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Latvia and the Baltic States: Establishing the Basis for Long-Term Competitiveness

Submitted by on 05 Mar 2014 – 11:26


By Edgars Rinkēvičs, Minister of Foreign Affairs, Republic of Latvia

Springing back after the global financial crisis, Latvia, Estonia and Lithuania are the fastest growing EU economies, with macroeconomic forecasts projecting steady GDP growth of 4% or better in the upcoming years. Bilateral trade amongst the three Baltic States is vigorous, and will remain high due to geography and customary business links. For small open economies, competitive exports are the optimal driving force behind a sustainable economy. Moreover, the broader Baltic Sea area is arguably the part of the European Union which has consistently provided globally competitive goods over time, and Latvia finds itself in the midst of this strategic neighbourhood which is, in itself, a source of innovation and productivity. As an expression of the national priority on exports, Latvia is working to tap new markets for its products and develop commercially-attractive transport networks for trade between Northern Europe and Asia.

The Baltic States are a Hub of North European Transport and Logistics

With increasing trade volumes globally, Latvia’s transport infrastructure – located in the centre of the Baltic Sea transit routes – offers pricing to beat the competition. Latvia can boast of three major ice-free ports.  And RigaInternationalAirport[1] is the fastest growing airport facility in the Northern European region, providing both passenger and cargo transportation, and the opportunity to conveniently transfer shipments to and from the nearby port.

The Northern distribution network from Baltic ports, initially established in 2009 as a supply route for NATO operations in Afghanistan, could serve as a main transport artery between Europe and Asia also after 2014, bringing in also partners further South. The block container train corridor projects such as ZUBR and Baltika-Transit are environmentally sound and efficient means for connecting Nordic countries with the Black Sea and Central Asia by rail.

For further integration of the Baltic States in the common European transport infrastructure, the Rail Baltica project presents the prospect of connecting Finland, Estonia, Latvia, Lithuania, Poland and Germany along one railway. The project will provide a higher level of mobility between the Baltic States, also contributing to more intensive BalticState cooperation in promotion of tourism in external markets.

Travel is a significant aspect of Latvia’s bilateral trade in services. In 2012, bilateral trade in services with Estonia travel constituted 12.8% of the total service trade turnover, while with Lithuania the figure was 35.5% (source: Bank of Latvia). In addition, two thirds of the first-time tourists that visited Latvia in 2012, also travelled to Estonia and Lithuania. The Baltic States together are becoming a brand. We have combined our efforts to promote the Baltic States as common tourist destination. Understanding the flow of tourists could be increased on a national basis by acting together with our neighbours rather than separately, the three governments signed a protocol[2] on co-operation in the field of tourism. The identity-building and joint marketing are incorporated in the EU’s Strategy for the Baltic Sea Region.

Further integration of the Baltic state markets is predictable with Latvia becoming the 18th member of the Eurozone in January 2014. When Lithuania joins the euro, it will complete the picture of a region benefitting from an improved investment environment.

Nevertheless, for export-based growth to be sustainable the Baltic States must have the capacity to compete in the global market.  Competitive export-based growth is at the heart of the “economic breakthrough” proposed in the National Development Plan of Latvia for 2014-2020.  And smart, sustainable, inclusive growth is a main thrust in the overarching Europe 2020 strategy.

Baltic State Interdependence is a Salient Feature of the Economic[3] Landscape

Trade itself, with trade promotion in targeted markets, is playing the central role in Latvia’s dramatic come-from-behind performance.  Already by the end of 2010, Latvia’s export volume had exceeded the pre-crisis level, and the third quarter[4] of 2013 was the thirteenth consecutive quarter with a positive growth rate. In the same period, the share of exports in the external trade balance had reached 44.6% (whereas exports accounted for only 37% in 2008).

