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Where Will Your Next Holden Come From? The 2004EUEnlargement and Trade with Australia

Richard Pomfret and Patricia Sourdin*

Abstract

The impact on Australia of the 2004 EUenlargement highlighted a major change inthe global economy. Previous EU enlarge-ments, notably British accession in 1973,diverted trade from third countries such asAustralia. After 2004, trade between Australiaand new Eastern European EU membersboomed. Deep integration allowed EU firmsto create regional value chains. Cars producedin regional value chains, often with finalassembly in Eastern Europe, are globallycompetitive. Reduced trade costs contributedto competitiveness, even in distant Australia,where Volkswagen, Audi, Peugeot and Holdencars are imported from Slovakia, the CzechRepublic, Hungary and Poland.

1. Introduction

When Britain joined the European customsunion in 1973, Australian trade was a majorcasualty: Britain’s food imports were divertedfrom Australia to new European sources and,less dramatically, UK firms looked to marketswithin the customs union. Further EU enlarge-ments in the 1980s and 1995 most likelydiverted some trade from Australia to intra-EU trade, but the new members were not majortrading partners of Australia, so the magnitudeswere small. The 2004 enlargement wasexpected to also have a small negative impacton non-member countries (Fuller et al. 2002;Pelkmans and Casey 2003), but the followingdecade saw a surge in the newEastern Europeanmember countries’ trade with Australia.

The different outcome largely reflects amajor change in the international tradingsystem in recent decades. Production ofmany goods is being fragmented across severalcountries in global value chains. The processhas often been regional, rather than global, withthree main foci in East Asia, Europe and NorthAmerica. The post-2004 boom in tradebetween Australia and Eastern Europe reflectsthe success of EU firms in creating regionalvalue chains (RVCs) and, in particular, thesuccess of EU car-makers in fragmentingproduction in order to compete successfullywith Asian car-makers in third countries suchas Australia.

The next section reviews the flourishing ofRVCs in Europe after creation of the EU singlemarket and the incorporation of some EasternEuropean countries into these RVCs. Section 3provides an overview of EU–Australian trade,with its pattern of exchanging Australianprimary products for European manufactures,

* Pomfret: School of Economics, The University ofAdelaide, South Australia 5005 Australia, and School ofAdvanced International Studies, The Johns HopkinsUniversity, Bologna 40126 Italy; Sourdin: School ofAdvanced International Studies, The Johns HopkinsUniversity, Bologna 40126 Italy. Corresponding author:Pomfret, email <[email protected]>. Theresearch was supported by a grant from the EU Centre forGlobal Affairs at the University of Adelaide. The project isreported in the University of Adelaide’s School ofEconomics Working Paper ‘Trade between Australia andthe EU, 1990–2015’, available at <http://www.economics.adelaide.edu.au/research/papers/doc/wp2016-10.pdf>,which provides more detail of the data and methods.

The Australian Economic Review, vol. 50, no. 2, pp. 181–94

�C 2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social ResearchPublished by John Wiley & Sons Australia, Ltd

[email protected]

http://www.economics.adelaide.edu.au/research/papers/doc/wp2016-10.pdf


and a brief discussion of how Europeanmanufacturers have withstood competitionfrom Asian competitors by keeping trade costscompetitive. Section 4 analysesAustralian tradewith the Eastern European countries that joinedthe European Union in 2004, documenting therole of EU car exports based on creation ofRVCs, with final assembly in Eastern Europe.The final section draws conclusions.

2. The Rise of Regional Value Chains

The phenomenon of global value chains beganto attract attention after the late 1980s. Baldwin(2014), for example, contrasts the first unbun-dling of the 1800s, when production andconsumption were separated geographically andworld trade flourished, to the second unbundlingof different stages of production which emergedon a global scale after the mid-1980s. The detailsvary, but the characteristic of global value chainsis the coordination of tasks performed in differentcountries and the essential condition is thatcomponents can be easily, cheaply and reliablymoved across national borders. Specific stimuliwere negotiation of the North American FreeTrade Area, completion of the European SingleMarket and the appreciation of the Japanese yenafter 1985.Many value chains are regional, ratherthan global, and the regional patterns vary, withproduction of electronic goods in ‘Factory Asia’the best-known RVC.

