US embassy cable - 03ROME4923

UNCLAS SECTION 01 OF 03 ROME 004923 
 
SIPDIS 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA HARLOW, STUART 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ AND 
4212/ITA/MAC/OEURA/CPD/DDEFALCO 
STATE PASS USTR 

E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, IT, EXPORT CONTROLS 
SUBJECT: IS ITALYS EXPORT LED GROWTH MODEL IN TROUBLE? 
 
REF: A. ROME 4236 
 
B. ROME 2853 
 
1.  SUMMARY:  ITALIAN EXPORTS TO ITS MAJOR MARKETS ARE 
FACING STIFF COMPETITION FROM, AND LOSING MARKET SHARE 
TO, CHEAPER EXPORTS FROM ASIA.  THE THREAT HAS TRIGGERED 
MUCH POLITICAL POSTURING IN ITALY, WITH FINANCE MINISTER 
TREMONTI AND UMBERTO BOSSI, NORTHERN LEAGUE LEADER AND 
MINISTER OF REFORMS, CALLING FOR A REVIEW OF, IF NOT 
RETALIATORY ACTION AGAINST, CHINA, INDIA, BANGLADESH, AND 
PAKISTAN.  OTHER PRESSURES SUCH AS THE STRONGER EURO AND 
SLUGGISH ECONOMIC GROWTH IN EUROPE ALSO ARE AFFECTING 
ITALIAN EXPORTS, WHICH ALREADY ARE DOWN 2.5 PERCENT THIS 
YEAR. 
 
2.  IN THE LONG TERM, ITALY FACES REAL PROBLEMS IN ITS 
EXPORT SECTOR, WHICH IS THE BACKBONE OF THE ECONOMY AND 
ACCOUNTS FOR 25 PERCENT OF GDP.  THE LIMITED INVESTMENT 
IN TECHNOLOGY IN THE PAST DECADE HAS PRODUCED A 
SPECIALIZED, BUT A HIGHLY LABOR-INTENSIVE EXPORT SECTOR, 
WHICH IS PARTICULARLY VULNERABLE TO COMPETITION FROM 
COUNTRIES WITH LOW LABOR COSTS.  END SUMMARY. 
 
BACKGROUND 
---------- 
 
    3.  ITALIAN EXPORTS ARE HEAVILY CONCENTRATED IN HIGH-END 
CONSUMER GOODS, THE DEMAND FOR WHICH IS PARTICULARLY 
INFLUENCED BY IMPORT PRICE.  AS SUCH, THESE PRODUCTS ARE 
SUSCEPTIBLE TO EXCHANGE RATE FLUCTUATIONS.  IN HIS ANNUAL 
REPORT ON MAY 31, CENTRAL BANK GOVERNOR ANTONIO FAZIO 
ARGUED THAT THE COMPOSITION OF ITALIAN EXPORTS, DOMINATED 
BY FURNITURE, LEATHER PRODUCTS AND MANUFACTURED GOODS, 
MAKES THEM HIGHLY VULNERABLE TO IMPORT PRICE TRENDS (REF 
B). 
 
POOR PERFORMANCE OF ITALIAN EXPORTS THIS YEAR 
--------------------------------------------- 
 
4. ACCORDING TO THE CENTRAL BUREAU OF STATISTICS (ISTAT), 
EXPORTS DECREASED BY 2.5 PERCENT, WHILE IMPORTS INCREASED 
BY 1.8 PERCENT IN THE FIRST SEVEN MONTHS OF 2003 COMPARED 
WITH THE CORRESPONDING PERIOD IN 2002.  THESE TRENDS HAD 
A DRAMATIC IMPACT ON THE TRADE BALANCE.  ITALYS FOREIGN 
TRADE THROUGH JULY 2003 REGISTERED A 1.6 BILLION EURO 
DEFICIT, COMPARED TO A FIVE BILLION EURO SURPLUS  IN THE 
CORRESPONDING PERIOD IN 2002.  CONFINDUSTRIA, ITALYS 
LARGEST EMPLOYERS ASSOCIATION, ESTIMATES THAT ITALIAN 
EXPORTS WILL DECLINE OVERALL BY 1.3 PERCENT THIS YEAR. 
ITALYS SHARE OF WORLD TRADE IS EXPECTED TO SHRINK, BELOW 
THE 3.9 PERCENT SHARE IN 2002 AND SIGNIFICANTLY BELOW THE 
AVERAGE 4.6 PERCENT SHARE IN THE PERIOD 1991-1995. 
 
