WORLD / Wall Street Journal Exclusive

Europe's low-cost neighbors pose new challenge
By JOHN W. MILLER (WSJ)
Updated: 2006-05-24 15:12

TUNIS, Tunisia -- While Europeans throw up barriers to slow the erosion of their manufacturing base by low-cost Asian imports, a different sort of competition looms for their £¿0 trillion ($12.87 trillion) services sector -- a challenge as plain as the nose on Catherine Blach¨¨re's face.

The 40-year-old Frenchwoman came to the northern tip of Africa and paid £¿,800 for a touch of cosmetic surgery, half what it would cost back home in Paris. "I also got a week in a five-star hotel," Ms. Blach¨¨re says, her face covered in blood and bandages after the surgery.

Europe's proximity to rapidly modernizing nations, coupled with the proliferation of less-expensive options for travel to such locales, is making it easier for Europeans to look beyond the Continent for services ranging from medical care to call centers to computer support. What's more, this type of competition can't be countered by the tariffs and quotas the European Union has imposed to stem the flow of goods from China and elsewhere.

EU ministers will gather on May 29 to debate whether to approve a watered-down version of the 25-nation bloc's services directive, which aims to eliminate barriers to the cross-border provision of services within the bloc. Yet the EU's effort also underscores the market forces encouraging change. For example, doctors and other health professionals were exempted from rules devised to make it easier for an EU business to set up shop in any of the 25 member states, even as European patients increasingly head to places like Tunisia, India and South Africa for affordable health care. And while most health care will remain the province of domestic medical providers, the growing popularity of people heading abroad for elective procedures hints at the long-term futility of protectionist measures.

Medicine is hardly the only arena in which Europeans are skipping to distant shores. French companies are rushing to this former French colony to hire French-speaking call-center operators and computer programmers. Businesses are shopping for services along the rim of the core of richer, older EU members, especially neighbors whose people speak their language. German companies are outsourcing services to Poland, which has many German speakers, and British groups are going into the Baltics.

Despite fears of lower-cost competition from abroad, many EU officials, economists and business people see the global services trade as ultimately benefiting Europe. They argue that as poor nations grow richer, they will become better markets for more European products. Even relatively small companies like Cosmetica Travel Agency, which organized Ms. Blach¨¨re's medical tour, depend on services and goods from Europe. Cosmetica purchased ads in French newspapers and the clinic says it gets scanners, computers, equipment and drugs from European suppliers.

Overall, the EU continues to export far more services than it imports. According to the European Commission, the bloc's executive arm, the EU's total trade surplus in financial services grew to £¿6 billion between 1998 and 2003, from £¿ billion between 1992 and 1997. In the computing sector, a £¿ billion deficit became a £¿0 billion surplus over the same time span.

Plastic surgery is one of several businesses finding a profitable niche in developing countries -- and it embodies many of the debates growing around services that might involve a personal or financial risk to the customer. It is easy to advertise, and people who can afford breast enlargements and other procedures can afford the travel.

Medical procedures outside Europe are also much less expensive as a rule. Wages in Tunisia, for example, are one-fifth to one-third those in Britain and other rich EU members. A surgeon in Tunisia makes about £¿0,000 a year -- about a quarter to half the amount a European can earn.

And plastic surgeons are finding a booming market among Europeans. European plastic surgeons are outraged at the trend, and warn it could be dangerous. "Europeans should be able to count on quality medical care, and when you travel overseas, you're not sure to get it," says Jean-Luc Roffe, president of the French Union of Plastic Surgeons, which has launched a campaign of interviews with French newspapers and television stations to dissuade EU citizens from traveling to Tunisia.

To many economists, though, these complaints "seem like vested-interest lobbying," said Alec van Gelder, a research fellow at the International Policy Network, a London think tank that promotes free markets in the developing world as a way of balancing global inequality. "There may be added risks with purchasing medical care in a country like Tunisia, but the consumer should be free to choose."