VZCZCXRO4357
PP RUEHLZ
DE RUEHPG #1677/01 3381321
ZNR UUUUU ZZH
P 041321Z DEC 05
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC PRIORITY 6657
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRAGUE 001677 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/TPP, EUR/ERA, EUR/NCE, E STAFF DAN MORRISON 
STATE PLEASE PASS USTR LISA ERRION 
COMMERCE FOR ITA/MAC/EUR MIKE ROGERS 
TREASURY FOR OASIA ANNE ALIKONIS 
 
E.O. 12958: N/A 
TAGS: ETRD ECON WTRO EUN EZ
SUBJECT: CZECH REPUBLIC: TRADE POLICY AND TRENDS AFTER EU 
ACCESSION 
 
REF: A. PRAGUE 1325 
 
     ¶B. PRAGUE 1526 
 
¶1. (U) SUMMARY: As the Czech Republic prepares for the WTO 
Ministerial Meeting in Hong Kong December 13-18, the Czech 
economy is basking in rosy statistics (reftel A).  The CR is 
enjoying a trade surplus for the first time since becoming an 
independent nation in 1993, with 2005 trade surplus forecast 
at over USD 2 billion (1.7 percent of GDP) after a deficit of 
USD 1 billion in 2004.  Despite the record trade surplus, 
there are winners (auto and steel) as well as losers 
(textiles) resulting from both EU accession and 
globalization.  Eighteen months after joining the EU, the 
country's most significant trading partners remain Germany 
and the other EU nations.  Further EU market penetration 
remains a GOCR priority, but the government has also been 
aggressively, if rather haphazardly, pursuing new markets, 
with an emphasis on China and Russia.  Within the EU, the 
GOCR is learning to maneuver within the "consensus" system by 
finding regional and subject-specific allies. 
Non-agriculture market access remains the GOCR,s top 
priority within the EU and in WTO trade discussions (reftel 
B).  END SUMMARY 
 
---------------------------------------- 
GERMANY REMAINS CZECH ECONOMY,S LIFELINE 
---------------------------------------- 
 
¶2. (U) As a small open economy, the Czech Republic continues 
to revolve primarily around the export of three goods: 
automobiles, electrical machinery, and industrial machinery. 
The Czech economy can be crudely summarized as a supplier of 
these goods for final assembly or sale in the Germany 
economy.  Czech exports consist of machinery and 
transportation equipment (44 percent), intermediate 
manufacturing products (25 percent), chemicals (7 percent) 
and raw materials and fuel (7 percent).  In the first half of 
2005, 84.8 percent of Czech exports went to the EU market. 
The Czech Republic's largest export partners are Germany with 
36 percent and Slovakia with 8 percent.  Much of the growth 
in Czech trade this year can be attributed to the outsourcing 
of manufacturing from Germany (through direct investment and 
orders) and the freer flow of goods to traditional partners 
(such as Poland and Slovakia) following EU accession. 
 
¶3. (U) While further market penetration into the EU remains a 
government priority, the GOCR is also focused on staying 
competitive in the face of rising labor costs.  Deputy 
Minister of Trade and Industry Martin Tlapa said that the 
government is keenly aware of the problem of eroding 
comparative advantage.  In an attempt to maintain and even 
increase market share in neighboring countries, he has pushed 
to improve the efficacy of the national trade promotion 
agency CzechTrade and ensure that they focus on effective 
assistance services for Czech exporters.  His office has 
submitted a five year strategy to the cabinet that it hopes 
will result in a significant increase in Czech exports, 
especially from SMEs.  In discussions with CzechTrade 
officials, however, it is apparent that no new money is 
forthcoming to increase staffing in their offices or to 
expand their current funding levels.  They hope that EU funds 
can be used to support the development of new programs, but 
the unexpected order earlier this year from the EU to halt 
one of their SME development programs as "uncompetitive," 
suggest that EU funds are unrealistic sources for the 
expansion of trade offices abroad.  Prime Minister Paroubek 
has made it clear that increased trade with Russia and China 
are goals of his government, but these attempts are at times 
poorly coordinated (for example, Paroubek neglected to bring 
anyone from the Ministry of Trade on his visit to China in 
June 2005).  Nevertheless, the Czechs believe that these two 
markets represent untapped potential for their exports, and 
look to expand their presence in these countries. 
 
----------------------- 
WINNERS:  Auto and Steel 
----------------------- 
 
¶4. (U) The Czech Republic is one of the largest auto 
producers in Central and Eastern Europe, and continuing 
success in the automotive industry is a significant driving 
force in the economy.  16 percent of the country's exports in 
the first half of 2005 consisted of road vehicles - the 
single largest sector in the Czech trade portfolio. 
 
