2. Latvian foreign trade policy
The Ministry of Economics is the main institution which implements Latvia’s interests in the field of foreign trade policy in the EU, WTO and other international institutions and organizations, carries out export promotion policy, as well as, within the framework of its competence, enforces internal market protection policy and fosters foreign economic cooperation with other countries.
Latvia’s trade relations with other countries are based on multiparty treaties within the WTO, free trade agreements (FTA) and other treaties which provide for the most-favoured nation regime (MFN).
Since its accession to the EU on May 1st, 2004, all foreign trade rules and international treaties currently in force within the EU became binding for Latvia. This created new conditions in the economic cooperation with Latvia’s neighbours and other third countries. Currently, EU internal trade constitutes approximately 80% of the foreign trade of Latvia. Trade with third countries has meanwhile seen some significant changes:
- introduction of the common EU external customs tariff, which led to import duty changes;
- expansion of the external market due to the many FTA’s concluded by the EU;
- introduction of quantitative restrictions (quotas) for imports of certain goods;
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application of market safeguard measures currently in force in the EU to imports of certain goods starting from May 1st, 2004.
Foreign trade is important for Latvia, since the internal market cannot ensure a sufficient growth for Latvian manufacturers. Only stable growth of Latvian exports can ensure the improvement of trade balance and the increase of GDP. Countries of the EU and CIS play the most important role in the foreign trade of Latvia at present, and this is not expected to change in the nearest future. However, in the light of the saturation of EU market and its poor growth rates, the importance of third countries in the foreign trade of Latvia is expected to grow. Latvian entrepreneurs face increasingly more new opportunities in such markets as USA, Russia, Ukraine, China and Japan.
- WTO (World Trade Organization)
The World Trade Organization (WTO) is an international, multilateral organization, which sets the rules for the global trading system and resolves disputes between its member states, all of whom are signatories to its approximately 30 agreements.
WTO headquarters are located in Geneva, Switzerland
The WTO aims to increase international trade by promoting lower trade barriers and providing a platform for the negotiation of trade and to resolve disputes between member nations, when they arise. The goal is to help producers of goods and services, exporters, and importers conduct their business. [1]
3.1 Principles of the trading system
The WTO discussions should follow these fundamental principles of trading.
- A trading system should be free of discrimination in the sense that one country cannot privilege a particular trading partner above others within the system, nor can it discriminate against foreign products and services.
- A trading system should tend toward more freedom, that is, toward fewer trade barriers (tariffs and non-tariff barriers).
- A trading system should be predictable, with foreign companies and governments reassured that trade barriers will not be raised arbitrarily and that markets will remain open.
- A trading system should tend toward greater competition.
- A trading system should be more accommodating for less developed countries, giving them more time to adjust, greater flexibility, and more privileges
[5].
In Early May 2004 the World Trade Organization had 147 members and countries are in the process of accession (149 countries - 11 December 2005). Latvia became a full-fledged member of the WTO on February 10, 1999. [5]
Following the EU enlargement on May 1, 2004, the European Commission has acquired the right to conduct joint and multiparty talks with countries that are in the process of accession to the WTO (Russia, Kazakhstan, Belarus, Ukraine and others). Through active and effective participation in work groups of the European Commission Latvia will be able to protect its economic interests. Latvia has concluded bilateral talks with Russia on the market access of manufactured goods in April 2004.
Latvian and foreign entrepreneurs can use the Latvian Investment and Development Agency’s (LIDA) internet home page http://www.exim.lv , which contains information about export and/or import operations. This home page also offers information about all business offers and studies held by LIDA or Latvian embassies abroad, as well as activities of foreign trade promotion organized by LIDA or other government or non-government institutions. Latvian companies may also place information in this home page. The home page ensures foreign companies with access to information about Latvian goods and services. The home page has about 400 users on a daily basis.
Latvia publishes a data base on Latvian companies call Export-Import Directory on an annual basis, which includes information about 800 Latvian exporters. The catalogue of 2004 will be supplemented with reports on priority fields in Latvia.
Within the framework of a Joint Council decision (the so-called “July package”) on August1st, 2004, WTO member states agreed on guidelines of negotiations, which contain conceptual statements and serve as an endorsement for further progress of DDA negotiations.
Latvia is interested in achieving results in the following DDA sectors:
- trade in non-agricultural goods;
- trade in services;
- trade in agricultural goods;
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trade facilitation.
The aim is to come to an agreement on the above-mentioned issues during the 6th Ministerial conference taking place in Hong Kong on 13-18 December, 2005, thus concluding the Doha Round until 2006.
