Foreign trade

As Estonia has had the same fixed exchange rate since 1992, this increase in foreign trade has also occurred in convertible currency terms (US$ or DM). The growth of exports during the time the currency appreciated seems to be, at first glance, paradoxical. However, here the initial conditions of the economy and the general framework of development should be taken into account. Estonia started its reorientation toward Western markets at a time when a very large share of its production was unacceptable to the markets of developed countries; Estonian enterprises had to substantially change the character of their products. Very many enterprises changed from being manufacturers of finished and semi-finished products to being subcontractors of Western firms. Several raw materials (e.g. unprocessed wood and scrap metals) have formed a very large share of Estonian exports.

The structure of Estonian imports has been largely determined by the necessity of purchasing fuel and other raw materials (e.g. cotton as an important raw material for Estonia’s rather large textile industry). Machinery, mechanical appliances and electrical equipment have also been important imports. Right after the monetary reform, the purchasing power of Estonian economic agents was artificially set very low. Domestic inflation and a rise in real incomes since 1995 increased the demand for imported goods. Evidence of this was the increasing value of imported consumer goods, which also contributed to the growth of the foreign trade deficit. It was only in 1999 that, due to the continuing impact of the Russian financial crisis and lower domestic demand, the foreign trade balance improved. The recovery in economic growth is expected to put new pressure on that balance, though the export potential of the country has improved in recent years, in large part due to foreign direct investments. Untitled Document

Estonian foreign trade by regions
Region 1995 1999
Export Import Export Import % % % %
EU 11.4 54.0 19.2 66.0 27.1 62.9 34.9 57.7
EFTA 0.5 2.4 0.5 1.7 1.3 3.0 1.3 2.1
CIS 5.3 25.0 5.5 18.9 5.8 13.4 10.3 17.0
Other Europe 2.9 13.7 1.6 5.5 5.8 13.4 3.4 5.6
America 0.6 2.8 1.0 3.4 1.5 3.6 3.1 5.1
Asia 0.3 1.4 1.3 4.5 1.4 3.1 6.3 10.4
Others 0.1 0.7 0.0 0.0 0.3 0.6 1.2 2.1
TOTAL 21.1 100.0 29.1 100.0 43.2 100.0 60.5 100.0
Source: Foreign Trade 1998, Tallinn: Estonian Statistical Office, 1999, pp. 34-36. Foreign Trade 4/99, Tallinn: Estonian Statistical Office, 2000, p. 6.

The geographical pattern of foreign trade by regions is described in Table 3. European Free Trade Agreement (EFTA) countries dominated Estonian foreign trade until 1994. As Estonia’s main trading partners, Finland and Sweden, and also Austria, joined the EU on 1 January 1995, the EU’s share was the highest in 1995 and afterwards. In 1999, 62.9% of Estonian exports went to the EU, and 57.7% of imports came from that region. The share of the Commonwealth of Independent States (CIS) was 13.4% and 17.0% respectively.

The geographical pattern of Estonian foreign trade changed very substantially in 1992. Reorientation to the Western market was not easy, and most producers were not ready for it. Finland played a very important role, encouraged by its knowledge of these markets and its linguistic similarity. Finland’s market share in 1991 was 2.3% of Estonian exports and 2.0% of its imports, increasing to 21.2% and 22.6% respectively in 1992. During the next few years Finland’s share remained rather close to these figures: in 1998, Finland accounted for 18.7% and, in 1999, for 19.4% of Estonian exports and for 22.6% and 22.8%, respectively, of imports. Finland also acted as a mediator for Estonian entrepreneurs. One reason why Finland’s share is high in Estonian foreign trade is the large amount of foreign direct investment in Estonia from Finland: the enterprises created on the basis of those investments tend to trade with Finland.

In the commodity structure of exports, traditional articles such as textile and food products have declined in relative and absolute terms, and in 1999, machinery and equipment had the largest share, with 20.9% of Estonian exports. The export of electrical devices was 79%, and machinery and mechanical devices accounted for 21%. The share of mobile telephones and TV apparatus parts in exports of electrical goods was about one third, with the most important markets being Sweden and Finland. The share of mobile phones in that commodity group was about 25% (mainly subcontracting to Sweden). Goods produced by subcontracting accounted for 73% of the exports of electrical goods.

Timber and wood products accounted for 14.5% of exports in 1999. The share of roundwood was 35%, and of sawn timber, 29% of that commodity group. The major markets for roundwood were Sweden, Finland and Norway, and for sawn timber, the UK and Germany. Other items in this section were chip and fiberboard, plywood and construction details and furniture.

Textiles and textile articles accounted for 11.8% of exports in 1999. Major items were non-woven clothing, at 39%, cotton products, at 19%, and hosiery products, at 15%. The main markets were Finland and Sweden, which also were the major customers of subcontracting.

A very rapid increase in exports of food products to the CIS market occurred in 1997 and during the first half of 1998. Processed foodstuffs made up 8.2% and animal products, 6.2%, of exports in 1998. Dairy products made up 39% of the export of animal products. The main item of export was milk powder, accounting for 40% of the export of dairy products. For certain items, Estonian producers and traders are interested in having economic links with Russia. As Estonia does not have a More Favored Nations (MFN) agreement with Russia, Estonian export suffered from higher customs. The Russian financial crisis put an end to the boom in the Estonian food industry and forced another restructuring toward a lower share of traditional manufacturing industries.

The shares of capital and know-how intensive industries have increased in Estonia’s exports, but there is still a relatively high proportion of natural resource and unskilled labour-intensive industries such as the manufacture of wood and textiles.

Machinery was the most important single article with 27.0% of total imports in 1999. More than one-third of those products was imported for processing. Base metals and metal products accounted for 9.7% and chemicals for 9.3% of imports in 1999.

In the category of textiles and textile articles (altogether 7.8% of imports), cotton accounted for a quarter (the main suppliers were Uzbekistan, Tajikistan and Turkmenia), and clothing contributed 17% (the main supplier was Finland).

Mineral products accounted for 7.4% of imports (95% of them consisted of fuels, out of which two-thirds were light and heavy oil and one-third, gas). The main suppliers of oil were Finland (re-export) and Russia, and the main supplier of gas was Russia.

Trade with the other Baltic countries, Latvia and Lithuania, has been rather modest. In 1999, Latvia’s share of Estonian exports was 8.7% and of imports 2.2%. To Latvia, Estonia exports electricity, which was the largest single article in 1992 and 1993. Later the share of electricity fell, and chemicals became the leading items. Lithuania’s share was 4.7% of exports and 1.6% of imports. Mineral products made up 38.7% of Estonian imports from Lithuania in 1994, but only a fraction of that in 1999. Estonia’s exports to Lithuania were dominated by food products (16%), machinery and mechanical appliances (13%) and chemicals (12%).

Estonia, Latvia and Lithuania signed the Baltic Free Trade Agreement in 1992 (enforced in April 1994). Additionally, since 1997 a free trade agreement on agricultural products has been in force. Nevertheless, the trade volume between the Baltic states has been quite modest. One reason could be that all the countries are exporters of quite similar raw material and cheap labour-intensive products and advantages of intra-industry trade have not been realised.

Germany has also been a market for wood, furniture and textile products (these items comprised 22%, 21% and 16% of Estonian exports to Germany in 1999). Estonia mainly imported transport vehicles from Germany (27% of imports from Germany), machinery and mechanical appliances (25%) and chemicals (9%). Between the two World Wars, Germany was the main trading partner of the Republic of Estonia.

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