U.S. opportunity in EU integration

  • 2003-07-03
  • Matt Kovalick

In May of next year Lithuania will officially become a member of the European Union, an event that 91 percent of the population supported in May in the hope that integration with the common market will accelerate development of the domestic one.
But as the Baltic country prepares to adjust its economy in accordance to Brussels' demands, many U.S. companies operating in Lithuania, and in Estonia and Latvia as well, are wondering how EU accession will affect their businesses.
The answer: Well, there is no cut-and-dry answer.
According to Ramunas Vilpisauskas, senior policy analyst at the Lithuanian Free Market Institute, just how EU membership impacts U.S. business interests depends on the specifics of those interests.
"It depends on what kind of activities the U.S. company is undertaking, when [the companies] were established, if they have investments in Lithuania or if they are simply trading with Lithuanian companies," said Vilpisauskas.
Some U.S. companies, such as Kraft Foods in Kaunas and MasterFoods in Gargzdai, could see upside from access to the common market that, after the 10 country expansion next year, will have 450 million consumers.
"A lot of our companies are doing business with current EU countries, and the removal of tariff barriers, as well as customs procedures, would be very helpful," Jonas Akelis, a partner at Ernst & Young Baltic, said.
"Until now, some people say Lithuania is only a small country with a small market," said Lithuanian Development Agency director General Remigijus Kabecius. "With membership, clearly Lithuania will be regarded as part of the EU market. Doing business in Lithuania will mean doing business in Europe," he said.
"Why pay more when you have the same market conditions and lower operating costs in the Baltic states?" said Kabecius.
"I think entry into the EU has more an upside than a downside," said Al Kris, director of Aon Consulting.
"Based on some contacts and projects that we've been involved with recently, there are offshore companies and investors that are trying to position themselves in this market to take advantage of Lithuania's lower cost of doing business, particularly lower wage rates, strong work ethic, and the educational level of its workforce," said Kris.
Despite a general sense of optimism, joining the European Union also means having to accept certain rules that could affect American business.
"The downside is, of course, that we will have to comply with EU policies and regulations with regards to trading with non-EU countries. Therefore, we will not be able to have our own policies on customs duties," said Ernst and Young's Akelis.
"If a company exports goods to Lithuania, some products might see a slight rise in import duties and some deterioration in trade," said Vilpisauskas.
He said that if a U.S. company export products to Lithuania deemed by the EU as "sensitive" – such as agricultural, steel or textiles — it might face higher import duties.
Overall, however, experts say Lithuania will not be affected as much as Estonia, which currently has one of the most liberal trade regimes in Eastern Europe.


Still, some American companies that in the past benefited from special agreements with the Lithuanian government might lose such advantages.
"No longer will certain companies be protected in the local market," said Ramunas Kazlauskas of Lideika, Petrauskas, Valiunas ir Partneriai, a local law firm.
"For firms like Coca-Cola and McDonald's import duties had been reduced and quotas increased" and those advantages will be eliminated with EU integration, he explained.
The United States and Lithuania are signatories in a Bilateral Investment Treaty, ratified in 2000. Latvia, Estonia and three other EU candidates have similar treaties.
Before accession, the European Union requires all candidate countries to modify any bilateral treaties to conform to EU regulations.
According to U.S. Ambassador John Teft, negotiations continue in both Brussels and Vilnius.
"It's important that this issue be resolved, because the bilateral investment treaty has the basic guarantees under which American investors can come into Lithuania and be assured of fair treatment and a successful investment," he said.
As issues are dealt with and regulations adopted over the next year, Teft said that he hoped the Lithuanian government would do everything it can to make the country as investor friendly for American firms as much as for European ones.
Albinas Zananavicius, head of foreign trade policy division at the Foreign Ministry, said that discussions were well underway in a trilateral format (EU, United States and candidate countries), but the question is complicated because of peculiarities of EU law involved in discussion.
But, he said, in some ways changes will be more theoretical than practical. After amending the treaty, he said that U.S. investment in Lithuania should not be effected.

Case by case basis

In terms of simple macroeconomics, EU enlargement means less trade barriers to trade in a larger market, so that corporations will be able to enjoy certain opportunities of economies of scale and better contend with increasing competition.
"After the Baltic states and the other seven new entrants become members of the EU and trade barriers begin to fall, we expect an acceleration in cross-border trade," said Bernhardt Wagner, managing director of UPS Baltic.
"With the removal of customs clearance barriers, we expect more businesses to begin shipping small packages as opposed to full truckloads, which is often the case today," he said.
American multinationals like UPS or Kraft Foods will also find it easier to link up sister branches across Europe.
"We've had an ongoing dialogue with our Hungarian, Polish and Czech colleagues, and this will continue. There is opportunity in free trade, and we'll look for ways to better leverage these relationships," said Rasa Bagdoniene, Kraft Foods' corporate affairs manager for the Baltic region.
She explained how Kraft confectionary brands like Milka and Toblerone chocolates already have found a niche in Lithuania and that with open borders Lithuania's best-selling Karuna brand chocolate could more easily compete in other markets abroad.
But the road has traffic going in both directions. Bagdoniene said Kraft expected an increase in competition from European players who could be more aggressive in vying for market share in the Baltics.
Still, much still depends on the situation of individual companies and sectors. Smaller companies may encounter different challenges with unknown consequences.
For example, EU enlargement also opens a larger labor market. Companies across the continent will compete for talented workers – no matter their origin.
"I think there will be problems for all companies employing highly qualified personnel, and that is a brain drain to the West," said Helen Smith of Kaunas-based Professional Management Tech-nologies, which works with its U.S. parent company to develop software products.
Although statistics from the Lithuanian Development Agency show that Lithuania possesses a highly educated workforce, one of the best in Europe by percentage, what happens if they leave to seek better wages?
LDA's Kabecius hopes that companies will quickly take advantage of Lithuania's knowledge-intensive fields, such as information technology, biotechnology, lasers and electronics, important sectors both for the country's future and for keeping talent close to home.

The final verdict

Although difficult to forecast, it is certain that the Lithuanian government and local authorities will continue to play a crucial role in attracting and keeping American and other investors.
"Some people think that after joining the EU everything will depend on Brussels," said Vilpisauskas. However, Eurocrats tend to focus more on topics such as the EU's common trade policy, he said.
Vilpisauskas believes that Lithuanian success in landing American or other foreign investors will depend on the local business environment.
"Investors will look at taxation policies and bureaucratic procedures – things not regulated by EU," he said.
"No matter if American or not, companies are more interested in assessing the impact of how well institutions, such as customs, are ready to implement regulations," said Kraft's Bag-doniene.
Businesses want to know "what will happen on May 1, 2004, when a truck pulls up to the border," she said.