ITALYS REACTION TO ITS STRUGGLING EXPORT SECTOR

UNCLAS ROME 005435

SIPDIS


DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA
PARIS ALSO FOR USOECD
TREAS FOR OASIA STUART
FRANKFURT FOR WALLAR
USDOC 6800/ITA/TD/OTEA/TISD/HSCHULTZ
STATE PASS USTR

E.O. 12958: N/A
TAGS: ECON EFIN ETRD IT EXPORT CONTROLS
SUBJECT: ITALYS REACTION TO ITS STRUGGLING EXPORT SECTOR

REF: A. ROME 4923


B. ROME 4236

C. ROME 2853


1. Summary: The slump in Italys export sector continues
to generate much public discussion. In contrast to calls
a few months ago for tariffs and retaliation against
cheaper exports from Asia, government and private sector
officials are calling for a radical overhaul in Italys
export sector. They are proposing higher spending for
research and development, a greater diversity in export
rt
products, and incentives for innovation, despite strong
pressures on Italys budget. End summary.

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EXPORT TRENDS
--------------


2. According to Italys Central Bureau of Statistics,
ISTAT, exports decreased by three percent, while imports
increased by 0.8 percent, in the first nine months of
2003 compared with the corresponding period in 2002. The
trade balance registered an E3.7 billion surplus through
September 2003, a third of the E13.3 billion surplus
registered in the corresponding period in 2002. The
current account deficit more than tripled, from E3.4
billion at the end of September 2002 to E14.5 billion at
the end of September 2003.

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ITALIAN TRADE COMMISSION ON THE EXPORT CRISIS
--------------


3. In November, Emboffs met with Beniamino Quintieri,
President of ICE - the Italian Trade Commission - for an
exchange of views on foreign trade. The primary function
n
of ICE, established in 1936, is to promote the export of
Italian products. Beniamino Quintieri, 51, president of
ICE since July 2001, is also professor of economics at
Libera Universita degli Studi Sociali (LUISS).


4. According to Quintieri, Italian exports to major
markets are facing stiff competition from, and losing
market share to, cheaper exports from Asia. This
phenomenon is not new, he argued, since Italian exports
historically have grown more slowly than German or
Chinese exports. The stronger euro and sluggish economic
growth in Europe have exacerbated the problem for Italian
exports, although, Quintieri explained, these factors
alone do not explain the crisis in Italian exports. For
example, the stronger euro also affects Germany, which is
slowly emerging from a recession; but German exports,
nonetheless, are growing faster than are those from other
EU Member States. The increase in German exports is
helping turn Germanys economy around.

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THE CHALLENGE
--------------


5. On November 12, ICE sponsored a round table discussion
on the results of a report on foreign trade by
ICE/Prometeia. (Prometeia is a Bologna-based think tank.)


6. Deputy Trade Minister Urso, one of the participants,
discussed Chinas competitive edge on Italian
manufacturing exports. Italys highly specialized, high-
cost export sector is particularly vulnerable to
competition from Chinese exports, he argued. Urso also
contended that China is the first lesser-developed
country (LDC) to benefit from globalization and the
openness of world markets. In the past, western
countries were those that received the greatest benefits
from foreign trade. Now, it is China that gets more
than what it gives.


7. Urso and other participants also raised concerns about

the changeover from the lira to the euro. Italy switched
from the weakest currency within Europe to the strongest,
they noted. This new situation was a shock for Italian
companies, especially exporters, and is not expected to
to
improve in the short term. Usro mentioned that according
to the latest financial forecasts, the euro is expected
to strengthen further against the dollar during 2004, and
could approach E1 to USD 1.20. (Note: A level already
passed this week. End note.)


8. Other speakers called for greater government support
to the Italian export sector, especially as it attempts
to innovate and diversify. In that regard, the Italian
Government has included in its draft 2004 budget specific
tax deductions for research and development. The 2004
budget also provides E400 million 2004-2006 to support
Italian companies abroad. This package of incentives,
negotiated with Italys leading industrial associations,
includes:

- funds to promote the Made in Italy trademark (E125
million);
- increased funds for ICE and other associations to
promote exports (E21 million);
- opening of a permanent exposition of Italian design and
Made in Italy products (E20 million);
on);
- creation of a one-stop shopping center where Italian
companies abroad can access representatives from the
Ministry of Foreign Affairs, ICE, and Sviluppo Italia.
(Sviluppo Italia Development Italy promotes foreign
investment in Italy.) (E44 million); and
- export incentives for handicraft companies (E10
million),and tax deductions for participation in trade
shows aboard.

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ATTRACTING FOREIGN INVESTMENT TO ITALY
--------------


9. Italian officials, both public and private, are also
promoting foreign investment in Italy. Recently, PM
Berlusconi visited the New York Stock Exchange, the first
time an Italian PM has done so, according to Quintieri.
American business attitudes toward investing in Italy are
positive, Quintieri argued. Nonetheless, he acknowledged
that U.S. business is encouraging Italy to simplify its
labor rules, improve infrastructure and increase the
efficiency of its tax system and its central and local
cal
bureaucracy.


10. The central government has given regional authorities
some authority to promote foreign investment in their
areas, and regional governments with ICE assistance are
pursuing foreign investment. According to Quintieri, ICE
and Sviluppo Italia are also organizing an event in New
York in December to present projects to potential U.S.
investors.


11. Quintieri also explained that there is some overlap
in functions of Sviluppo Italia with those of ICE,
responsible for Italian exports as well as foreign
investment in Italy. ICE, with its large network of
offices around the world, serves as a point of contact
for Italian companies abroad.

--------------
AND SUPPORTING ITALIAN INVESTMENT ABROAD
--------------


12. Italian companies need to look beyond Italys own
borders not only for markets for their products but also
for opportunities for direct investment, Quintieri
argued. Investment abroad can help make Italian
n
companies more dynamic, he said. Despite these
initiatives, the GOI may still face an up-hill struggle

to convince Italian firms of the benefits of foreign
investment. Quintieri said that Italian companies do not
recognize the benefits for the domestic market that
investment abroad brings. Many Italian companies still
think that investment abroad would force them to cut back
on jobs in Italy. On the contrary, Quintieri argued,
experience shows that those companies that invest abroad
increased the number of jobs in Italy and had stronger
balance sheets than those that sold only in the domestic
market.


13. Quintieri said ICE is interested in encouraging joint
Italian/U.S. investment in the ten EU accession countries
and in Eastern Europe, in general. According to
Quintieri, Italy is second only to Germany in investment
in Eastern Europe.

--------------
COMMENT
--------------


14. In the short term, the euros strength will continue
to penalize Italian exports. At the same time, Italys
s
EU membership and WTO obligations severely constrain the
government from taking retaliatory steps to improve its
trade position with respect to its competitors, whatever
the domestic political rhetoric. Despite strong
pressures on budgetary expenditures, the GOI therefore
appears to be embarking on the road of helping underwrite
diversification and expansion into non-traditional
markets. End comment.

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2003ROME05435 - Classification: UNCLASSIFIED