US embassy cable - 03ROME5435

UNCLAS  ROME 005435 
 
SIPDIS 
 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREAS FOR OASIA STUART 
FRANKFURT FOR WALLAR 
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, IT, EXPORT CONTROLS 
SUBJECT: ITALYS REACTION TO ITS STRUGGLING EXPORT SECTOR 
 
REF: A. ROME 4923 
 
     B. ROME 4236 
C. ROME 2853 
 
1. Summary: The slump in Italys export sector continues 
to generate much public discussion.  In contrast to calls 
a few months ago for tariffs and retaliation against 
cheaper exports from Asia, government and private sector 
officials are calling for a radical overhaul in Italys 
export sector.  They are proposing higher spending for 
research and development, a greater diversity in export 
rt 
products, and incentives for innovation, despite strong 
pressures on Italys budget.  End summary. 
 
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EXPORT TRENDS 
------------- 
 
2. According to Italys Central Bureau of Statistics, 
ISTAT, exports decreased by three percent, while imports 
increased by 0.8 percent, in the first nine months of 
2003 compared with the corresponding period in 2002. The 
trade balance registered an E3.7 billion surplus through 
September 2003, a third of the E13.3 billion surplus 
registered in the corresponding period in 2002.  The 
current account deficit more than tripled, from E3.4 
billion at the end of September 2002 to E14.5 billion at 
the end of September 2003. 
 
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ITALIAN TRADE COMMISSION ON THE EXPORT CRISIS 
--------------------------------------------- 
 
3. In November, Emboffs met with Beniamino Quintieri, 
President of ICE - the Italian Trade Commission - for an 
exchange of views on foreign trade.  The primary function 
n 
of ICE, established in 1936, is to promote the export of 
Italian products.  Beniamino Quintieri, 51, president of 
ICE since July 2001, is also professor of economics at 
Libera Universita degli Studi Sociali (LUISS). 
 
4. According to Quintieri, Italian exports to major 
markets are facing stiff competition from, and losing 
market share to, cheaper exports from Asia.  This 
phenomenon is not new, he argued, since Italian exports 
historically have grown more slowly than German or 
Chinese exports.  The stronger euro and sluggish economic 
growth in Europe have exacerbated the problem for Italian 
exports, although, Quintieri explained, these factors 
alone do not explain the crisis in Italian exports.  For 
example, the stronger euro also affects Germany, which is 
slowly emerging from a recession; but German exports, 
nonetheless, are growing faster than are those from other 
EU Member States.  The increase in German exports is 
helping turn Germanys economy around. 
 
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THE CHALLENGE 
------------- 
 
5. On November 12, ICE sponsored a round table discussion 
on the results of a report on foreign trade by 
ICE/Prometeia. (Prometeia is a Bologna-based think tank.) 
 
6. Deputy Trade Minister Urso, one of the participants, 
discussed Chinas competitive edge on Italian 
manufacturing exports. Italys highly specialized, high- 
cost export sector is particularly vulnerable to 
competition from Chinese exports, he argued.  Urso also 
contended that China is the first lesser-developed 
country (LDC) to benefit from globalization and the 
openness of world markets.  In the past, western 
countries were those that received the greatest benefits 
from foreign trade.  Now, it is China that gets more 
than what it gives. 
 
7. Urso and other participants also raised concerns about 
 
the changeover from the lira to the euro. Italy switched 
from the weakest currency within Europe to the strongest, 
they noted.  This new situation was a shock for Italian 
companies, especially exporters, and is not expected to 
to 
improve in the short term.  Usro mentioned that according 
to the latest financial forecasts, the euro is expected 
to strengthen further against the dollar during 2004, and 
could approach E1 to USD 1.20. (Note: A level already 
passed this week.  End note.) 
 
8. Other speakers called for greater government support 
to the Italian export sector, especially as it attempts 
to innovate and diversify.  In that regard, the Italian 
Government has included in its draft 2004 budget specific 
tax deductions for research and development.  The 2004 
budget also provides E400 million 2004-2006 to support 
Italian companies abroad.  This package of incentives, 
negotiated with Italys leading industrial associations, 
includes: 
 
- funds to promote the Made in Italy trademark (E125 
million); 
- increased funds for ICE and other associations to 
promote exports (E21 million); 
- opening of a permanent exposition of Italian design and 
Made in Italy products (E20 million); 
on); 
- creation of a one-stop shopping center where Italian 
companies abroad can access representatives from the 
Ministry of Foreign Affairs, ICE, and Sviluppo Italia. 
(Sviluppo Italia  Development Italy  promotes foreign 
investment in Italy.) (E44 million); and 
-  export incentives for handicraft companies (E10 
million), and tax deductions for participation in trade 
shows aboard. 
 
---------------------------------------- 
ATTRACTING FOREIGN INVESTMENT TO ITALY 
---------------------------------------- 
 
9. Italian officials, both public and private, are also 
promoting foreign investment in Italy.  Recently, PM 
Berlusconi visited the New York Stock Exchange, the first 
time an Italian PM has done so, according to Quintieri. 
American business attitudes toward investing in Italy are 
positive, Quintieri argued. Nonetheless, he acknowledged 
that U.S. business is encouraging Italy to simplify its 
labor rules, improve infrastructure and increase the 
efficiency of its tax system and its central and local 
cal 
bureaucracy. 
 
10. The central government has given regional authorities 
some authority to promote foreign investment in their 
areas, and regional governments with ICE assistance are 
pursuing foreign investment. According to Quintieri, ICE 
and Sviluppo Italia are also organizing an event in New 
York in December to present projects to potential U.S. 
investors. 
 
11. Quintieri also explained that there is some overlap 
in functions of Sviluppo Italia with those of ICE, 
responsible for Italian exports as well as foreign 
investment in Italy.  ICE, with its large network of 
offices around the world, serves as a point of contact 
for Italian companies abroad. 
 
----------------------------------------- 
AND SUPPORTING ITALIAN INVESTMENT ABROAD 
----------------------------------------- 
 
12. Italian companies need to look beyond Italys own 
borders not only for markets for their products but also 
for opportunities for direct investment, Quintieri 
argued.  Investment abroad can help make Italian 
n 
companies more dynamic, he said.  Despite these 
initiatives, the GOI may still face an up-hill struggle 
 
to convince Italian firms of the benefits of foreign 
investment.  Quintieri said that Italian companies do not 
recognize the benefits for the domestic market that 
investment abroad brings.  Many Italian companies still 
think that investment abroad would force them to cut back 
on jobs in Italy.  On the contrary, Quintieri argued, 
experience shows that those companies that invest abroad 
increased the number of jobs in Italy and had stronger 
balance sheets than those that sold only in the domestic 
market. 
 
13. Quintieri said ICE is interested in encouraging joint 
Italian/U.S. investment in the ten EU accession countries 
and in Eastern Europe, in general.  According to 
Quintieri, Italy is second only to Germany in investment 
in Eastern Europe. 
 
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COMMENT 
------- 
 
14. In the short term, the euros strength will continue 
to penalize Italian exports.  At the same time, Italys 
s 
EU membership and WTO obligations severely constrain the 
government from taking retaliatory steps to improve its 
trade position with respect to its competitors, whatever 
the domestic political rhetoric.  Despite strong 
pressures on budgetary expenditures, the GOI therefore 
appears to be embarking on the road of helping underwrite 
diversification and expansion into non-traditional 
markets.  End comment. 
 
SEMBLER 
 
 
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 2003ROME05435 - Classification: UNCLASSIFIED