Within the European Union, outsourcing oroffshoring to reduce costs was not new in the1990s. In 1973–1976, Ford Motors opened agreenfield facility in Valencia to produce a newEuropean model, the Fiesta, benefiting fromthe opening of the Spanish economy and EUaccession a decade later to source componentsfrom across the European Union for theassembly line in Valencia. Completion of theEU single market in 1986–1992 stimulatedoutsourcing by French firms to lower-wage EUcountries (Kramarz 2008), and after the fall ofCommunism in 1989, Austrian firms out-sourced tasks to Eastern Europe (Egger andEgger 2003).

Nevertheless, the RVC phenomenon reallypicked up in Europe in the late 1990s.1

Aggregated input–output analysis shows that

value-added in EU trade flattened in 1985–1995and then had a larger decline in 1995–2005(Johnson and Noguera 2012). A reduction invalue-added in trade is the counterpart toincreased trade in parts and components, suggest-ing that as Eastern European countries preparedfor EU accession, Western European firmslooked to them for the more labour-intensivetasks in RVCs.

Other measures reinforce this time frame.Between 2002 and 2012, the share of parts andcomponents in Eastern European countries’trade grew substantially.2 Total exports of partsand components by emerging Europe increasedfrom $58 billion in 2002 to $156 billion in 2007to $195 billion in 2012 and imports increasedfrom $67 billion in 2002 to $184 billion in 2007to $229 billion in 2012 (Pomfret and Sourdin2014). The Czech Republic, Poland, Hungaryand Slovakia were, in that order, the largestimporters and exporters of parts and compo-nents in Eastern Europe in 2012.

3. Trade between Australia and theEuropean Union

Australia’s international tradewent throughmajorchanges in direction and composition between1950 and 1990 (Pomfret 2015). The UnitedKingdom, thedominant tradepartner in 1945,wasovertaken first by Japan and then by China andSouth Korea as the major export markets(Anderson 1995), a pattern associated with themining boom in Australia and burgeoningdemand for coal, iron ore and other minerals inthe rapidly industrialising East Asian countries.Australian trade became characterised by asurplus with East Asia and a deficit with EuropeandNorthAmerica.By2015, theEuropeanUnionaccounted for just over 5 per cent of Australianexports and 18 per cent of Australia’s imports.The United Kingdom, Netherlands and Germanywere the largest export markets, accounting forover half of EU imports from Australia (Figure1a). The origin of Australian imports was morediffused, with Germany, the United Kingdom,Italy and France the main suppliers (Figure 1b).The Eastern European countries that haveacceded to the European Union since 2004remain minor trading partners for Australia.

182 The Australian Economic Review June 2017

�C 2017 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

In 2015, Australia’s European export mar-kets were dominated by the United Kingdomand the original EU member countries:Netherlands, Germany, Belgium, France andItaly (Table 1). However, growth of exports tothese markets over the last quarter-century wasnot especially rapid: 110 per cent for UnitedKingdom, 174 per cent for Netherlands, 35 percent for Germany, 170 per cent for Belgium, 42per cent for France and –27 per cent for Italy.Exports to some Eastern European countrieshad high growth rates, but mostly from a verylow base, and the values remain small, exceptfor Poland. Australian exports to Polandincreased by 535 per cent in 2005–2015,accelerating during the 5 years after 2010when Australian exports to the EuropeanUnion as a whole fell by nearly two-fifths: in2015, Australian exports to Poland amounted

to $238 million, exceeded only by original EUmembers, the United Kingdom and Spain.

The commodity composition of Australia’sexports to the European Union has fluctuated.The share of fuels increased during thecommodity boom of the early 2000s beforefalling back and the share of other non-foodcrude materials fell from over one-third in 1990to under one-fifth in 2015. The impact of thecommodity boom is apparent in the increase inAustralian coal exports to the European Union,from $1,130million in 2001 to a peak of $5,317million in 2008, when coal accounted for overone-quarter of the total, before falling to $2,492million in 2013 and $2,070 million in 2015.Australian exports of precious metals and otherminerals to the European Union increased from$1,166 million in 2001 to $6,928 million in2011, before dropping to $2,215 million in2015. Exports of manufactures from Australiato the European Union grew steadily and theshare of Standard International Trade Classifi-cation categories 5–8 increased from about one-quarter in 1990 to two-fifths in 2015: exportsof medical equipment and apparatus to theEuropeanUnion increased from $223million in2001 to $694 million in 2015 (Table 2).

