The fundamental political changes that has happened in the world during the last decade created important preconditions for the development of new trends in international economic relations. The most prominent event in this area is the profound restructuring of the foreign economic cooperation complex of transformation countries. There occurred a sharp trade reduction between Russia and Central and East European countries (CEECs), the leadership in their trade belongs now to the EU. The development cooperation strategy that was previously considered as an important priority has practically disappeared. Under new conditions Russia as well as CEECs have been compelled to curtail drastically their trade with developing countries, to stop economic assistance, to reduce other forms of economic cooperation. Nowadays the transformation countries are often viewed in the developing world not as desired and perspective partners but as a dangerous competitors.

Still in recent period there appeared some signs of a new Russia’s and CEEC’s approach to the developing world. Certain facts: growing diplomatic activity, trade increase, broadening scientific and technological cooperation with developing countries testify to transformation countries intention to diversify their external economic relations and to reduce the excessive dependence on economic links with Western countries.

A new system of economic relations with developing countries is being formed now. Its distinction consists in that it has as a basis pure commercial principles. Previous development cooperation strategy has been often used as an effective instrument for achieving ideological and political goals. Economic efficiency was regarded as minor factor. Nowadays it acquired first rank significance, fundamental for mutual beneficial cooperation.

The revival of economic cooperation with developing countries is considered in Russia, CIS and some CEECs as an objective necessity. It should be stressed that the third world market for a long period has consumed substantial part of machinery and other industrial exports of CMEA members. With CMEA members assistance developing countries have constructed more than 2.500 industrial and other enterprises. Under the nowadays conditions when transformation countries are not able to export on a massive scale their machinery and other industrial products to oversaturated and demanding Western markets the broadening of economic relations with developing countries is regarded as promising possibility. In addition the growth potential and the dynamics of the third world market is a real and very important factor that is thoroughly utilized by industrial centers. Thus if at the beginning of the 70’s the share of the South in the exports of the United States and Japan was equal to 29% and 37%. Now it amounts respectively to 37% and 41% respectively. The developing countries annual imports of machinery and equipment exceeds at the moment 300 bill dollars. Taking these considerations into account Russia and other transformation countries are trying to reconquer their lost position on the third world markets.

On the other side developing countries have supplied to CMEA members a lot of necessary raw materials (cotton, natural rubber, oil, bauxite’s etc) and agricultural products (coffee, tea, bananas, sugar). In the 1980’s the annual supply of these goods only to Soviet Union amounted to 3 billion U.S. dollars. The third of these deliveries have been effected on the basis of Soviet credits repayment. As a matter of fact approximately one half of Soviet credits rendered to developing countries has been paid off by the deliveries of raw materials and agricultural products. Thus the rehabilitation of economic cooperation with the South is consistent with important national interests of transformation countries. A further increase of economic cooperation with developing countries may be expected in the near future. Special attention will be given to India, Turkey, South-East Asian NIE, as well as to Latin American countries. According to some estimates the share of developing countries in Russia’s trade turnover may reach within next 5-7 years 25% (now their share is about 9%).

No doubt much will depend on the internal economic stability as well as on special measures to facilitate this process. Of great importance is active State Policy aimed at the effective support of development cooperation. The program of economic stabilization adopted lately in Russia by E.M.Primakov Government foresees to broaden state participation in the foreign economic sector to make it more balanced and effective.

Such are some general trends in the modern development cooperation of transformation countries. These processes and their consequences are clearly seen in Europe. One of the most important trends on the European political and economic scene in the 1990s has been the growing involvement of the European Union in Eastern Europe. There now appears to be no stopping the EUs eastward enlargement to include the Central and East European reforming countries. Market reforms and economic transformation in the Central and East European countries have made a strong impact on the EU because of geographic proximity. But the effects of the fundamental changes in the CEECs have also been felt far beyond Europe’s borders. Eastern Europe has emerged as a new and increasingly competitive supplier of goods and services to western economies, providing companies throughout the world with new trade and investment opportunities in the region. The transnational corporations are actively including the CEECs in their global production systems. Today these countries rank first among developing and non-industrial states in the EU hierarchy of the trade and aid preferences.

These changes have raised concern among the EU traditional partners in the developing world, including Latin America. The latter fear that closer EU relations with the CEECs could lead to a diversion of EU trade and investment flows away from Latin America towards the CEECs.

