Relocation of production in Europe – challenges for the European labour movement

1. Relocation of production in Europe – challenges for the European labour movement Presentation at the OMNES seminar, Paris 29 November 2005 Andrew Watt European Trade Union Institute for Research, Education and Health and Safety http://www.etui-rehs.org

2. A new global background Fall of Iron Curtain, opening up of China, India et al. Huge part of world population integrated into the world economy within a short time period: • Also huge labour force (2 bn workers?) with different factor conditions • The labour supply of (especially) CEE, unlike at previous market entry of ‘peripheral countries’, has medium to high skills • But at same time new markets

3. A new global background Enlargement: skilled labour at much lower costs in vicinity • NMS-s having adopted the ‘acquis’ (labour, industrial, environmental, investment standards) • > ‘reckless competition’ partially brought under control, but risk level for investment decreased > CEE locations more attractive China, India a ‘wild East’ of unregulated capitalism • Informal sector • Repression of trade unionism • Poverty and underemployment • Export-led strategy (sustainable?)

4. Domestic background Integration of CEE parallel with the emergence of China at a time of • High unemployment in many EU15 countries • Sluggish economic and productivity growth • Lack of growth orientation of macroeconomic policy • Political crisis (Constitution) and threat over ‘European Social Model’

5. Concerns As companies seek to take advantage of newly emerged opportunities to exploit large differentials in wages and working conditions, Workers and unions fear that this will lead to a massive exodus of well-paid jobs in high-wage countries, to a weakening of labour’s bargaining position and thus to a downward spiral of wages and conditions.

6. Relocation: a definition • Relocation refers to cross-border investments which concern the shift of economic activities to foreign locations. • It includes both international outsourcing and intra-firm cross-border investment. • Relocation implies a substitution effect on domestic operations in the source location, including, most importantly, employment (e.g. through the transfer of jobs). • Difficult to identify clear ‘relocation’ cases, most transactions have a mixed character with diverse impacts on both source and target countries (e.g. Electrolux, IBM BS). • Consequently difficult to collate and interpret data (definitional problems, aggregation problems). Neither FDI nor trade data give the whole picture.

7. Fears about relocation Sluggish economic growth and continued high unemployment in much of the EU15 Workers in the EU15 fear massive exodus of well-paid jobs to New Member States as well as China, India or elsewhere. This weakens labour’s bargaining position and could lead to a downward spiral of wages and working conditions. Low employment and income levels in the New Member States. Need FDI for economic modernization, job creation, wage growth. Also in NMS fear that investment moves on further East.

8. Outsourcing and offshoring Source: Adapted from WTO 2005 and OECD 2005

9. Inflow of FDI into the 5 accession countries between 1993 and 2004 (in € millions)

10. FDI as a % of GDP

11. FDI inflows, world = 100% Source: UNCTAD World Investment report 2004; own calculations.

12. FDI to NMS and China/India still marginal The share of the NMS in the total FDI inflow to Europe, and their share in the FDI flow within the EU 25 remains rather marginal. Of the €77.2 bn inward FDI to EU 25 in 2003, €74.9 bn went to EU15 and just €2.3 bn to EU10. And while FDI from the EU15 to EU10 amounted to €6.9 bn in 2003, between the EU15 it was €183.7 bn. China and India account for less than 10% of global FDI (possibly growing, but unclear whether structural or cyclical increase) Contrary to popular perceptions, investment flows among the ‘high-wage’ western European countries or between US and EU15 are currently far more important than that from the high to the low-wage eastern European countries and to China/India.

13. Relocation currently exaggerated in media, but ... Evidence suggests that currently existing amount of relocation is limited and media reports must be treated with care But • May be differing in qualitative terms (higher up the value chain) • Sectoral and regional concentration can cause severe problems • Different groups of workers addected differentially (but skill types unclear) • Future potential is still uncertain • Actual relocation and threat of relocation not the same • Workers (rightly) don’t distinguish between relocation and threats from import competition, structural change, immigration

14. Are fears justified? Capital movements have for long been part of capitalist economy: is something new going on? Available evidence is patchy and incomplete. It seems to suggest that at aggregate level relocation is a smaller phenomenon than the public debate supposes. However there are indeed many examples of relocating firms and sectors that are seriously affected. Also, it is unclear if relocation will speed up in the near future. Finally, many employers threaten with relocation and demand downward adjustment of wages and working conditions, which is the major challenge.