Australian imports from EU members in2015 were dominated by Germany, the UnitedKingdom, Italy, France, Netherlands andBelgium (Table 1). Between 1990 and 2015,growth of exports to Australia from thesecountries, apart from the United Kingdom, wasaround 270 per cent, but it was slower in thedecade after 2005: 35 per cent for Germany, 9per cent for United Kingdom, 29 per cent forItaly, –16 per cent for France, 59 per cent forNetherlands and 17 per cent for Belgium.Australian imports from the European Unionare dominated by manufactured goods, withonly slight changes in the shares of broadcommodity groups: in 2015, over half fell intofour Harmonized System two-digit categories:84, non-electrical machinery; 85, electricalmachinery and equipment; 87, vehicles; and30, pharmaceutical products (Table 2).

A striking feature of Table 1 is thatAustralian imports from the larger EasternEuropean countries that acceded to the Euro-pean Union in 2004 grewmore rapidly than the

Figure 1a Destination of Australian Exportsto the European Union (EU), 2015

20150%

United Kingdom,

29%

Netherlands,19%

Germany,14%

Belgium,8%

France,8%

Switzerland,6%

Italy,6%

Spain,4%

Poland,2%

Sweden,2%

Rest of EU, 2%

Germany, 25.0%

United Kingdom, 14.1%

Italy, 12.0%

France, 8.7%

Switzerland, 6.5%

Ireland, 4.3%

Netherlands, 4.3%

Spain, 4.3%

Sweden, 3.8%

Belgium, 3.3%Rest of

EU, 13.6%

Source: International Trade Centre Trade Map.

Figure 1b Origin of Imports to Australia from the European Union (EU), 2015



Pomfret and Sourdin: Where Will Your Next Holden Come From? 183

Tab

le1AustralianExp

orts

to,a

ndIm

portsfrom

,EU

Cou

ntries

Australianexports

Australianimports

Value

Exportgrow

th(%

)Value

Importgrow

th(%

)

Country

2015

US$million

2010–2015

2005

–2015

1990–2015

2015

US$million

2010–2015

2005

–2015

1990

–2015

Austria

54.20

–11

16143

822.57

–5

8411

Belgium

818.73

–12

46170

1,239.10

–16

17270

Bulgaria

67.06

951

21923

40.53

1116

1,292

Switzerland

519.37

101

235

–12

2,420.13

17107

392

Cyprus

1.41

–80

–82

–22

16.67

90453

3,223

Czech

Republic

a104.65

38110

618

629.63

144

343

1,816

Germany

1,115.74

–21

1235

9,226.92

–7

35267

Denmark

89.88

–31

–33

53844.72

–14

12355

Spain

388.23

–30

–27

191

1,524.93

–3

49860

Estoniab

3.65

144

264

26,463

45.56

10196

37,465

Finland

26.68

–77

–93

–12

529.01

–19

–22

126

France

788.66

–23

342

3,267.45

–10

–16

268

UnitedKingdom

2,726.53

–63

–15

110

5,302.60

–4

999

Greece

10.31

–49

–70

–69

150.16

–1

30237

Croatiab

2.65

–93

18150

18.88

–34

8247

Hungary

18.93

9023

1,447

409.32

–4

155

1,902

Ireland

47.98

–60

–59

328

1,561.52

–28

31,082

Iceland

1.53

–69

–67

272

16.62

76119

1,159

Italy

540.79

–39

–30

–27

4,326.69

–6

29276

Lith

uaniab

6.87

134

173,740

33.79

65136

51Luxem

bourgc

8.91

511

1,045

8,479

18.44

–30

808

1,636

Latviab

4.34

–36

–41

2,816

16.03

276

478

14,040

Malta

2.47

–76

–36

–3

17.07

1181

1,475

Netherlands

1,666.75

–11

18174

1,586.35

2659

271

Norway

40.49

–24

–6

263

269.07

–30

21160

Poland

237.67

1,190

535

707

572.78

88110

1,842

Portugal

12.78

–4

–61

–60

142.63

1010

231

Rom

ania

40.87

262

5–55

100.65

112

253

1,134

Slovak

Republic

a2.53

–25

–42

151

344.23

134

1,645

26,939

Sloveniab

27.23

328

492

3,965

76.74

6656

441

Sweden

205.05

–58

–34

134

1,438.18

–29

–9

122

Notes:(a)1993–2015.

(b)1992–2015.

(c)Luxem

bourgwas

included

underBelgium

until

2003.

Source:UN

COMTRADE.



