Exports still on the rise but trade structure changing

In July of 2010 the value of Latvian foreign trade transactions increased, as both imports and exports grew (respectively by 29.4% and 41.9% over the year).

The link between the growth of the processing industries in breakdown by industry and exports indicates that the economic recovery in Latvia is based on the opportunities to export. Thus in July a substantial rise in the manufacturing and exporting of pharmaceuticals was observed, but it was the growth of exports of seasonal goods and goods with pronounced oscillations in their global prices (grains and metals) that was more decisive for the rise in exports.

The most rapid increase in imports is observed in the group of iron and steel products, which is explained by the need for intermediate goods in industry and the close link to the metal export dynamics. A similar correlation is observed also in the dynamics of the trade flows of rubber, plastics, wood pulp and its products. The knits and textiles group is one of those where in the breakdown by subgroup a difference between the gradually renewed foreign and sluggish domestic demand is observed: imports are rising in the subgroup of knitted fabric (2.3 times in a year), which could be related to intermediate consumption, but in the knitted clothing subgroup a drop in imports and rise in exports are observed.

Although exports are on the rise and a further export increase is expected, at the moment it does not ensure a further improvement in the trade balance. This can be explained by the specifics of trade structure: the beneficial dynamics of the previous quarters was to a large extent based in the differences of the development of domestic and foreign demand. As the demand abroad resumed sooner than in Latvia and prices in the foreign markets rose, the Latvian businessmen had an opportunity to both resume exporting in the so-called traditionally larger groups of goods and to export stores that had accumulated in manufacturing or as a result of earlier imports, or created by an underused production capacity. A positive trade balance was therefore observed in groups of goods untypical for the pre-crisis period, including specific kinds of equipment, devices and vehicles. As domestic demand resumes, not only the imports of intermediate goods that meet some of the needs of manufacturing but also the imports of consumer goods could increase. A rise in the imports of capital goods is also possible as evidenced by the increasing degree at which capacities are used in the processing industry.

The dynamics of the competitiveness of prices and costs has been and remains beneficial. That is one of the factors that have allowed us to maintain or increase our market shares in the markets of our main trading partners. The current monthly assessment of the rate of export orders by businesses (available for August) indicates a small improvement compared to the previous months, pointing to beneficial export opportunities in the coming months.

One should keep in mind, however, the inadequate investment in the processing industries as an important risk factor. A lack of investment was characteristic not only of the period of the deepest crisis but is a factor now as well. Therefore, as growth resumes, a gradual return to the pre-crisis trade structure is taking place, characterized, first of all by such groups of export groups that have an important effect on the oscillations in global prices and, second, by a great import investment in exports. Investment could encourage both a diversification of the structure of and innovative solutions in manufacturing (for which research activity is also indispensable), as well as a wider interstate cooperation and goods-recognition in the world's markets.