15. Drivers of relocation: labour costs Wage difference between OMS and NMS at exchange rate, on average 4.5 times (at PPP cca 1:2), e.g. wages in Germany are six times higher than in Estonia.. But the wage gap is getting smaller due to high wage growth in NMS and also to the appreciation of CEE currencies vs the Euro E.g. the 32% wage increase in HU between 2000-2003 appeared as over 50% increase in Euro Gap with China/India much greater (Issues: exchange rate, labour standards and trade union freedom, development model)

16. Wages in Europe, 2004(1000 Euro) Note: Data refer to average compensation per employee Source: AMECO database

17. Real wages in 2004 compared to 2000 Note: Data refer to change in real compensation per employee in local currency in 2004 (2000=100) Source: AMECO database

18. Real GDP per employee in 2004 compared to 2000 Source: AMECO database

19. Drivers: Corporate tax rates

20. Corporate tax rates and state aids The table shows both a general trend towards lower rates of corporate tax – evidence of tax competition – and the substantially lower rates in the NMS (averaging around 2/3 of EU15 levels). Lower tax rates would normally imply lower revenue, and thus lower public investment in infrastructure. Simplistic theory that efficient solutions are found through competition (firms vote with their feet). This may lead to lower tax rates generating higher fiscal revenue, at the expense of other countries. Care must be taken with tax-rate figures, however. The rates are applied to a tax base (essentially a definition of profits) which varies substantially between countries. For instance Germany has very substantial tax allowances that reduce the effective corporate tax burden. State aid: regional policy concerns vs. ‘level playing field’, EU competition policy. Conflictual area for workers and unions (Ford)

21. Relocation constraints • Difficulty of unbundling production processes (SMEs vs. MNCs) • Necessity of customer proximity • Additional transport, communication, management costs and difficulties • Quality and reliability issues • Availability of adequately skilled labour in ‘accessible’ places • Language and cultural issues • Risks (economic and political stability, industrial relations climate etc.)

22. Justifications for policy Mainstream view • Cope with local adjustment needs • Promote political acceptance of change Critical view • Structural problems can be long term, have cumulative effects and leading to lasting unemployment • Equity: sharing benefits of ‘globalisation’ with ‘losers’ • Need to actively build comparative advantage (industrial policy) • Industrial democracy/workers’ participation

23. Challenges and policy types • Reducing incentives for relocation • Coping with actual relocation • Dealing with the threat of relocation General aim: active management of structural change in a forward-looking way with the involvement of social partners and with strengthened workers participation to promote a ‘high-road’ adjustment path and avoid a downward spiral

24. Anticipating change company level • productivity improvements through upgrading of skills and work organisation and through innovation and R&D sectoral and national levels • industrial policy strategy • generalised support for research and innovation • specific sectoral policies, (e.g. renewable sources of energy, clean technologies, environmental friendly transport) European level • Rethink relationship between industrial and competition policy all policy levels • Promote at life-long learning • Productivity-oriented collective bargaining • Demand-side policies for full employment

25. Adjustment challenge advance notification • Permits workers to adjust, workers’ representatives to negotiate solutions and poublic employment service to assist adjustment a right to re-adjustment support for every retrenched worker • European-level globalisation fund • Use of EU structural funds • National policies • Sectoral initiatives by social partners Defend unemployment benefits and employment protection legislation • Offer security • Promote mobility • Facilitate good job matches

26. Responding to the relocation threat strengthen information and consultation rights • EWCs key role Intensify efforts to coordinate collective bargaining • Doorn • EMF • ETUC, etc. Capacity building of TU-s in the NMS and globally Strengthening social dialogue especially on branch level in CEE

27. Drawing the line Where should relocation be simply unacceptable? • Difficult debate • Consider interests of all workers (at European or global level) Some pointers: • Which minimum standards must be entirely taken out of competition (core labour standards)? • What are the corporate social responsibilities of companies in relocation decisions? • Is it acceptable that a company that is already earning a reasonable return relocates with the sole purpose of increasing its profits? • Should the regulations governing the reimbursement by relocating companies of subsidies and other incentives from local, national and European sources be tightened?