Tab

le2Major

AustralianExp

orts

andIm

portsto

theEurop

eanUnion

,Harmon

ized

System

(HS)

Two-DigitCategories,2001–2015

(US$

million)

Trade

HScode

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Exports

Allproducts

Total

7,967

8,477

10,459

10,087

11,751

15,884

17,544

20,124

13,860

17,211

18,368

16,774

12,584

11,388

10,153

Coal

271,130

1,147

1,241

1,525

2,626

2,873

2,582

5,317

2,003

3,706

4,296

3,260

2,492

2,128

2,070

Gold,

silver,diam

onds

71580

788

1,895

840

611

2,469

3,680

4,388

4,712

5,056

5,684

5,114

2,464

1,896

1,477

Zinc,

lead,copper

etc.

26586

596

661

785

981

2,052

1,789

1,551

507

1,171

1,244

1,434

894

1,167

738

Medical

equipm

entandapparatus

90223

267

316

451

505

497

590

661

562

589

769

685

682

750

694

Oilseed

12110

5334

9837

114

25171

353

190

1,051

1,141

1,155

714

690

Wine

22561

659

716

965

993

999

1,203

1,007

772

770

716

693

594

547

475

Machinery

andparts

84309

294

327

377

452

529

557

528

463

463

533

494

507

530

432

Meatof

beef

andsheep

02166

144

155

207

207

216

215

296

249

276

390

349

401

483

415

Imports

Allproducts

Total

15,376

17,869

22,280

27,068

30,211

30,336

38,047

44,202

34,528

39,226

45,055

47,024

44,076

43,144

37,024

Machinery

842,672

3,066

3,811

4,664

5,478

5,851

6,979

7,813

6,848

6,821

7,868

9,706

9,001

7,961

6,391

Motor

vehicles

andparts

871,931

2,289

2,988

3,384

3,861

3,757

5,059

6,000

3,910

5,570

6,487

7,397

7,271

6,833

6,348

Pharmaceutical

products

301,536

2,039

2,504

3,442

3,752

3,735

4,680

5,133

5,430

6,325

7,658

6,789

6,486

6,044

5,315

Electrical,electronic

equipm

ent

851,915

1,777

2,132

2,596

2,813

2,967

3,195

3,721

3,260

3,117

3,852

3,927

3,497

3,402

2,644

Medical

equipm

entandapparatus

90793

900

1,152

1,533

1,715

1,862

2,188

2,528

2,272

2,545

2,852

2,939

2,813

2,940

2,598

Source:InternationalTrade

CentreTrade

Map.



EU average, especially in the decade afterjoining the European Union. Australianimports from Poland in 2015 amounted to$573 million, an increase of 110 per cent in theperiod 2005–2015, $630 million from theCzech Republic (10 year growth: 343 percent), $409 million from Hungary (10 yeargrowth: 155 per cent) and $344 million fromSlovakia (10 year growth: 1,645 per cent). Thiscontrasts with an expectation that tradebetween the new EU members and thirdcountries would decline as Eastern Europeanfirms responded to their preferential access toWestern European markets.

The growth paths of Australia’s exports to,and imports from, Europe since 1990 havediffered. The value of Australian exports to theEuropean Union soared between 2000 and2010, but grew slowly in the 1990s and fell byalmost 40 per cent between 2010 and 2015(Figure 2). By contrast, Australian importsfrom the European Union grew by almost 50per cent between 1990 and 1995 and by over 80per cent between 2000 and 2005, but moreslowly in 2005–2010 and 1995–2000, fallingslightly in 2010–2015. The export pattern wasclearly related to the large increase in fuel andminerals prices in the early 2000s, whileimports from the European Union were morestable. Since 2000, these trends have led to afluctuating, but widening, bilateral trade deficitfor Australia on EU trade (Figure 3). Again,however, some of the new EU members wentagainst the trend as their exports to Australia in2010–2015 increased, rather than declined:imports from the Czech Republic grew by 144per cent, imports from Slovakia by 134 per centand imports from Poland by 88 per cent.

