New entrants present an opportunity and a threat

LATVIA and Slovenia are the sort of nations only geography teachers, dedicated Eurovision fans and a handful of diehard football bores could place on a map. But, if the Europhiles are to be believed, come next week they will be key to the economic fortunes of the region.

On May 1, ten new member states join the EU - the Baltic states of Poland, Latvia, Lithuania and Estonia; the Central European nations of Slovenia, the Czech Republic, the Slovak Republic and Hungary; and the Mediterranean islands of Malta and Cyprus.

The ten bring with them a population of 75 million people, taking the total number of people living within the new 25-member EU above 450 million and representing an enormous and potentially lucrative market for North-East exporters.

Any remaining barriers to trade with the accession states will vanish overnight, opening up swathes of the former Soviet Bloc to free trade within Europe and providing a stepping stone to Russia itself. The North-East, with its geographical position on the shipping lanes to the Baltic and historical ties with the region, is, in theory, better placed than most to exploit that new market.

However, to date the region's record in exporting to the new member states has been, frankly, pitiful.

In the year up to last September, the sum total of the region's exports to Slovenia amounted to a less than impressive £4,509 - or, to put it another way, were one North-East firm to sell a second-hand saloon from its company car fleet to Ljubljana's equivalent of Arthur Daley, they would double our exports at a stroke.

The region did only marginally better elsewhere. The best performance by the North-East's exporters came in Poland, amounting to just £76,000 and a quick glance at the products behind that figure reveal some of the quirks on which international trade is built.

According to David Robinson, managing director of PD Teesport through which much of our trade with Eastern Europe flows, our best performing exports to Poland were cosmetics and cooking oil, while making the return journey were plenty of raw materials and, incongruously, that most quintessentially Swedish of items - Ikea flat pack furniture which, it transpires, is made in Poland.

It is a dismal record which the region desperately needs to improve on. According to One NorthEast figures, one-third of all the region's manufacturers depend on exports for survival.

Although figures are hard to come by, there are some signs that our exports may have picked up in the run-up to accession. Estonian, Latvian and Lithuanian trade delegates on a mission to the region earlier this year reported a healthy interest from North-East companies, several of which were in the process of forming partnership deals with their Baltic counterparts.

In addition, Teesport, the region's leading gateway to Northern Europe, has high hopes for a significant increase in Baltic-bound trade.

EU enlargement, so the theory goes, offers exporters not only an opportunity to move in on new markets, but also to source low-cost raw materials, particularly coal, steel, timber and food stuffs, from Central and Eastern Europe.

Accession also raises labour issues. Businesses often complain of skill shortages, particularly in the construction industry where the region needs to recruit 2,500 workers every year just to replace those retiring from the trade. The free flow of skilled labour from Eastern Europe may be politically sensitive, but it may help industry plug the gaps.

Consumer goods, telecommunications and, perhaps surprisingly, the creative industries are predicted to be among the most important exports in the medium to long term, but in the immediate months to come it is the North-East's traditional strengths of construction and manufacturing know-how which will be most in demand.

Many of the accession countries are former members of the Warsaw Pact and, although great strides have been made in terms of economic convergence with the West since the fall of the Berlin Wall, much of the industrial infrastructure dates back to the Soviet era.

Billions of pounds worth of reconstruction aid is being poured into the development of accession countries, for example in the redevelopment of the Polish port of Gdansk, and it is there where the first opportunities may lie for the region's manufacturing and construction sectors under partnership arrangements with firms from the host nations.

It is North-East expertise which, according to John Williams, international trade director at the North-East arm of UK Trade and Investment, may be our most important commodity.

"As our economy has been moving from basic metal-bashing to sophisticated engineering, theirs is moving forward towards buying the components which will enable them to become manufacturers.

"I expect us to form trading relationships with those countries where, for example, we may have the knowledge end of the business in this region and they have the manufacturing capability in the Baltic for servicing a third market, for example, in Russia."

He added: "Trade with those countries has been relatively light to date, largely because they aren't yet economies which draw in a lot of products - our ability to export is a function of their ability to import.

"But there isn't much doubt in my mind that there is great scope and quite a lot of momentum. I don't think it's possible to predict what the effect will be other than to say that trade will increase."

But, as with all things European, opinion is divided as to whether expansion is a good thing for the region.

Nissan, for example, says it will make a negligible difference to exports from its Wearside plant because of the tariff arrangements which have existed in the run up to accession. The only possible effect, a spokesman said, was if membership brought long-term growth in Eastern Europe which will eventually increase the demand for cars there.

The region's ports could be expected to be the businesses which would most benefit but, surprisingly, there is a mixed reaction there as well. Some of the smaller ports argue accession will not make a jot of difference, but the region's biggest operator, PD Teesport, is in no doubt that accession has already brought the region tangible benefits - earlier this month Teesport enticed a Lithuanian shipping line to up sticks from Immingham and relocate its Baltic service to the North-East, while a regular service to Poland is now under way as well.

But, as well as North-East exports rolling through Teesport, the primary fear among the Eurosceptics is that expansion opens the market here to greater competition from economies still, to a large extent, based on low-cost labour.

In the past two years, the region has seen a series of multinationals switch production to the accession countries - doubly attractive now that these low labour economies are about to move inside the fold of European tariffs. Black and Decker moved production from Spennymoor to the Czech Republic six months ago, Samsung is now producing in Slovakia and only last week, Terry's announced the closure of its York chocolate factory with production shifting, among others, to Poland and Slovakia.

There are fears that these may be the first of many - fears which centre on the persistent rumour that Nissan would consider relocation of some of its production to Slovakia were business conditions to demand it and that, with European grant aid targeted towards Eastern Europe, there would be greater financial incentives to do so than to stay on Wearside.

The Federation of Small Businesses is worried that the shift of vital European Structural Fund aid to Eastern Europe will have a dramatic impact on the region, until now a major recipient of grants from Brussels.

Darlington branch chairman Peter Troy said: "EU structural funds will have to be stretched further and, by definition, there will be a smaller slice of the cake available for the North-East which will have a major impact on the small business community.

"New businesses are currently opening up in the North-East at record levels and the success rate is higher than the national average. That is partly down to the assistance that is available, which is pivotal to the success of the North-East. The obvious conclusion is that the start-up rate will decline when our slice of that cake gets smaller."

While warning against patronising our new partners, John Williams argues the region has nothing to fear as it will be some time before the less sophisticated economies of the accession countries can compete with the region's manufacturers on quality grounds.

"The companies we have in this region have already demonstrated their ability to sell in the sophisticated economies of western Europe, with year-on-year increases in our exports against a declining euro and the best competition in the world," he said.

"Added competition within Europe from the accession countries isn't going to alter that - it may increase the number of competitors, but it also increases the opportunities."