The Latin American countries consider Eastern Europe as a new and rather dangerous competitor on the EU market owing to the growing export potential and the ability to attract foreign direct investments and other capital flows. The recent events (the conclusion of Europe Agreements with the CEECs and Baltic states) testify to the firm intention of the EU to upgrade its institutional relations with these countries, provide them technical and financial assistance as well as facilitate private investments. Under these circumstances Latin American countries will have to adapt to the powerful market-driven consequences of the transition process in the CEECs.

There arises the question whether these concerns and fears are justified? To answer this question we have to analyze the recent evolution of the economic relations of the both country groups with the EU.

It must be stressed that the relative importance of Latin America and the CEECs in EU trade investment and public aid flows are more or less similar. They account for relatively small share of extra EU trade. Latin America’s share in 1997 was just over 5% while that of the CEECs was slightly over 6%. As to the areas of private investments and official development assistance Latin America and Eastern Europe held roughly similar shares of the EU total: they account for 12% and 10% respectively of the total extra EU foreign direct investments (FDI) and for 7% and 5% respectively of total European official assistance. But the main difference consists in that the CEECs have increased substantially during the 90s their share while Latin American share has remained constant or even diminished. Thus the CEECs have more than doubled their share in extra EU trade while Latin American share has diminished from 6,5% in 1981 to 5,6% in 1996 in imports and from 6,4% to 5,7% in exports.

As a result the EU has become the CEECs most important export market and the most important foreign supplier of goods and services. The EU is now the destination of almost 50% of the CEECs export and account for a similar share of the CEECs imports from abroad. The same trends are seen in the flow of private investments and aid. At the end of the 80’s the share of the CEECs in this field was close to zero. Now EU members supply about 60% of FDI and official assistance to this region. The capital flow increased rapidly. The EU FDI stock is estimated now at 10-12 billion dollars.

On the whole in the 90’s Latin America has lost some important positions on the EU market. And more than that. There are fundamental changes in the general configuration of trade relations. In the 80-s Latin American exports to the EU exceeded two times imports and Latin American countries had considerable positive balance. Now they have regular trade deficits. In 1996 and 1997 this deficit amounted yearly to 10 billion dollars. The main cause of these unfavorable changes are low growth rates of Latin American exports to the EU. In 1997 the export volume of Latin America to the EU was only 15% higher than in 1985. At the same period the EU exports to Latin American countries more than doubled. Nevertheless Latin America as a whole sends almost one fifth of its exports to the EU. The members of the EU account for roughly 30% of the total exports of Brazil, Chile, Cuba, the Dominican Republic, Panama and Peru. Europe remains the Second largest foreign investor in Latin America after the United States and supplies about 60% of all bilateral official development assistance (ODA) received by the region.

These facts help to understand Latin America’s current preoccupation with events in Europe at a time when the region itself is becoming increasingly interested in external markets and capital for its own development. Latin America is aiming at upgrading its relationships with the EU and at minimizing the potential difficulties associated with recent developments in Eastern Europe.

It must be recognized that throughout the 1980’s and in current decade Latin America remained a «low» priority for EU trade and economic policy, regarded as being close to the bottom of the EU pyramid of preferences. For the region as a whole beyond Most Favorite Nations treatment the General System of Preferences (GSP) continues to be the main instrument for promoting Latin American exports to Europe - particularly non-traditional exports. In 1995 EU reformed its GSP for industrial products and in 1996 for agricultural products making it simpler more transparent and more predictable. Although in terms of tariff concessions the new scheme is on average no more generous than the old one and preferences will be eroded by the gradual implementation of the tariff cuts agreed in the Uruguay Round. Besides it is quite possible that at the beginning of the next year some Latin American countries can be excluded from the GSP as soon as they belong to the advanced group of the developing countries. The most affected will be probably Brazil - second largest exporter of agricultural products to the EU after the United States. The major part of preferences can be lost for Argentina and Chile. Some Latin American countries have since 1991 benefited from enhanced privileges under the GSP, granted by the EU as part of its strategy to fight the drugs trade in producing countries. Thus for industrial products from five Andean countries as well as for many agricultural products exported from these countries and from Central America market access is comparable to that afforded to the CEEC’s under the Europe Agreements: it guarantees these countries virtually free access to the EU market for a substantial part of their exports, albeit under more cumbersome procedure and subject to greater instability than would be the case in a real free trade area.

In contrast, trade liberalization between the EU and the CEEC’s is more comprehensive covering all industrial products. It’s also reciprocal and contractually established through the European Agreements. Trade privileges for the CEECs cannot therefore be easily reversed through unilateral EU decisions as is the case with the GSP.

It is clear that Latin American countries are confronting active competition from the CEECs in all important areas of trade, investments and public aid. What are real results of this competition? How has it affected or will affect Latin America’s economic relations with the EU?