An important reason why Europe hasremained a significant market and supplier isthat the costs of trade between Europe andAustralia have remained competitive (Figure4). Trade costs are determined not only bydistance, volume and the commodity composi-tion of bilateral trade, but also by portefficiency, customs procedures and regulationsand behind-the-border costs, all of which varysubstantially from country to country. Euro-pean Union exporters have kept their tradecosts to around the global average for exports

to Australia, with much lower airfreight coststhan China and lower maritime freight coststhan the United States.3

4. Eastern European EU Members’ Tradewith Australia

The four-largest countries that joined theEuropean Union in 2004 all had above-EU-average growth in exports to Australia in2005–2015, and especially since 2010, whenAustralia’s deficit on merchandise trade withthese countries widened (Figure 5).4 TheEastern European countries’ exports areheavily concentrated in a single product:passenger motor vehicles. In 2015, car exportsto Australia from Poland were at A$60 million,from Hungary at A$179 million, from theCzech Republic at A$269 million and fromSlovakia at A$373 million; that is, over one-third of all merchandise exports from the fourcountries to Australia and over four-fifths ofSlovak exports to Australia.

Before 1989, the centrally planned econo-mies had different automotive industries.Poland had a pre-1989 connection withWestern European car firms through itspartnership with Fiat. Czechoslovakia had thelargest indigenous car production, with Skoda(taken over by Volkswagen (VW) in stagesfrom 1991) and Tatra (factory closed in 1998).Hungary specialised in bus production and hada large automotive components sector but nocar assembly plant. None of these operationsprovided the basis to compete in global carmarkets after the end of central planning.

The first move by a major Western producerin the 1990s was VW’s purchase of Skoda,which continued to produce in the CzechRepublic as a separate brand.5 Opel and Suzukiinvested in Hungary in 1991 and Audi in 1993.Despite these earlymoves, expansionwas slow.Opel abandoned car assembly in Hungary in1996. In Poland, Fiat expanded productionprimarily to serve the domestic market thatPoland protected from imports,6 while FSO inWarsaw was liquidated in 1995 and its facilitiestakenover byDaewoo. The parent companies ofboth Fiat and Daewoo were financially troubledand Daewoo went bankrupt in 2001.7 In 1998,



Figure 2 Growth in Australian Exports to, and Imports from, the European Union, 1990–2015

–60 –40 –20 806040200

%

%

Export Growth, 1990-Pe

riod

–10 9080706050403020100

1990 -1995

1995 -2000

2000 -2005

2005 -2010

2010 -2015

Import Growth, 1990--2015

-2015

-

-

-

-

-

Perio

d

1990 -1995

1995 -2000

2000 -2005

2005 -2010

2010 -2015-

-

-

-

-

Note: Export growth between 1990 and 1995 was 0.26 per cent.

Sources: UN COMTRADE; authors’ calculations.

Figure 3 Australia’s Merchandise Trade with Europe, 2001–2015

0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

5,00010,00015,00020,00025,00030,00035,00040,00045,00050,000

US$

mill

ion

ExportsImports




Opel (GM)opened a greenfield plant inGliwice,initially with capacity of 70,000 cars marketedthrough a network of over 100 dealerships inPoland. In the early 2000s, Radosevic andRozeik (2005, p. 13) observed that ‘a combina-tion of market size factors and inheritedcompetencies in automotive assembly coupledwith strategies of foreign investors has ledPoland and the Czech Republic to be the twoleading production locations’ in EasternEurope, although car output in Poland hadplummeted from over 600,000 units in 1999 tounder 300,000 in 2002 as the import substitutionstrategy ran out of steam.

Accession to the European Union in 2004and to Schengenland in 2007 reduced intra-EU

trade costs for the four Eastern Europeancountries and provided a catalyst for develop-ment of RVCs, especially in the car industry.Creation of RVCs increased the competitive-ness and export sales of EU cars, includingthose with final assembly in Eastern Europethat are exported to Australia. In the decadeafter 2004, the automobile RVC phenomenonhas varied in intensity: weakest in Poland,essentially a one-brand show in Hungary,stronger and more diversified in the CzechRepublic and most dramatic in Slovakia.

All the greenfield investments since 2000have been in the Czech Republic and Slovakia.In the Czech Republic in February 2005, theToyota Peugeot Citroën Automobile (TPCA)

Figure 4 Costs of International Trade, Percentage of Free-on-Board Values of Australian Imports

(a) EU Exporters

(b) All Exporters

0

2

4

6

8

%%

10

12

14

Ad valorem air freight

Ad valorem ocean freight

0

2

4

6

8

10

12

14

16

Ad valorem air freightAd valorem ocean freight

1990

1992

1994

1996 1998

2000

2002 2004

2006

2008 2010

2012 2014

1990

1992

1994

1996 1998

2000

2002 2004

2006

2008 2010

2012 2014

Note: Adjusted for commodity composition.