Latvian exports to Lithuania and Estonia made up over 27% of the total external trade turnover for Latvia in 2012. Lithuania is Latvia’s most important export and import partner. Estonia is the third largest trade partner.  The leading category of exported goods to both countries is machinery, electrical devices, and components of such equipment (25% of all goods exported to Lithuania and 18.5% those going to Estonia). Latvia exports substantial quantities of mineral products (12.6%) and livestock and related products (10,4%) to Lithuania, while transport vehicles (10.2%) and foods (9.7%) are the major categories of goods exported to Estonia.

Meanwhile, looking from the other side, mineral products make up 38.3% of Lithuanian exports to Latvia followed by food products (8.7%) and then machinery and electrical devices (8.4%).  Estonia’s chief exports to Latvia are machinery and electrical devices (16.6%); metal and raw materials for metal are 11.1% of exports.

Regarding Latvia’s trade in services, the transport sector has always been the most important imported and exported service – with Estonia transport services are 36,6% of Latvia’s exports and 47,5% of its imports, and with Lithuania, transport is 21.9% of Latvia’s exports and 21.5% of its imports. The Baltic cooperation in development of a common transport infrastructure is increasing.

Fostering Competitiveness

The Latvian government recognizes that real and lasting economic resilience in the context of global economic fluctuations depends on Latvia’s ability to develop exports with value-added and ever-enhancing quality. Latvia’s “Sustainable Development Strategy 2030” sets a target of achieving an innovative and eco-efficient economy; and these are guiding principles for future national development. The Baltic Sea region is the EU innovation leader and Latvian small-and-medium-sized enterprises (SMEs) and start-ups are actively cooperating with their Baltic Sea region counterparts. Latvian entrepreneurs have achieved world-wide recognition for excellence in such areas as innovative woodworking technologies, LCD 3D technologies, pharmaceuticals and modern wireless data transmission technology. These are cases where the “Made in Latvia” label with support from regional investors has carried the name of Latvia into markets in Asia and Latin America.

Multi-national funds are supporting bilateral trade and sharing of best practices amongst the SMEs in the Baltic States. For example, the joint Baltic Innovation Fund was launched in 2012 by the European Investment Fund in close co-operation with the three BalticState governments. This Fund makes available EUR 200 million to “boost equity investments for Baltic SMEs with high growth potential over four years through private equity and venture capital.

Export Diversification 

 For the sake of market reliability, Latvia assigns major importance to export market diversification, aiming for all five continents and thereby lowering exposure to fluctuations in demand for various goods.  The Baltic market itself with 6.5 million inhabitants is an insufficient catalyst for the economies of the three Baltic States. Currently 87% of Latvian exports go to 20 countries within the EU and Commonwealth of Independent States.

To maintain growth patterns seen in the past years of recovery from recession, we are putting effort into accessing the rising consumer economies in Asia, Latin America and the Middle East. To cater to the needs of Latvian businesses, next year we are opening an embassy in India, and new Latvian embassies will be opened in the Gulf Countries and Eastern Asia in the next couple of years. In addition to the 44 existing embassies, the network of Latvian Honorary Consuls covers 69 countries today and is expanding rapidly, especially in the emerging markets.

Sustainable trade goes hand-in-hand with development of a sound infrastructure, connectivity and cooperation. The Baltic countries have enormous potential to play a crucial role in connecting the European Union market with the East. Fostering cooperation within the Baltic Sea region (Belarus, Denmark, Estonia, Finland, Germany, Iceland, Latvia, Lithuania, Norway, Poland, Russia, Sweden) contributes to overall EU competiveness in the global economy.

Future Prospects

For the Baltic Sea region, the world is shrinking and expanding at the same time.  Through the development of our transportation and logistics sector, the Baltics are beginning to gain access to the large markets outside of the EU.  Untapped markets offer opportunities for our export-oriented companies. Active regional cooperation, integration, networking and innovation are putting Latvia on course to enjoy long-term competitive advantages in global markets.

[1] I wonder if a map or aerial shot of the airport and port of Riga would be good here.  Also a map of the Northern Distribution Network.

[2] October 17, 2013

[3] figures in this section were sourced from the Bank of Latvia