Free trade might boost global economic growth, but it can have devastating effects on those who are not prepared for it. At the end of the day, a country needs to learn how to ride the waves of globalisation otherwise it ceases to be master of its own destiny.
During the 1990s the initial euphoria on the demise of communism was promptly followed by disillusionment in the countries of Central Europe. Joining the EU proved to be a longer than expected process for them and their economies lay in ruins.
The Pannonia motorbike, a product of Hungarian communist era manufacturing.
An image by mango_kr on Flickr – CC BY-NC-ND 2.0
To boost trade before becoming members of the EU, governments of the region founded the Central European Free Trade Agreement (CEFTA) in 1992. But the region’s first market-based free trade area did not prove successful. The problem was that the economies of its member states started to compete with each other for European markets instead of cooperating and creating more sophisticated goods to sell at a better price.
Meanwhile, as accession negotiations with the EU advanced, the trade barriers between the Union and Hungary were gradually lowered. Customs tariffs were lowered asymmetrically in order to protect the fledgling Hungarian economy by granting Hungarian exports better conditions on EU markets than EU exports had on the Hungarian one. Yet the legacy of its communist past prevented the country from making proper use of the opportunity.
In its wake communism left a complete lack of domestic investors with capital, and a raft of globally uncompetitive State Owned Enterprises (SOEs). Even the privatisation of these SOEs did not help. Many of them were sold only to to be consigned to the scrapheap to make way for the products of the very foreign companies that bought them. This lead to marked economic deconstruction during the period when Hungary should have been reaping the benefits of the asymmetrical tariff regime.
An abandoned Hungarian factory. Picture by lost in pixels – Flickr – CC BY-NC-ND 2.0
Thus by the time Hungary joined the EU the country was left with a very open economy coupled with a huge trade deficit which made it totally reliant on Western companies and investors.
Erstwhile flourishing sectors such as food processing or leather manufacturing are now in ruins. Consequently our domestic market is now flooded with products from both West and East thanks to free trade. And while it is true that Hungary has become part of Western European supply chains, those foreign companies who create a tangible share of the Hungarian GDP are attached to this region only by the need for maximising profits and nothing else. For multinational corporations (MNCs) having a manufacturing plant in any given country does not necessarily mean reinvesting their profits in the same place.
It seems like the country and the region as a whole have ended up on a double periphery. On the one hand, encouraged by free trade and low labour costs, some western multinationals have decided to set up production on the eastern ends of the EU, while on the other China is now using these eastern countries as access points to the same European free trade area, and to assert its interests in the EU through individual Member States.
The presence of these multinationals, however can give a false sense of security. We risk losing our remaining industrial capacities as workers strive for better living standards and demand higher wages. This might drive Western companies to relocate even further East. In addition, once Chinese companies have learnt the rules of the game in the EU, they might simply move further West.
Hungary is just another good example of the fact that in a world of increasingly globalized free trade you will have to be ready to reap the benefits and watch out for the costs, if you want to avoid ending up totally defenceless.