Some experts from West European research centers are trying to calm Latin American business community and governments with the conclusions that there exists broad complementarity between both regions at the EU market and there is no real interest confrontation. For instance Peter Nunnenkampf well known German economist from Kiel Weltwirtschatsinstitut writes in his article published in the latest Revista de la CEPAL: «Recent evolution of trade and foreign direct investments indicate that the EU eastward enlargement does not affect much Latin America. As to the trade the CEECs and Latin American countries are working at the different areas of the EU market».(Revista de la CEPAL abril 1998, p. 124(translation from Spanish).

The real situation does not often confirm such conclusions because there are many examples testifying that Latin American exporters are under competitive pressure from the CEECs on different EU markets. The main conclusion that can made on the basis of sectoral studies consists in that in each case where EU imports from Latin America declined in terms of shares in total EU imports at the same time the EU imports from the CEECs rose.

Let us take industrial products. They account for ¼ of the total Latin American exports to the EU. The Latin American exporters have lost some important positions on the EU market. Their share in the total EU imports for the last 10 years fell from 2,5% to 2%. Over the same period industrial exports by the CEEC to the EU grew very rapidly, their share of the EU total imports of industrial products rose from 2,5% to 5%. These unfavorable trends have been especially felt on textiles clothing and footwear markets which are of great importance for many Latin American countries. Latin American exports of these products diminished by over 10%. In contrast during the same period the CEECs exports rose by about six times.

Latin America faces also strong competition from the CEECs in vehicles and transport equipment, aluminum, iron and steel markets. These products have the most significant potential for trade diversion, arising from the preferential market access granted to the CEECs by the Europe Agreements. Some of this trade diversion have already occurred and this process may be accelerated in the nearest future.

Special attention merits the situation on the EU market of agricultural products. These products account for nearly 50% of total Latin American exports to the EU. On the European market Latin American producers are selling about 1/3 of the region’s exports. For the CEECs the relative importance of the EU market is similar. But if Latin America is a leading supplier to the EU, providing more than ¼ of all-extra EU imports of agricultural products the CEECs have marginal positions, providing about 5% of extra- EU imports. The main object of the competition between the regions are temperate agricultural products. Latin American access to the EU market is determined mostly by MFN tariffs. For about a half of Latin American exports duties under MFN are high. The CEECs market access is determined mainly by Europe Agreements. One of the substantial advantage of the latter is that they include preferences for many temperate agricultural products (including beef, dairy products etc). So it is in these kind of products that trade diversion has occurred in recent years. The eastward enlargement of the EU may intensify this process. According to the estimates of IRELA experts for some of 42 sensitive products, particularly for poultry, once the CEECs are in the EU they will be much better placed to export to their fellow members. Trade diversion could also occur in processed products: the investment and know how that CEECs food industries are expected to receive after accession will stimulate the production of processed products in which both Latin America and the CEECs are competitive producers.

Preference advantages that the CEECs have now is a very important factor in their competition with Latin America. But we do not have to exaggerate their significance. The erosion of Latin American positions on European markets is due not only to continued protection in the EU and increased competition of the CEECs. In many cases the retreat of Latin American suppliers is determined by their incompetitiveness. This factor is closely connected with the previous economic model of the import substitution industrialization that has been in force in the majority of Latin American countries for a long period of time. In the 90s the economic policy has fundamentally changed. It aims to increase the production efficiency and competitiveness of Latin American goods on internal as well as on international markets. There is substancial progress in this respect. But low competitiveness is still affecting the Latin American exports of industrial products and weakens Latin American positions on EU markets.

Trade is the main area of the economic cooperation between EU and Latin America. The year trade turnover amounts now to 85 billion US dollars. The other areas are not as significant as trade. Annual European capital flows to Latin America run at about 4 billion doll. for FDI and 2 billion doll. for official development assistance (ODA). So what kind of impact can be made on these areas by the EU eastwards enlargement?

With regard to FDI, it would be misleading to assume that well-established EU plants in Latin America will close down and replacement production facilities will be opened in the CEECs. What seems more likely is that some incremental investment in Latin America can be affected by the emergence of sourcing markets in the CEECs. It must be noted that in the 90’s the flow of the EU capital have been rather sluggish. Europe’s share in total FDI in Latin America have been on decrease. At the same time European firms increased their investments in the CEECs. This applies not just to EU based TNC’s, but also to many small and medium-sized enterprises for which geographical proximity has made it relatively easy to enter CEECs markets. These trends give some reasons to suggest that there is some diversion of European investments from Latin America to the CEECs.

