The Baltic countries' changing foreign trade patterns and the Nordic connection

Abstract

The 1990s have seen the delinking of the Baltic economies from Soviet industrial structures, rapid liberalization of local economies and foreign trade, and a burst of trade expansion. Estonia's exports, in particular, have grown consistently at a sufficiently high rate to bring about solid export-led growth for its economy.The article gives an overview of the changes that have taken place in the foreign trade of the Baltic countries, paying particular attention to Nordic-Baltic trade relations and possible future developments in trade. Underlying overall trade development, the Baltics' trade reorientation to the West has been profound and rapid, especially in Estonia's case.Russia and the other CIS members have been replaced by the EU as the Baltics' main trading partner.Latvia and Lithuania have reoriented themselves to the non-Nordic EU, while Estonian foreign trade is heavily concentrated on Finland and Sweden.Application of a gravity model of trade suggests (in contrast to results obtained for foreign trade of central and eastern European countries in transition) that the Baltic countries' foreign trade with a few European countries has exceeded its potential, in particular Finland and Sweden.The extreme is seen in Finnish exports to Estonia which have grown far larger than the estimated potential.The implication is a decline in the share of the two Nordic countries in the Baltics' foreign trade. The structure of Finnish and Swedish trade with the Baltic countries differs considerably from the structure of Finland's and Sweden's foreign trade in general.Trade is concentrated in resource- and labour-intensive goods, while intra-industry trade is less significant.Nordic-Baltic trade levels, above all Finnish-Estonian trade, have been influenced by a number factors in the opening up of the Baltic economies.These include proximity, lack of competition, free trade arrangements, intermediation of goods and, in Estonia's case, direct investment by Finnish and Swedish companies.A major identifiable element supporting the development of Estonian trade with Finland and Sweden is outward processing in the fields of textiles and machinery. In the medium and long run, the Baltic countries will have to tackle several wider issues influencing their external sector. These issues include the sustainability of competitiveness in the production of labour-intensive products in the face of efforts by other low-cost producers; the limits imposed by marginal natural resource wealth; the viability of commercial agriculture at such northern latitudes; the exploit ability of forest resources; and development of "east-west" transport/shipping gateways and production geared toward eastern markets.Scarcity of evident competitive advantages and uncertainty related to many fields emphasize two priorities, ie the maintenance of economic stability in terms of policy and institutions, and further investment in relatively well-educated populaces. Keywords: foreign trade, Baltic countries, Nordic countries.