Sources: Authors’ calculations of the cost, insurance and freight–free on board gap, that is (cif-fob)/fob, from AustralianBureau of Statistics data; Sourdin and Pomfret (2012, pp. 31–44) provide more details about the data and method.



greenfield factory started production of smallcars, such as the Toyota Aygo, Peugeot 107 andCitroen C1; production reached the plannedyearly capacity of 300,000 cars in 2006 as thefirm became one of the Czech Republic’sbiggest exporters. Hyundai started productionin November 2008, with a capacity of 200,000cars per year. When the TPCA and Hyundaifactories in the Czech Republic and thePeugeot Soci�et�e Anonyme (PSA) and Kiafactories in Slovakia reached capacity, thesetwo countries had the highest per capita caroutput in the world.

Slovakia, the smallest of the four countries,has grown to become one of the leading carproducers in world due to the presence ofthree companies: VW (since 1991), PSA

Peugeot Citroën (since 2003) and Kia Motors(since 2004). After a slow start in the 1990s,the Slovak economy turned around after the1998 election led to more determined prepa-ration for EU accession. Output of the VWfactory also grew slowly, until the companyundertook further investment after the gov-ernment introduced generous tax incentives in1998.8 By 2006, the three factories had acapacity of over 1 million cars (PSA:450,000; VW: 300,000; Kia: 300,000), thelargest in Eastern Europe (Jakubiak et al.2008), all with state-of-the-art technology. Acontributory factor to the rapid expansion ofSlovakia’s car industry is that Slovakia hasbeen the only one of these four countries toadopt the euro, removing exchange rate

Figure 5 Australia’s Merchandise Trade with Four Eastern European Countries, 2001–2015

(a) Australia’s Merchandise Trade with Poland

(b) Australia’s Merchandise Trade with the Czech Republic

0

100

200

300

400

500

600

700

800

US$

mill

ion

Imports

Exports

Imports

Exports

0

100

200

300

400

500

600

700

US$

mill

ion

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Continued



uncertainty in RVC trade with Germany,France and other eurozone countries.

In Hungary, Audi expanded its facilities and,in 2013, opened a new production plant for theAudi A3 Cabriolet and Limousine and TTCoup�e and Roadster; sales in 2013 were 5.6billion euros (Bisztray 2016). Magyar Suzukihas assembly lines, but is only one-third thesize of Audi’s Hungarian operation. Hungariancar exports may grow following the increase inAudi’s capacity and the opening in 2013 ofMercedes-Benz’s first plant in Eastern Europe.

Although Poland’s car exports to Australialag the other three countries, the situation maybe changing. Since February 2015, GMGliwice has been producing Holden Astrasand Cascadas and the two-millionth GM

Gliwice car produced in April 2015 was aHolden Cascada convertible for the Australianmarket. The Cascada was developed at Opel’sInternational Technical Development Center inR€usselsheim, Germany, assembled at GM’sPolish plant in Gliwice and marketed underOpel, Buick and Holden marques. Fiat Chrys-ler revived production at Tychy with newmodels of the Fiat 500 and Lancia Ypsilon in2015 and appeared to be looking to exportmarkets when it announced in September 2015a $100 billion investment in the Tychy plant.

As the four countries became integrated incar and other RVCs, their trade within theEuropean Union and with third countriesflourished. The ability of the four EasternEuropean countries to export to Australia has

Imports

Exports

Imports

Exports

(c) Australia’s Merchandise Trade with Hungary

(d) Australia’s Merchandise Trade with the Slovak Republic

050

100150200250300350400450

US$

mill

ion

350

400

150

200

250

300

US$

mill

ion

0

50

100

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: UN COMTRADE.

Figure 5 Continued



been facilitated by reductions in their tradecosts. In 1990 for Poland and Czechoslovakia,the costs of trading with Australia weresubstantially higher than the trade costs ofthe major EU exporters and higher than theaverage trade costs of imports into Australia(Table 3). By 2005, these trade costs weresubstantially reduced and they continued tofall over the decade 2005–2015, convergingtowards the EU norm. For Hungary andSlovakia, the trade costs were equal to, orless than, Germany’s trade costs, despite bothcountries being landlocked.9

We do not address the growth or otherimpacts ofEUaccession (Campos,Coricelli andMoretti 2014), but the RVC developmentplayed a part in the Eastern European countries’above-average growth after accession. Thisgrowth explains the increase in Australianexports to those countries after 2004, as opposedto the anticipated decline in the new members’imports from third countries and especially fromagricultural-exporting countries.