EXPORTS TO THE EU 
----------------- 
 
5. EXPORTS TO EU COUNTRIES (MORE THAN 50 PERCENT OF TOTAL 
    TAL 
EXPORTS) FELL BY 1.8 PERCENT IN THE FIRST SEVEN MONTHS OF 
2003 COMPARED TO THE CORRESPONDING PERIOD IN 2002, WHILE 
IMPORTS FROM THE EU (ALMOST 60 PERCENT OF TOTAL IMPORTS) 
INCREASED BY TWO PERCENT DURING THE SAME TIME.  TRADE 
WITH EU COUNTRIES THROUGH JULY 2003 REGISTERED A 3.3 
BILLION EURO DEFICIT, COMPARED TO A TWO BILLION EURO 
DEFICIT REGISTERED IN THE CORRESPONDING PERIOD IN 2002. 
THROUGH JULY 2003, THE LARGEST DECREASES WERE REGISTERED 
IN LEATHER AND LEATHER PRODUCTS (DOWN 12.1 PERCENT) AND 
TEXTILES AND APPAREL (DOWN 8.1 PERCENT). 
 
EXPORTS TO NON-EU MARKETS 
------------------------- 
 
6. THE PERFORMANCE OF ITALIAN EXPORTS TO NON-EU MARKETS 
HAS BEEN EVEN WORSE THAN THAT OF EXPORTS TO EU MARKETS. 
IN THE FIRST NINE MONTHS OF 2003, ITALIAN EXPORTS TO NON- 
EU COUNTRIES, WHICH INCLUDES THE U.S., TURKEY AND THE 
FOUR MERCOSUR COUNTRIES, DROPPED BY 3.5 PERCENT, WHILE 
IMPORTS INCREASED BY 1.6 PERCENT.  THE GREATEST DECLINE 
WAS IN EXPORTS TO MERCOSUR, DOWN 16.1 PERCENT, TO THE 
 
ROME 00004923  002 OF 003 
 
003 OVER THE 
CORRESPONDING PERIOD IN 2002.  THE STRONGER EURO VERSUS 
THE DOLLAR IS THE KEY FACTOR BEHIND THE DECLINE IN 
EXPORTS TO MERCOSUR AND THE UNITED STATES.  THESE TRENDS 
HAD A NEGATIVE IMPACT ON ITALYS PREVIOUS TRADE SURPLUS 
WITH NON-EU COUNTRIES.  TRADE WITH NON-EU COUNTRIES 
REGISTERED A 3.5 BILLION EURO TRADE SURPLUS THROUGH 
SEPTEMBER 2003, LESS THAN A HALF OF THE 7.9 BILLION EURO 
SURPLUS REGISTERED IN THE CORRESPONDING PERIOD IN 2002. 
 
THE THREAT FROM LOW-COST EXPORTING COUNTRIES 
-------------------------------------------- 
 
7.  ITALY, WITH ITS HIGHLY SPECIALIZED BUT ALSO HIGHLY 
LABOR-INTENSIVE EXPORT SECTOR, IS VULNERABLE TO 
COMPETITION FROM COUNTRIES WITH LOW LABOR COSTS, SUCH AS 
INDIA, BANGLADESH, PAKISTAN, CHINA AND KOREA. WITH 
RESPECT TO LEATHER AND WOOL PRODUCTS, INDIA AND PAKISTAN 
NOW EACH HAVE LARGER MARKET SHARES THAN ITALY DOES IN THE 
GERMAN, FRENCH AND SPANISH MARKETS. MEXICO ALSO NOW 
OFFERS STIFF COMPETITION IN FURNITURE (CHAIRS ANDS SOFAS) 
FOR THE U.S. MARKET. 
 
THE SPECIFIC MENACE FROM CHINA 
------------------------------ 

8.  POLITICAL LEADERS IN ITALY ARE POINTING FINGERS AT 
CHINESE EXPORTS AS THE LEADING CAUSE FOR THE DECLINING 
MARKET SHARE OF ITALIAN EXPORTS.  FINANCE MINISTER 
TREMONTI RECENTLY DECLARED TO ITALIAN JOURNALISTS: IN 
THOSE MARKETS WHERE CHINA ENTERS, IT TENDS TO EXCLUDE 
ITALY. (REF A REPORTS ON THE POLITICAL POSTURING 
REGARDING THE THREAT FROM ASIA.)  MARKET ANALYSTS ALSO 
ARE BEGINNING TO MAKE SIMILAR OBSERVATIONS. THE EDISON 
FOUNDATION, A MILAN-BASED INSTITUTE THAT PROMOTES 
BUSINESS R&D, ARGUES THAT ITALIAN EXPORTS ARE RAPIDLY 
LOSING MARKET SHARE IN THE EU TO ASIAN AND, IN 
PARTICULAR, TO CHINESE COMPETITION. 
 
