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

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 competitiveness Assess empirical contribution of hypotheses Economic 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 competitiveness Recovery in export market share ► 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

2. Ties to Fast Growing Trading Partners Reasons  Long-standing ties to oil exporters and Emerging Asia  Attractive product mix (German brand) Evidence  High export growth to Asia and oil exporters  Strong global export demand growth

Exports to Asia and Oil Exporters

3. Meeting Global Investment Demand Reasons  Global cycle: strong investment growth  Germany: specialized in capital goods Evidence (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

4. Regionalization of Production Reasons  Global labor supply increase  Eastward European integration  High German wage costs for low skilled Evidence  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

II. Empirical Export Model Time series model tailored to Germany Sample: quarterly data Variables Xgr Quarterly real commodity exports Reer_ulc Real effective exchange rate at unit labor costs GdemGermany’s global export demand (WEO)  Trade weighted real imports in partner countries GinvInvestment activity in Germany’s trade partners  Trade weighted investment in partner countries Ind_VADomestic 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

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)

III. Explaining Germany’s Export Market Share vis a vis Industrial Countries Approximation  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

Conclusions Export market share recovery since 2000 Model explains  85% export growth  70% of market share recovery since 2000 Main 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