5. Conclusions

In stark contrast to Australia’s experiencewith the 1973EU enlargement, after the 2004enlargement Australia’s trade with new mem-bers increased dramatically. The principal driverhas been the integration of the four-largest newmembers into EU value chains and this processhas been clearest in the car industry. Trade withAustralia has been facilitated by a drop in thecosts of bilateral international trade. The processhas been most dramatic in Slovakia, which is

probably related to factors that enhancedSlovakia’s attractiveness as anRVCparticipant,such as improved ease of doing business and ofcrossing borders, including adoption of the euroand accepting Schengen status.

Holden symbolised Australia’s desire fora domestic car industry in 1948. The import-substituting industrialisation strategy wasabandoned after 1983 (Gregory 1988),although the tariff on cars fell slowly,from 57.5 per cent to 22.5 per cent in1997, and car-makers were supported by asuccession of schemes and subsidies. Fol-lowing grants of A$149 million in 2009 andA$270 million in 2012 from state andfederal governments, Holden sought afurther A$265 million grant in 2013 as theprice for maintaining car production inAustralia. The price was too high. Whennegotiations between company and govern-ment broke down, GM announced thatHolden would follow Ford and Toyota andcease car assembly in Australia in 2017. In aworld economy where location is of tasks,rather than integrated production of productssuch as cars, a high-wage country cannotcompete in semi-skilled tasks such as carassembly.10 The US parent company willcontinue to market Holdens in Australia andsource some components from Australia, butthe cars will be assembled in places likePoland, which have relevant skills at lowercost.

First version received September 2016;final version accepted November 2016 (Eds).

Table 3 Trade Costs on Exports to Australia, Ad Valorem

Country 1990 1995 2000 2005 2010 2015

Czech Republic 11.1 9.2 7.4 7.6 6.4 5.9Hungary 9.2 7.7 6.1 6.3 5.2 5.0Poland 14.7 12.7 8.6 8.2 6.8 6.5Slovakia 11.1 9.1 6.6 7.1 5.9 5.6Germany 9.1 7.4 6.8 6.7 6.0 5.6United Kingdom 9.8 8.6 7.3 7.2 6.4 5.9All Australian imports 9.7 8.6 7.4 7.6 6.2 5.6

Notes: (cif-fob)/fob, adjusted for commodity composition—calculated from Australian Bureau of Statistics data, asdescribed in Pomfret and Sourdin (2011). Sourdin and Pomfret (2012, pp. 31–44) provide more details about the data andmethod.



Appendix 1: European Countries’ Statuswith Respect to the European Union,Schengen and the Euro

Appendix 1 provides accession dates of EUmember countries and the status of candidatecountries and members of the EuropeanEconomic Area. It also lists dates of imple-menting the Schengen Agreement and adopt-ing the euro.

Endnotes

1. Marin (2006), di Mauro and Forster (2008) and Timmeret al. (2013) analyse the growth of RVCs in the EuropeanUnion.

2. This measure of the extent of value chain trade has beenused by Ng and Yeats (1999), Yeats (2001), Athukorala(2010, 2014) and Fung et al. (2013). Trade data are fromUN sources; in this article, ‘$’ values are US dollars;Australian dollars are shown as ‘A$’. Unless otherwisestated, ‘EU’ data include the 28 EU members, as of 2015,

Table A1 European Countries’ Status with Respect to the European Union, Schengen and the Euro

Country EU member Status Schengen Euro

Belgium 1957 1995 1999France 1957 1995 1999Germany 1957 1995 1999Italy 1957 1997 1999Luxembourg 1957 1995 1999Netherlands 1957 1995 1999Denmark 1973 2001 xIreland 1973 x 1999United Kingdom 1973 x xGreece 1981 2000 2001Portugal 1986 1995 1999Spain 1986 1995 1999Austria 1995 1997 1999Finland 1995 2001 1999Sweden 1995 2001 yCyprus 2004 x 2008Czech Republic 2004 2007 yEstonia 2004 2007 2011Hungary 2004 2007 yLatvia 2004 2007 2014Lithuania 2004 2007 2015Malta 2004 2007 2008Poland 2004 2007 ySlovakia 2004 2007 2009Slovenia 2004 2007 2007Bulgaria 2007 x yRomania 2007 x yCroatia 2013 x yIceland EFTA/EEA 2001 xLiechtenstein EFTA/EEA 2011 xNorway EFTA/EEA 2001 xSwitzerland EFTA 2008 xAlbania C2014 x xBosnia and Herzegovina x xKosovo x zMacedonia C2005 x xMontenegro C2010 x zSerbia C2012 x x