PRAGUE 00001677  002 OF 003 
 
 
Companies from across the globe (Japan, Germany, Korea, and 
the United States) continue to invest in the expanding Czech 
automotive industry.  The major player, however, remains 
Skoda Auto, which is the single largest exporter in the 
country, accounting for 7.7 percent of the country's entire 
export value in 2004. 
 
¶5. (U) The Czech steel industry has naturally benefited from 
the auto-industry boom.  Although employment in the industry 
has declined over the years, productivity is up and companies 
are profiting from increased domestic demand and exports. 
However, a dark cloud remains over the industry, which 
illustrates the inherent weakness of the current economic 
growth in the country.  Necessary structural reforms have not 
been made which would protect the industry in times of 
economic downturn.  As part of the country's accession, three 
major producers of steel in the country: Vitkovice, Nova Hut' 
(now Mittal Steel Ostrava), and Valcovny Plechu (Frydek 
Mistek) were allotted EU restructuring funds.  They have 
until 2006 to carry out required reforms intended to 
revitalize and streamline the firms, which were previously 
sprawling and inefficient relics of the communist era. 
However, the boom in the market has been too tempting for the 
companies to miss out on, and instead of reducing production 
and closing certain mills, as they are required to do under 
the EU's protocol, they have instead ramped up production. 
As a result, it appears to be almost certain that the 
companies will not comply with the protocol.  This will cost 
them billions of Czech crowns in repayments and leaves the 
companies, in the long-term, subject to the same 
inefficiencies that will hamper their ability to compete in a 
normal market. 
 
----------------- 
LOSER:  Textiles 
----------------- 
 
¶6. (U) Since 1989, the textile industry has lost over 70 
percent of its work force and EU membership has put an end to 
the GOCR,s ability to protect the flagging industry.  With a 
dramatically reduced workforce and increased competition from 
abroad, the textile industry faces a grim future.  Chinese 
imports, according to the Textile Association (ATOK), are the 
main culprit and with very few exceptions the domestic market 
is now closed to Czech producers because they cannot compete 
on price.  ATOK and the Ministry of Trade and Industry both 
pin their hopes on "technical textiles" (defined by the 
industry as textiles for application where performance and 
specifications are more important than aesthetics and 
fashion) as the only hope that can save the domestic textile 
industry  The assumption is that cheap Chinese imports may 
be hard to compete with on price, but that Czech roducers 
can find a niche market where they can emain competitive. 
The recent EU-China spat on txtile quotas was of great 
interest to the Czech roducers and they prevailed upon the 
government o side with other traditional textile-producing 
cuntries to support continued protection of the EU arket. 
 
-------------------------------- 
ADJUSING TO THE EU "GREAT GAME" 
------------------------------- 
 
¶7. (SBU) Although several of our Minstry of Trade and 
Industry contacts lamented the verall weak position that a 
small country like the Czech Republic has in he EU, they are 
gradually learning to become savv about working within the 
"consensus" system.  Deputy Minister of Trade and Industry 
Tlapa said that the tried-and-true Visegrad-4 alliance 
(Poland, Czech Republic, Slovakia, and Hungary) is oftentimes 
a good negotiating unit on trade issues.  However, trade 
representatives are learning to find countries with similar 
interests on a subject-by-subject basis: for example, allying 
with France and Italy on the latest textile brouhaha with the 
Chinese.  Although they are quick to give the canned response 
("trade is a pillar one issue so we stand by the EU 
position") to any U.S. demarches on trade issues, the GOCR is 
often eager to hear from US officials that there are other EU 
nations with whom they may find common ground on issues. 
 
¶8. (SBU) The Head of the Trade Policy Unit at the Czech 
Mission to the EU Dita Charanzova says that they have learned 
a lot from the EU internal decision-making process this year, 
but could only claim "minor victories" (such as pushing for 
agreements on aluminum) in goading the direction of EU trade 
 
PRAGUE 00001677  003 OF 003 
 
 
policy, and only with the "very close cooperation with other 
players". 
 
¶9. (SBU) COMMENT: Even though the Czech economy was a 
relatively open economy prior to May 2004, EU accession still 
had a positive impact on the Czech trade balance and helped 
to boost GDP growth.  However, given the country's 
overwhelming reliance on trade with Germany, diversification 
is an important future consideration.  The importance of 
trade in non-agricultural goods explains why the country is 
focused on NAMA in the current WTO negotiations (reftel B). 
However, the GOCR is unwilling to take on France or 
neighboring Poland on this issue.  While the GOCR is quietly 
hoping and lobbying within the EU for movement on the 
agriculture issue, they will ultimately go along with 
whatever the EU party line is once a decision has been made. 
CABANISS