Q-Tool Extension: Competitiveness 1. Agenda 2. Definitions and Indicators 3. CGE Implementation 4. Conclusions

1. Agenda

Specification of „Competitiveness“ Firm level (cost structure, innovation potential,...) Sectoral level (market shares, mark-ups,...) Country level (terms-of-trade,...) Review of existing indicator systems Input/output-based indicators Data availability Compatibility with quantitative modeling framework Implementation of indicators in CGE core-model Illustrative policy application (here: EU leadership in climate policy) Agenda

2. Definitions and Indicators

Firm level: „A firm is competitive if it can produce products [...] of superior quality or lower costs than its domestic and international competitors. (US-President`s Commission on Industrial Competitiveness 1985, S. 6) National level: “Competitiveness [...] is understood to mean a sustained rise in the standards of living of a nation and as low a level of involuntary unemployment possible.” (European Competitiveness Report 2004) Sectoral level:... Position of a sector in relation to other sectors or to the same sector in other countries in terms of market share and productivity. Selected Definitions

Output / Performance Input / Policy “ex-post” “ex-ante” Market share Profitability Productivity R&D Expenditures Stock of Human Capital Cost Structure Innovation Potential Based on: Firm level: Sectoral level: (Relative) market shares - RMS Revealed Comparative Advantage - RCA Productivity / Profitability R&D expenditures Investment flows (FDI) Innovation Potential (Patents) Indicators (1) National level: Real Exchange Rate Terms of Trade Constant Market Shares (CMS) Productivity Per Capita Income Balance of Current Account Labour unit costs R&D expenditures Investment Flows (FDI) Innovation Potential

Indicators (2): Country Level

Indicators: RCA Revealed Comparative Advantage – RCA (Balassa 1965)

3. CGE Implementation

Application: EU Leadership in Climate Policy Unilateral EU carbon emission constraints (e.g. EU-ETS) Alternative emission reduction targets: Impacts on international competitiveness Policy implementation: Issue: Global environmental effectiveness (carbon leakage) -5,10,15, 20, 25, 30% cutback of CO 2 emissions compared to BaU Endogenous tax differentiation: -Tax rates discriminated in favour of carbon-intensive industries -Tax ratios between other sectors and carbon-intensive industries: 1 (uniform), 2, 5, 10, 20, inf (exemptions)

Parameterization of Static PACE Version Base year: 2001 Data base of global economy: GTAP V6 Coverage: 87 regions, 57 sectors, 5 factors Aggregation:

Stylized Model Structure

Results (1): Welfare

Results (2): Differentiated Carbon Values

Results (3): Terms-of-Trade

Results (4): Output of Carbon-intensive Industries (EIS)

Results (5): Output of Other Industries (OTH)

Results (6): RCA Change for Carbon-intensive Industries (EIS)

Results (7): RCA Change for Carbon-intensive Industries (EIS)

Results (8): Excess Cost of Tax Differentiation

Conclusions Trade-off between indicators at different levels (e.g. sector / nation) Cautious Use of Competitiveness Indicators: Trade-off between indicator at the same level (e.g. sectors) At sectoral level: RCA, RWA, etc. CGE Implementation of selected competitiveness indicators: At national level: (Per-capita) income, Terms of Trade, etc. “ Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous”. (P. Krugman (1994), Foreign Affairs, 1-17)