The role of investment and trade in fostering economic security

Dec 20, 2023

By Liga Smildzina-Bertulsone, Executive Director of AmCham Latvia

Under the current geopolitical circumstances, economic security, and investment attraction, particularly, investment from the key strategic partner – the United States – has become crucial for the entire Baltic region. The role of the Baltic region in the global arena increased after Russia’s invasion of Ukraine and the turmoil next to their borders. Latvia, along with its Baltic neighbors remains among the most committed NATO members striving to stop Russia’s aggression and support Ukraine in its fight for democracy, independence, and the rule of law.

The concept of economic security has become a popular subject matter for public policy making both in the U.S. and Europe referring to people’s ability to meet their basic socio-economic needs and the interplay among national security, access to and production of essential products, services, technology, and innovation.

Trade and investment flows are a telling factor of the interaction between any two countries. While the U.S. remains the largest trade and investment partner of the EU, so far only a relatively small fraction of these massive flows has translated into the bilateral trade and investment relationship between the U.S. and Latvia. The most obvious reasons are the small size of the market and the geographic location, which can be viewed both as an advantage – the center of the Baltic states and a well-connected logistics hub, and a disadvantage – the periphery of the EU in demographic decline.

To look at how investment and trade contribute to a nation’s – and in this case Latvia’s – economic security, let’s first consider some data.

After Latvia’s accession to the EU in 2004, the inflow of foreign direct investment (FDI) steadily grew, reaching its highest peak in 2022, totaling in EUR 22.6 bn or about 3.7% of GDP. While more than 80% of Latvia’s FDI originates from the EU with top investors Sweden, Estonia and Lithuania, the United States occupies a relatively small number of the total FDI – slightly below EUR 300 mil. of all accrued U.S. FDI. However, the U.S. FDI is on the rise with most investments made into Latvia’s finance and trade sectors, as well as a growing number of startups. Over the last decade, Latvia’s FDI outflows to the U.S. started literally from scratch, now having reached the total value of EUR 60-70mil. On the business front, the U.S. had invested EUR 157 mil. in 340 Latvian companies, mainly in the financial and startup industries.

Because of the country’s location, it is not surprising that the top two trading partners for Latvia are relatively small markets of its neighbors Lithuania and Estonia, followed by more prosperous markets like Germany, Poland, and Sweden. In 2022 Latvia’s value of exports constituted EUR 21.27 bn, increasing by nearly 30% y-o-y and hitting an all-time high of the total external trade value.

In terms of bilateral trade, the U.S. became the 11th largest trading partner for Latvia reaching EUR 1.5bn in the total trade turnover for goods and services. Although trade between the two countries has a lot of room for improvement, in the last year Latvia’s exports with the U.S. increased by 50% and imports by a staggering 65%. Latvia’s exports to the U.S. exceeded imports by almost double making up 3.7% of its total export volume. Latvia’s largest exports to the U.S. are wood, beverage and tobacco, computers and electronics, optical products, transportation, and machinery manufactures.

The data suggests that momentum is gaining for Latvia to continue to expand upon its trade with the U.S. and promote investment opportunities in several sectors with the highest potential for growth such as energy, biomedicine, global business services, life sciences, innovation, electronics, and technology.

While military security and defense cooperation with the U.S. has been the cornerstone of Latvia’s national security, the role of economic security until recently has been somewhat neglected. So far, its national economic policy has failed to address the importance of more vocal and forthcoming activities that encourage investment from key strategic partners. Another challenge that affects the investment climate is scarce workforce availability that needs to be urgently and complexly addressed to retain the attractiveness of the economy.

Purely from a security perspective, the presence of U.S. investment and trade is extremely important in the Eastern flank countries. Several ongoing platforms, including the EU-U.S. Trade and Technology Council, and the Three Seas Initiative, speak to strengthening transatlantic economic cooperation, but more should be done in prioritizing the U.S. as a full-range partner, including from the economic perspective. The willingness to proactively promote U.S. investments is a small but important step on the road to unlocking immense opportunities that hold promise not only for accelerated economic growth but, even more importantly, could considerably contribute to the common security.

The article was first published in Baltic Rim Economies 4/2023, a special edition on transatlantic cooperation.

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