What Explains Germany’s Rebounding Export Market Share
Stephan Danninger(IMF Research Department)
Fred Joutz(George Washington University)
September 2008
Germany regains export market share since 2000
14
15
16
17
18
19
20
21
22
23
24
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
32
34
36
38
40
42
44
Industrial countries
Euro area (right scale) 1/
Share of German Exports in Total Imports of
German export performance (In Percent of GDP)
0
10
20
30
40
50
60
70
1995 2000 2005 2007
Exports G&S
German Export Sector: Stylized Facts
Export market share Globally: recovery since 2000 From 16-20% among industrial
countries From 37-40% in Euro area
GDP growth Since 2000: 80% of growth from net
exports
Questions and implications
Possible explanations Global demand growth? Allocation of production processes? Other: e.g. price competitivenessAssess empirical contribution of hypothesesEconomic and welfare implications Gains through growth of global trade (e.g. economies of scale) Income redistribution Re-organization of production processes
Preview of Results
German exports driven by: Global market growth (export ties) Reorganization of production process Other traditional factors
Improvement in cost competitivenessRecovery in export market share 2000-05
► 30% Global trade growth: German specific► 30% Regionalized production► 40% Other and residual (unexplained)
Empirical challenge to gauge economic impact
Outline
I. Potential explanations Stylized facts and literature
II. Empirical models of export growth
III. Empirical contribution to change in market share
I. Potential explanations:Four Hypotheses
1.Regained cost competitiveness Wage moderation: undoing of unification related
wage cost hike IMF (2001), Blanchard & Phillipon (2004)
2. Ties to fast growing trading partners “Favorable product mix” (Everaert et al 2005),
3. Demand shift to capital goods Global investment boom (WEO 2006) “Pathological export" growth (Sinn 2006, Davis 1998)
4. Regionalization of production processes Off-shoring (Sinn 2006, Marin 2005) Vertical specialization (Hummels 2001)
1. Regained cost competitiveness
75
80
85
90
95
100
105
110
115
120
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Germany
Euro area
Real Effective Exchange Rate, ULC Based Jan. 1999 =100
2. Ties to Fast Growing Trading Partners
Reasons Long-standing ties to oil exporters and
Emerging Asia Attractive product mix (German brand)Evidence 2000-05 High export growth to Asia and oil
exporters Strong global export demand growth
Exports to Asia and Oil ExportersTable 1. Germany. Selected export growth rates and shares
95-00 00-05 95-05 Share of exports 2005
(Annual growth rate)
(In percent)
Total exports 9.3 5.6 7.4 100 Of which 1/
European Union … … 7.4 63.3 Euro area … … 6.9 43.3 EU (new) … … 12.5 8.6
Asia 6.2 5.9 6.3 11.0 China 11.4 17.6 14.5 2.7 India -2.3 15.1 6.0 0.5
Oil exporters Saudi Arabia 7.8 8.9 8.3 0.5 Arab Emirates 12.8 14.9 13.8 0.5 Iran 5.4 23.1 13.9 0.5
Source: German Statistical Office. 1/ of which does not add up to total.
3. Meeting Global Investment DemandReasons Global cycle: strong investment growth Germany: specialized in capital goodsEvidence 2000-05 (mixed) Investment growth in German partner
countries higher than in industrial countries
Share of capital goods in German exports stable/fallen
Investment Activity: Global and by German Trade Partners
Global Investment and Investment Activitiy of Germany's Trading Partners (Percent change from a year ago)
World
Industrial countries
Emerging markets
-6
-4
-2
0
2
4
6
8
10
12
14
16
1999Q1 1999Q4 2000Q3 2001Q2 2002Q1 2002Q4 2003Q3 2004Q2 2005Q1 2005Q4
Germany's trade partners
Source: WEO.
4. Regionalization of ProductionReasons Global labor supply increase Eastward European integration High German wage costs for low skilledEvidence 2000-05 Increased imported inputs in export sector
e.g. Sinn (2006) Decline in domestic value added in traded
sector Cost reduction from off-shoring (e.g. Marin 2006)
Domestic Value Added in Export Sector
12.4 12.8 14.0 14.5 15.3 16.9 16.7 18.4 17.7 18.9 18.6
18.7 18.3 19.3 19.6 20.723.4 23.3 21.8 21.9 22.3 23.1
65.5 65.7 63.8 63.2 61.6 57.4 57.7 57.5 58.1 56.8 56.5
0
20
40
60
80
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Re-exported imports Imported intermdiaries Domestic value added
Domestic Value Added and Imported Inputs of the Export Sector 1995-2005
Source: German Statistical Office.