Notes: C denotes the date when EU candidacy was accepted (Kosovo and Bosnia and Herzegovina are considered to be ‘inthe queue’, even though the EuropeanUnion has not yet accepted formal candidacies), EEA denotes the European EconomicArea, EFTA denotes the European Free Trade Association, x denotes non-participant, y denotes committed to theintroduction of the euro and z denotes Kosovo andMontenegro, which use the euro but are not members of the eurozone (thatis, they cannot issue euros or participate in eurozone decision-making).



plus European Economic Area and European Free TradeAssociation members (Iceland, Liechtenstein, Norway andSwitzerland), which had free access to EU markets (seeAppendix 1).

3. Figure 4 uses the cif-fob measure of trade costsadjusted for commodity composition that is describedmore fully in Sourdin and Pomfret (2012, pp. 31–44).Similar graphs for the United States, China and NewZealand are in the Working Paper ‘Trade betweenAustralia and the EU, 1990–2015’ at <http://www.economics.adelaide.edu.au/research/papers/doc/wp2016-10.pdf>.

4. Australian exports consisted mainly of raw materials(for example, A$168million coal and A$44 million copperto Poland or A$122 million wool to the Czech Republic).

5. On pre-2004 developments, see Radosevic and Rozeik(2005), Jakubiak et al. (2008) and Bl�azquez, D�ıaz-Moraand Gandoy (2013). It is worth recalling that in the 1990s,US and EU car producers were widely seen to be interminal decline, with car production inevitably becomingconcentrated in Asia: an Asiaweek article ‘Asian in theDriver’s Seat’ (23 February 1993) highlighted VW,Daimler-Benz, Fiat, Volvo, Saab and Jaguar as in deepesttrouble, while GeneralMotors (GM) and Ford were heavilyin debt, closing factories and laying off workers. A FarEastern Economic Review cover story (‘Into Top Gear’, 13October 1994) had the same theme of inexorable Asiandominance in the car industry. Integrated national carindustries in Europe (and in Australia or Malaysia) weredoomed. Producing along an international value chain wasthe only way to maintain competitiveness, while makingthemost of EU andUS car producers’ skills in tasks such asdesign or marketing.

6. Poland’s import duties fell gradually from 35 per cent in1993 to 5 per cent in 2001. An import quota introduced in1995 at 25,000 units increased slowly to 36,200 in 2001(Radosevic and Rozeik 2005, p. 33). The other countries’tariffs were much lower and all EU candidates’ duties andother restrictions on EU imports were phased out in 2001.

7. Fiat ceased assembly at Bielsko Biala in 1999,concentrating production at the nearby Tychy plant.Production at Tychy peaked in 2009, after which Fiatmoved production lines back to Italy in response topolitical pressure. Between 2008 and 2016, the Tychy plantassembled the Ford Ka under contract.

8. The two greenfield investments also received a largesubsidy: PSA received 160 million euros and Kia receivedover 170 million euros. After EU accession, the countrieshad to comply with EU rules that, with a few exceptions,prohibit state aid for distorting competition within thesingle market. Thus, generous assistance, such as what VWin Slovakia or Suzuki in Hungary, received during the1990s was no longer permissible after 2004.

9. The decline in trade costs was due to a mix of increasedtrade efficiency and identification of new exports withlower trade costs. The goods being exported in the 1990s

involved high trade costs that were likely to impede exportgrowth at the intensive margin. Joining RVCs in the 2000swas a pathway to trade in commodities that could beexported at lower cost because the RVC’s organisationincluded not only efficient production but also efficienttransport to, and marketing in, distant markets.

10. Components producers may continue to flourish ifthey have a competitive edge. The most striking transfor-mation is in the FishermansBend (Victoria) plant that, usingits state-of-the-art knowledge ofmaterials,manufactures thecomposite moveable trailing edge (MTE) wing surfaces forthe Boeing 787 aircraft. In 2003, the facility won the US$5billion, 20 year, sole-supplier contract for the B787MTE bydemonstrating full-scale, resin-infused structures that metaerospace-quality requirements while integrating multiplecomponents into single, unitised parts, thus reducingassembly labour, time and cost.

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