- Exports and imports in Latvia
If we look at the statistics we will see that since Latvia has joined the EU and the WTO he number of exports has increased, not only the number of things being exported but also, if we convert the merchandise into money equivalent this figure has also increased.
pic 4.1 Exports of Latvia
The real Latvian export is significantly dependent on the real exchange rate of lat, real foreign GDP and foreign investment stocks into Latvian manufacturing companies. The effect of the real exchange rate of lat differs across the export groups: the effect on the real export to Russia is negative, but the effect on the real export to European Union countries is statistically insignificant (because the increase of real exchange rate has negative effect on export-oriented manufactures’ profitability, but not on the export volume). The effect of the foreign demand is positive on all groups of Latvian export (the values of elasticities are positively dependent on the openness ratio of importing countries). The results of the models indicate, that foreign investment is not only source of financing current account, but also important development factor of Latvian economy – foreign investment has positive effect on real Latvian export to EU. The real export to EU and Russia has a significant momentum, but real export to Baltic countries immediately reacts on the changes in exogenous factors. Developed models can be used in the analysis and forecasting of Latvian export.
Latvian export promotion programme was approved by the Cabinet of Ministers on October 12, 2004. This medium-term policy planning document is intended for the period of 2005-2009 and it sets out the aims and the main objectives of export promotion, as well as the results to be achieved. [6]
The aim of the programme is to promote the international competitiveness of Latvian enterprises, to foster entry into new markets and consolidation in the existing ones. [6]
The following directions of action have been put forward in the framework of the programme so as to achieve the set goals:
- To set up the institutional infrastructure of export promotion both in Latvia and abroad;
- To promote the international competitiveness and professional capacity of Latvian enterprises;
- To support export marketing activities;
- To develop and ensure financial instruments for export promotion.
The programme foresees that there will be at least 15 Latvian foreign economic representative offices abroad until 2010 and no less than 20 foreign representative offices until 2015. [6]
There is also an increase in imports if we compare the situation from 1999 to 2004, again the EU and WTO memberships have played their roles in the development of Latvian imports. First of all great terms were provided and Latvia received a lot of offers and of course the country made a choice to import things which are easier to bring in instead of producing.
pic 4.2 Imports of Latvia
- Exports by commodity group
The value of commodity exports in 2005 reached 2871.4.mln lats, an increase of 721.4 mln lats or 33.6% compared with the previous year. The value of exports grew in all commodity groups but for the most significant export goods the increases were 56.6% for machinery and mechanical appliances; electrical equipment, 50.9% for prepared foodstuffs and alcoholic and non-alcoholic beverages, 24.7% for base metals and articles of base metals and 29.3% for the products of the chemical and allied industries. Growth in the export value of wood and articles of wood as well as in textiles and textile articles was less rapid, by 8.6%. Of the commodities, the share of which in the total export value is currently not large, the export of plastics and articles thereof rose particularly rapidly (by 55.2%), as did the export of pulp of wood; paper and cardboard (by 40.8%). [2]
- Imports by commodity group
The value of imports in 2005 in Latvia reached 4834.7 mln lats, up by 1029.4 mln lats or 27.1% compared with the previous year. The value of imports rose in all commodity groups. The fastest increases in imports were 56.9% for mineral products, 26.5% for transport vehicles, 26.0% for machinery and mechanical appliances; electrical equipment, 29.2% for plastics and articles thereof and 28.7% for food products, alcoholic and non-alcoholic beverages and tobacco. Of the commodities the share of which in the total import value is not large, a particularly rapid rise was observed in the imports of miscellaneous manufactured articles (mainly furniture) – by 32.3%. [2]
- Statistics for January – March 2006
pict. 5.1 Exports for Latvia January – March 2006 – [2]
Compared to January-March 2005, the considerable increases in exports in January-March 2006 were 54.1% for agricultural and food products, 43.8% for plastics and plastic products and 41.4% for optical instruments and apparatus. The decreases in exports, in turn, were 33.9% for mineral products and 0.2% for wood and articles of wood.
pic 5.2 Imports for Latvia – January March 2006 – [2]
Compared to January-March 2005, the steepest increases in imports in January-March 2006 were 52.4% for transport vehicles, 51.9% for miscellaneous manufactured articles (including furniture) and 28.0% for plastics and plastic products. There was, in turn, a decrease of 1.3% in the imports of wood and of articles of wood.
