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Cablegate: Czech Republic: Trade Policy and Trends After Eu

VZCZCXRO4357
PP RUEHLZ
DE RUEHPG #1677/01 3381321
ZNR UUUUU ZZH
P 041321Z DEC 05
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 6657
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRAGUE 001677

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/TPP, EUR/ERA, EUR/NCE, E STAFF DAN MORRISON
STATE PLEASE PASS USTR LISA ERRION
COMMERCE FOR ITA/MAC/EUR MIKE ROGERS
TREASURY FOR OASIA ANNE ALIKONIS

E.O. 12958: N/A
TAGS: ETRD ECON WTRO EUN EZ
SUBJECT: CZECH REPUBLIC: TRADE POLICY AND TRENDS AFTER EU
ACCESSION

REF: A. PRAGUE 1325

B. PRAGUE 1526

1. (U) SUMMARY: As the Czech Republic prepares for the WTO
Ministerial Meeting in Hong Kong December 13-18, the Czech
economy is basking in rosy statistics (reftel A). The CR is
enjoying a trade surplus for the first time since becoming an
independent nation in 1993, with 2005 trade surplus forecast
at over USD 2 billion (1.7 percent of GDP) after a deficit of
USD 1 billion in 2004. Despite the record trade surplus,
there are winners (auto and steel) as well as losers
(textiles) resulting from both EU accession and
globalization. Eighteen months after joining the EU, the
country's most significant trading partners remain Germany
and the other EU nations. Further EU market penetration
remains a GOCR priority, but the government has also been
aggressively, if rather haphazardly, pursuing new markets,
with an emphasis on China and Russia. Within the EU, the
GOCR is learning to maneuver within the "consensus" system by
finding regional and subject-specific allies.
Non-agriculture market access remains the GOCR,s top
priority within the EU and in WTO trade discussions (reftel
B). END SUMMARY

----------------------------------------
GERMANY REMAINS CZECH ECONOMY,S LIFELINE
----------------------------------------

2. (U) As a small open economy, the Czech Republic continues
to revolve primarily around the export of three goods:
automobiles, electrical machinery, and industrial machinery.
The Czech economy can be crudely summarized as a supplier of
these goods for final assembly or sale in the Germany
economy. Czech exports consist of machinery and
transportation equipment (44 percent), intermediate
manufacturing products (25 percent), chemicals (7 percent)
and raw materials and fuel (7 percent). In the first half of
2005, 84.8 percent of Czech exports went to the EU market.
The Czech Republic's largest export partners are Germany with
36 percent and Slovakia with 8 percent. Much of the growth
in Czech trade this year can be attributed to the outsourcing
of manufacturing from Germany (through direct investment and
orders) and the freer flow of goods to traditional partners
(such as Poland and Slovakia) following EU accession.

3. (U) While further market penetration into the EU remains a
government priority, the GOCR is also focused on staying
competitive in the face of rising labor costs. Deputy
Minister of Trade and Industry Martin Tlapa said that the
government is keenly aware of the problem of eroding
comparative advantage. In an attempt to maintain and even
increase market share in neighboring countries, he has pushed
to improve the efficacy of the national trade promotion
agency CzechTrade and ensure that they focus on effective
assistance services for Czech exporters. His office has
submitted a five year strategy to the cabinet that it hopes
will result in a significant increase in Czech exports,
especially from SMEs. In discussions with CzechTrade
officials, however, it is apparent that no new money is
forthcoming to increase staffing in their offices or to
expand their current funding levels. They hope that EU funds
can be used to support the development of new programs, but
the unexpected order earlier this year from the EU to halt
one of their SME development programs as "uncompetitive,"
suggest that EU funds are unrealistic sources for the
expansion of trade offices abroad. Prime Minister Paroubek
has made it clear that increased trade with Russia and China
are goals of his government, but these attempts are at times
poorly coordinated (for example, Paroubek neglected to bring
anyone from the Ministry of Trade on his visit to China in
June 2005). Nevertheless, the Czechs believe that these two
markets represent untapped potential for their exports, and
look to expand their presence in these countries.

-----------------------
WINNERS: Auto and Steel
-----------------------

4. (U) The Czech Republic is one of the largest auto
producers in Central and Eastern Europe, and continuing
success in the automotive industry is a significant driving
force in the economy. 16 percent of the country's exports in
the first half of 2005 consisted of road vehicles - the
single largest sector in the Czech trade portfolio.

