McMorrow and Werner Roger, acknowledges that globalization has caused much pain as many industries and regions have seen their competitiveness undercut by cheap Asian imports.
And while the benefits of globalization are spread across the E.U.'s entire 25-nation membership, the report says the negative impact is concentrated in labor-intensive manufacturing, making it a difficult issue to tackle by political means.
Still, the report says that European industry maintains "its dominant world market share" with strong exports of cars, pharmaceuticals and chemicals. Increased exports from the E.U. are one of the key benefits of global competition, it says. China, for example, buys more European-made Airbus (ABI.YY) passenger jets and Volkswagen AG (VOW.XE) cars now than it did ten years ago.
In order to increase its production of everything from textiles to mobile phones, China now needs to import more European-made textile-manufacturing machines and cellphone components than it did in the mid-1990's.
"China is able to export huge volumes of information- and computer-technology products because it imports all of the high-value-added parts and components," that go into their manufacture, the report says. "China is just an assembler of such goods - not a manufacturer in the traditional sense."
Similarly, as Indian exports of textiles, chemicals and minerals to the E.U. grew by a total of 29% between 2003 and 2004, Indian imports of European gems, jewelry and engineering products grew by a total of 32.4% over the same period, according to Eurostat, the statistical unit of the European Commission.
Past experience supports the view that a combination of cheap goods and the concentration of production where it is most cost effective benefits everyone, not just the seller. After World War II, Europe opened its borders to greater trade with the U.S., and despite fears that Europe would be overwhelmed with cut-price American goods, the E.U. report says that the result was an average 20% rise in living standards across Europe.
Similarly, the U.S. benefits from the rise of China and India, the E.U. report says. U.S. industries "focus on high technology segments in the market, while outsourcing the labor intensive stages of the production of these goods to Mexico, Brazil and China."
The E.U. study says that while the U.S. has produced fewer manufactured goods in the last decade or so, its share in the global production of high-value products increased to about 27% in 2003 from about 22% in 1997. The outsourcing of labor-intensive manufacturing lets U.S. companies focus on more specialized technology, such as high-tech goods, researchand semiconductors, which earn higher profit margins compared with the DVD-player and cellphone markets dominated by China.
The result is that, with respect to China,U.S. import prices have fallen more than U.S. export prices. This has not yet been the case for the E.U., the report says.
The "E.U.'s economic problems are domestic, not external, in origin," it says, concluding that the E.U. must reform its stagnant labor and product markets.
European businesses must take stock of their strengths, capitalize on them and focus on high-value-added products for which demand continues to grow, while benefitting from cheaper assembly abroad.
The report concludes that the E.U.'s ability to make the permanent and drastic changes it needs will be the difference between profiting from globalization and confirming what the report describes as "the E.U.'s ongoing decline as a global economic power."
-By Anne Jolis Dow Jones Newswires; +32 2 741 1488; email@example.com
(END) Dow Jones Newswires
July 31, 2006 08:31 ET (12:31 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.