pic 5.3 Exports and Imports for Latvia 2005 – 2006 –[2]
The value of exports in March 2006 increased by 18.2% or 41.6 mln lats compared to the previous month and by 13.6% or 32.4 mln lats compared to March 2005, reaching 269.7 mln lats. [2]
The value of imports in March 2006 was by 15.3% or 63.7 mln lats higher than a month ago and 25.0% or 95.9 mln lats higher compared to March 2005, reaching 480.1 mln lats. [2]
The total foreign trade turnover in the 1st quarter of 2005 was by 22.0% or 358.8 mln lats higher than in the 1st quarter of the previous year and its value was as high as 1987.2 mln lats. [2]
- Trade in non-agricultural goods
Latvian exports of non-agricultural goods in 2005 constituted 90.1% of the total goods exports volume of Latvia. 89.7% of the total exports of non-agricultural goods were exported to WTO member countries (int.al., 75.7% - to EU member countries, 14.0% - to other WTO member countries), 9.9% to countries in the accession process to the WTO, and only 0.4% to other countries.
The main non-agricultural goods export partners of Latvia are EU member countries, and the CIS countries (Russia, Ukraine, Belarus, Kazakhstan and others) in the accession process to the WTO. It is expected that with the accession of CIS countries to the WTO the trade volume of Latvian non-agricultural goods to these countries will increase remarkably.
- Trade in services
The clearly negative foreign trade balance of Latvia is partly covered by the positive balance of services (exports – 963.2 million LVL, imports – 636.5 million LVL)[6]. According to the data of the balance of payments, the export of services in 2005, in comparison with the preceding year, has increased by 11%, and import – by 19%. Approximately 60% of the total exports of services are revenues from transit haulage.
The structure of Latvian economy in sector profile has somewhat changed in the recent years. The share of services sectors constituted 72.2% of the GDP in 2000, and 72.9% (after added value) in 2005. [6]
- Trade in agricultural goods
Latvia supports further, gradual and significant agricultural market liberalization in accordance with the DDA. Since further agricultural market liberalization is in the interests of both developed and developing countries, WTO member countries should cooperate effectively to solve the agricultural matters. [6]
- Trade facilitation
With regard to trade facilitation Latvia supports expansion of regulations promoting safe and predictable market system without export and import disturbing rules. Simplified and in line procedures, decreased volume of documentation and increased simplicity along with the WTO principles of non-discrimination and national system would be particularly favourable for Latvia as a transit country.
By simplifying customs documentation, the expenditures on document design would decrease, thus promoting the participation of small and medium enterprises in the international market. At the same time the environment for investment attraction would improve, and with regard to the government – administration would improve, expenditures decrease, trade turnover increase and the amount of illegal trade decrease. [6]
- Main partners of Latvia’s foreign trade
pic 6.1 Main export partners of Latvia for year 2006 – [6]
As can be seen in the graph there are 5 main destinations where Latvia exports its products – Russia, Lithuania, Estonia, Germany and Great Britain. The most popular exported items are - wood and wood products, machinery and equipment, metals, textiles, foodstuffs. There is a question – why these countries. First of all they are not located very far from Latvia geographically so the costs of exporting to them are minimal, second of all there is a high demand of these items in the above mentioned countries.
pic 6.2 Main import partners of Latvia for year 2006 – [6]
The main countries from which Latvia imports merchandise are – Lithuania, Estonia, Germany, Great Britain and Russia. Mostly Latvia imports machinery and equipment, chemicals, fuels, vehicles, things that are either produced in a small volume in Latvia or not produced at all.
If we compare the list of countries to which Latvia exports, wee can see that almost all countries are the same in these 2 lists. So that proves that there are some rules and regulation and also some agreements by which these countries not only import from Latvia but also provide some of their merchandise to export to Latvia.
Conclusions
Membership of such world wide known strong organisation as WTO and EU has strongly influenced the economy (and foreign trade in particular) in Latvia.
The number of exports and imports has increased so has the number of countries to which Latvia exports and from which imports.
Latvia foreign trade has lots of room for development, several policies have already been designed to aid this matter and a lot are on their way. The Ministry of Economy is in particular interested in the development of foreign trade. Not only will it help to stabilise Latvian economy, but it will also increase the level of welfare in the country and stimulate foreign investors to put in into Latvian real estate, projects, etc.
Judging by the above mentioned tendencies of development and improvement it can be said that Latvia is on its way to become one of the economically strong countries, which will dictate the rules and regulations for work trade and economy.
Used Sources
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– wikipedia (general information; theory)
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– The Statistic of Latvia
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- Latvian export and import directory
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John Sloman “Economics” 5th edition by prentice Hall, year 2003
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- World Trade Organisation – official web site
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- Ministry of Economics of Latvia – official web site