PRAGUE 00001677 002 OF 003


Companies from across the globe (Japan, Germany, Korea, and
the United States) continue to invest in the expanding Czech
automotive industry. The major player, however, remains
Skoda Auto, which is the single largest exporter in the
country, accounting for 7.7 percent of the country's entire
export value in 2004.

5. (U) The Czech steel industry has naturally benefited from
the auto-industry boom. Although employment in the industry
has declined over the years, productivity is up and companies
are profiting from increased domestic demand and exports.
However, a dark cloud remains over the industry, which
illustrates the inherent weakness of the current economic
growth in the country. Necessary structural reforms have not
been made which would protect the industry in times of
economic downturn. As part of the country's accession, three
major producers of steel in the country: Vitkovice, Nova Hut'
(now Mittal Steel Ostrava), and Valcovny Plechu (Frydek
Mistek) were allotted EU restructuring funds. They have
until 2006 to carry out required reforms intended to
revitalize and streamline the firms, which were previously
sprawling and inefficient relics of the communist era.
However, the boom in the market has been too tempting for the
companies to miss out on, and instead of reducing production
and closing certain mills, as they are required to do under
the EU's protocol, they have instead ramped up production.
As a result, it appears to be almost certain that the
companies will not comply with the protocol. This will cost
them billions of Czech crowns in repayments and leaves the
companies, in the long-term, subject to the same
inefficiencies that will hamper their ability to compete in a
normal market.

-----------------
LOSER: Textiles
-----------------

6. (U) Since 1989, the textile industry has lost over 70
percent of its work force and EU membership has put an end to
the GOCR,s ability to protect the flagging industry. With a
dramatically reduced workforce and increased competition from
abroad, the textile industry faces a grim future. Chinese
imports, according to the Textile Association (ATOK), are the
main culprit and with very few exceptions the domestic market
is now closed to Czech producers because they cannot compete
on price. ATOK and the Ministry of Trade and Industry both
pin their hopes on "technical textiles" (defined by the
industry as textiles for application where performance and
specifications are more important than aesthetics and
fashion) as the only hope that can save the domestic textile
industry The assumption is that cheap Chinese imports may
be hard to compete with on price, but that Czech roducers
can find a niche market where they can emain competitive.
The recent EU-China spat on txtile quotas was of great
interest to the Czech roducers and they prevailed upon the
government o side with other traditional textile-producing
cuntries to support continued protection of the EU arket.

--------------------------------
ADJUSING TO THE EU "GREAT GAME"
-------------------------------

7. (SBU) Although several of our Minstry of Trade and
Industry contacts lamented the verall weak position that a
small country like the Czech Republic has in he EU, they are
gradually learning to become savv about working within the
"consensus" system. Deputy Minister of Trade and Industry
Tlapa said that the tried-and-true Visegrad-4 alliance
(Poland, Czech Republic, Slovakia, and Hungary) is oftentimes
a good negotiating unit on trade issues. However, trade
representatives are learning to find countries with similar
interests on a subject-by-subject basis: for example, allying
with France and Italy on the latest textile brouhaha with the
Chinese. Although they are quick to give the canned response
("trade is a pillar one issue so we stand by the EU
position") to any U.S. demarches on trade issues, the GOCR is
often eager to hear from US officials that there are other EU
nations with whom they may find common ground on issues.

8. (SBU) The Head of the Trade Policy Unit at the Czech
Mission to the EU Dita Charanzova says that they have learned
a lot from the EU internal decision-making process this year,
but could only claim "minor victories" (such as pushing for
agreements on aluminum) in goading the direction of EU trade

PRAGUE 00001677 003 OF 003


policy, and only with the "very close cooperation with other
players".

9. (SBU) COMMENT: Even though the Czech economy was a
relatively open economy prior to May 2004, EU accession still
had a positive impact on the Czech trade balance and helped
to boost GDP growth. However, given the country's
overwhelming reliance on trade with Germany, diversification
is an important future consideration. The importance of
trade in non-agricultural goods explains why the country is
focused on NAMA in the current WTO negotiations (reftel B).
However, the GOCR is unwilling to take on France or
neighboring Poland on this issue. While the GOCR is quietly
hoping and lobbying within the EU for movement on the
agriculture issue, they will ultimately go along with
whatever the EU party line is once a decision has been made.
CABANISS

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