Flows of official development assistance are the strongest candidate for diversion. This is confirmed by the dominant political influence and strong self interest of EU governments in guiding the transformation process in the CEECs through technical and economic assistance. There was a fall in Latin American’s share of the EU ODA. Accession of the CEECs could put serious straines on the EU budget and may make potential negative effects on assistance to Latin America. Yet the EU motivation for continued assistance to Latin American countries (to promote economic links, regional integration) the fight against drugs are likely to remain strong and will counteract to this trend.

A few words about direct economic relations between the CEEC’s and Latin America. In the 1980’s at the beginning of economic reforms in transformations countries there was a substancial drop in the mutual trade and other forms of economic cooperation. That was a direct result of external economic complex restructuring in the CEEC’s and Russia. But in current decade these countries reactivated their economic links with Latin America. Their trade exceeded considerably the level reached in 1985. The main driving force of trade growth is increased imports. Latin American countries became main suppliers of such goods as cafe, bananas, fishmeal, oilcakes. As to the CEEC’s exports to Latin America it is rather sluggish because of strong competition on Latin American market and insufficient competitiveness of many CEEC’s industrial products. But nevertheless for the period 1990-96 transformation countries exports to Latin America almost doubled.

On the whole it should be stressed that economic reforms in CEEC’s facilitated the mutual economic relations. According to some CEPAL experts (United Nations Economic Commission for Latin America and the Carribeans). «Economic reforms in CEEC’s enabled Latin American countries to increase bananas and cafe exports. Bananas and cafe markets in CEEC’s are growing and this process guarantees future demand stability». (CEPAL.. Relationes commerciales entre America Latina y los paises de Europa central y oriental a la luz de sus reformas economicas. LC/L 1105. 10.03.1998, p. 46).

What will be the future of economic relations between the EU and Latin America. Lately the EU has made some important steps to strengthen the political and economic links with Latin America. In 1994 the Commission of the EU adopted «Basic document on the EU relations with Latin American and the Caribbeans» and in 1995 approved the Latin America strategy of the EU for the period 1996-2000 which had three main elements: a) to develop political relations b) to facilitate regional integration c) to establish new type of economic cooperation flexible and mutually beneficial. At the end of 1995 the EU and Southern Common Market signed the inter-regional trade and economic cooperation agreement which was followed in 1996 by a new Framework Cooperation Agreement with Chile and in 1997 by Economic Association Agreement with Mexico. In the near future the EU is planing new significant steps. There is a proposal to sign with Mercosur in 1999 the Free Trade Zone Agreement and to organize the summit of the States and Governments Heads of the EU and Mercosur. According to some experts these steps may open a new way for the development of economic cooperation between two regions.

This trend corresponds to the important national interests of the EU. This is to prevent the evident marginalization of the EU at the Latin American market. The EU share in Latin American exports dropped in the 90’s from 24% to 14% and in imports from 21% to 17%.

The future of the EU Latin American economic relations depends on the mutual efforts of the both regions. The EU has to take real measures to liberalize the Latin American access to European markets. There are now new problems in this respect. One of them is possible negative effect of the European Monetary Union (EMU). The EMU creation means that Latin American exports will depend not only on the dynamics of the European markets but to a substantial extent on the evolution of the euro rate, especially its correlation with US dollar. So the EU has to take necessary measures not to discourage Latin American exporters.

In its turn Latin American countries have to continue economic reforms, to reduce macroeconomic instability and to raise the competitiveness of their products. The importance of the latter problem is difficult to overestimate. The industrial products share in Latin American exports to the EU is rather low (about 25%). So to raise the competitiveness means to have a chance to increase industrial products exports and to diminish the strong dependence on raw materials and agricultural products. Up to now the share of raw materials in Brazilian exports exceeds 80% and in Argentina’s exports - 60%.

Equally important are Latin American efforts to diversity markets in the EU. The Latin American dependence on traditional European suppliers and buyers is excessive. The share of five European countries (Germany, Spain, France, United Kingdom and Italy) amounts to 80% of Latin American trade.To diversify its trade with the EU Latin American countries need to elaborate commercialization programs as well as special measures of government financial support of the exports.

For both regions the best way to decide many difficult problems in all areas of mutual economic cooperation is to accelerate the rapprochement on the basis of the free trade zone creation. This evolution will facilitate the coordination of commercial policies, accelerate mutual trade and make it more balanced. On this basis both regions will be able to stop the processes of its marginalization on Latin American and EU markets and create necessary preconditions for the development of all forms of advanced economic cooperation.