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

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100

105

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115

120

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

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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