9.  EXPORTS FROM CHINA ARE THREATENING ITALYS MARKET 
SHARE IN THE EU IN SUCH SECTORS AS KITCHENWARE AND 
KITCHEN UTENSILS, MANUFACTURED MARBLE AND OTHER STONES, 
FURNITURE AND FURNITURE PARTS, VALVES, AND LAMPS. IN 
KITCHENWARE, ITALYS MARKET SHARE IN THE EU DECREASED 
FROM 24 PERCENT IN 1990 TO 12 PERCENT IN 2002, WHILE 
CHINAS MARKET SHARE INCREASED DRAMATICALLY FROM 3.5 
PERCENT OF 1991 TO 37 PERCENT IN 2002.  IN THE LAMP 
SECTOR, FOR EXAMPLE, ITALY'S SHARE IN THE EU MARKET 
DECREASED FROM 22 PERCENT IN 1990 TO 12 PERCENT IN 2002, 
WHILE AT THE SAME TIME, CHINAS MARKET SHARE INCREASED 
FROM 1.6 PERCENT IN 1990 TO 29 PERCENT IN 2002. EVEN IN 
SECTORS WHERE ITALIAN EXPORTS HAVE TRADITIONALLY BEEN 
DOMINANT (E.G., LEATHER SHOES), ITALIAN SHOES FACE STIFF 
COMPETITION FROM LOWER-COST BUT STILL GOOD QUALITY SHOES 
MADE IN CHINA AND KOREA. CHINA HAS BECOME THE LARGEST 
EXPORTER OF SEMI-LEATHER SHOES TO THE U.S. MARKET, AND 
    ITALYS MARKET SHARE IS NOW LESS THAN ONE THIRD OF THE 
CHINESE ONE.  BUSINESS SOURCES IN THE SOUTHERN ITALIAN 
REGION OF PUGLIA HAVE COMPLAINED THAT THE REGIONS 
IMPORTANT SOFA INDUSTRY IS ENTERING A CRISIS PERIOD 
BECAUSE OF AGGRESSIVE CHINESE COMPETITION.  PREVIOUSLY, 
CHINA HAD BEEN ACTIVE ONLY IN THE LOWER-END SOFA MARKET, 
BUT IS NOW TAKING OVER THE LUXURY END AS WELL.  ONE OF 
THE REGIONS LARGEST SOFA FACTORIES HAS REPORTEDLY LAID 
OFF 300 WORKERS AS A RESULT OF FALLING ORDERS. 
 
THE EFFECT ON JOBS 
------------------ 
 
10.  GIVEN THE TRENDS, EMPLOYMENT IN THE EXPORT SECTOR 
HAS DECLINED. PRATO CONFARTIGIANATO, THE CONFEDERATION OF 
CRAFT ENTERPRISES THAT REPRESENTS 6,000 COMPANIES, 
INCLUDING 2,800 IN THE TEXTILE SECTOR, CLAIMS THAT ALMOST 
500 COMPANIES ARE HAVING DIFFICULTIES AND THAT ALMOST 
2,000 JOBS HAVE BEEN LOST IN THE LAST TWO MONTHS. 
LOCAL PLANTS IN THE TEXTILE DISTRICT OF PRATO IN TUSCANY 
 
ROME 00004923  003 OF 003 
 
S AS REASONS FOR THE 
JOB CUTBACKS. 
 
OTHER CONCERNS 
-------------- 
 
11.  WHILE EXPORTS HAVE TRADITIONALLY BEEN VULNERABLE TO 
EXCHANGE RATE FLUCTUATIONS, ITALIAN EXPORTERS ARE LOSING 
A COMPETITIVE EDGE FOR ANOTHER REASON, MANY ECONOMISTS 
WORRY.  ITALY INVESTS ONLY .75 PERCENT OF ITS GDP IN R&D, 
COMPARED TO AN AVERAGE OF 1.75 PERCENT IN THE EU.  THIS 
LACK OF INVESTMENT IN TECHNOLOGY HAS REDUCED THE 
COMPETITIVENESS OF ITALYS EXPORTS AND AGGRAVATED THEIR 
SENSITIVITY TO EXCHANGE RATE FLUCTUATIONS. 
 
12.  IN THE LONGER TERM, ITALYS POLITICAL AND ECONOMIC 
LEADERS WILL HAVE TO TAKE A HARD LOOK AT ITS EXPORT- 
DRIVEN ECONOMIC MODEL.  EU COMMISSIONER PEDRO SOLBES 
RECENTLY TOLD ITALYS LEADING BUSINESS DAILY, IL SOLE 24 
ORE, THAT HE IS SKEPTICAL ABOUT THE GOVERNMENTS 
PREDICTION THAT ITALYS EXPORTS WILL INCREASE IN 2004. 
HE REMARKED THAT IT HAS BEEN A LONG TIME SINCE ITALY WAS 
ABLE TO HOLD ON TO ITS MARKET SHARES IN EXPORTS, GIVEN 
THEIR LIMITED ABILITY TO COMPETE ON PRICE.  A MORE 
FAVORABLE EXCHANGE RATE WOULD HELP, BUT LONG-TERM TRENDS 
    ARE NOT ENCOURAGING, HE CONCLUDED. 
 
 
NOTE: MISSING SIGNATURE. 
 
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 2003ROME04923 - Classification: UNCLASSIFIED