II. Empirical Export ModelTime series model tailored to GermanySample: quarterly data 1993-2005Variables
Xgr Quarterly real commodity exportsReer_ulc Real effective exchange rate at unit labor costsGdem Germany’s global export demand (WEO)
Trade weighted real imports in partner countriesGinv Investment activity in Germany’s trade partners
Trade weighted investment in partner countriesInd_VA Domestic value added in industry
Share of domestic value added in industrial output
Estimation Approach
Determine cointegrating relationship All variables in log levels are I(1) CI(Xgr Reer_ulc, Gdem, Ginv, Ind_VA)General to specific approach A simple unrestricted VAR was estimated Evaluated for statistical fit and stability. Lag structure of the VAR is determined. Test for equilibrium or cointegrating
relation(s) among the variables.
Long-run Relationships: Standard Export Model
Standard findings on determinants Exchange Rate Elasticity of about 0.4% Unit Global Export Demand Elasticity 85% of “disequilibrium corrected” in 4 quarters
0.42 10.63
t t tExports Real Effective Exchange Rate Global Export DemandSpeed of Adjustment
Long-run Relationships: Augmented by the Regionalization Hypothesis
Expanded model with improved fit Low real exchange rate elasticity
Consistent with weakening of traditional channel Global demand elasticity less than unity
Decline possibly due to omitted variable bias Decline in domestic value added increases export
Consistent with hypothesis of Germany becoming a trading hub (Sinn 2006)
_ _
0.14 0.78 3.84
0.10 0.08 1.06: 0.43 , 0.26 , 0.08 .
0.11 0.11 0.03
t t t t
xgr reer u ind va
Exports Real Effective Exchange Rate Global Export Demand Value Added
Speed of Adjustment and
III. Explaining Germany’s Export Market Share vis a vis Industrial CountriesApproximation Decompose foreign export demand into
Growth common to all industrial countries Growth specific to Germany
Export growth in excess of common component lead to gain in market share: REERulc, Ind_VA, Germany specific demand
Caveats Limited sensitivity analyses Assume similar effects across countries No standard error of estimates Decomposition biased towards lower German
specific export demand growth
Explaining the Increase of Export Market Share
Reer_ulc Ind_VA
Actual Model Residual Total
Model Table 6.B 6.01 4.99 1.01 3.99 3.27 0.72 0.08 0.93Model D2 6.01 4.64 1.36 3.95 3.24 0.71 0.11 0.58
Model Table 6.B 83.1 16.9 66.4 54.4 12.0 1.3 15.4Model D2 77.3 22.7 65.8 53.9 11.8 1.8 9.7
Model Table 6.B … 37.1 … … 26.2 2.8 33.9Model D2 … 49.3 … … 25.7 3.9 21.1Memorandum items
Long run parametersModel Table 6.B … … 0.78 0.78 0.78 -0.14 -3.84
Model D2 … … 0.7707 0.7707 0.7707 -0.1926 -0.84
Percent of market share increase explained by
Percent of export growth explained by
Global demandAdv. country
commonGerman specifc
(Average annual growth rate)
Export growth
Conclusions
Export market share recovery since 2000Model explains 85% export growth 70% of market share recovery since 2000Main factors for market share recovery 30% Growth in global demand (product mix?) 30% Regionalization of production (“Bazaar”?) 10% Cost improvement (despite euro apprc.)But economic implications cannot be assessed (e.g.: gains of trade?, re-allocation of production
processes?)
Data needs: A practitioners view
Assessing economic effects requires more detailed trade data
Real trade flows Disaggregated by sector
But high level of aggregation (1-2digit) Differentiation by types of goods
Inputs, capital, and consumption goods Comparability over time
At least 15 years (quarterly frequency) Cross country comparability
Capture institutions, regulation, and economic structure