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
44 70
24
23
22
Share of German Exports in
Total Imports of
Industrial countries
German export performance
(In Percent of GDP)
42
60
Euro area (right scale) 1/
21
40
50
20
40
19
Exports G&S
38
18
30
36
17
20
16
34
15
10
32
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
14
0
1995
2000
2005
2007
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 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
120
115
Real Effective Exchange Rate, ULC
Based Jan. 1999 =100
110
105
100
95
90
85
Germany
80
Euro area
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
75
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 Exporters
Table 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
Of which 1/
European Union
Euro area
EU (new)
Asia
China
India
Oil exporters
Saudi Arabia
Arab Emirates
Iran
9.3
5.6
7.4
100
…
…
…
6.2
11.4
-2.3
…
…
…
5.9
17.6
15.1
7.4
6.9
12.5
6.3
14.5
6.0
63.3
43.3
8.6
11.0
2.7
0.5
7.8
12.8
5.4
8.9
14.9
23.1
8.3
13.8
13.9
0.5
0.5
0.5
Source: German Statistical Office.
1/ of which does not add up to total.
3. Meeting Global Investment Demand
Reasons
 Global cycle: strong investment growth
 Germany: specialized in capital goods
Evidence 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
16
14
Global Investment and Investment Activitiy of Germany's Trading Partners
(Percent change from a year ago)
12
10
Emerging markets
8
Germany's
trade partners
World
6
4
2
0
-2
Industrial countries
-4
-6
1999Q1
1999Q4
Source: WEO.
2000Q3
2001Q2
2002Q1
2002Q4
2003Q3
2004Q2
2005Q1
2005Q4
4. Regionalization of Production
Reasons
 Global labor supply increase
 Eastward European integration
 High German wage costs for low skilled
Evidence 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
Domestic Value Added and Imported Inputs of the Export Sector 1995-2005
100
80
65.5
65.7
63.8
63.2
61.6
57.4
57.7
57.5
58.1
56.8
56.5
23.4
23.3
21.8
21.9
22.3
23.1
60
40
20
18.7
18.3
19.3
19.6
20.7
12.4
12.8
14.0
14.5
15.3
16.9
16.7
18.4
17.7
18.9
18.6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0
Re-exported imports
Source: German Statistical Office.
Imported intermdiaries
Domestic value added
II. Empirical Export Model
Time series model tailored to Germany
Sample: quarterly data 1993-2005
Variables
Xgr
Quarterly real commodity exports
Reer_ulc Real effective exchange rate at unit labor costs
Gdem
Germany’s global export demand (WEO)

Ginv
Investment activity in Germany’s trade partner

Ind_VA
Trade weighted real imports in partner countries
Trade weighted investment in partner countries
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
Exportst   0.42 Real Effective Exchange Ratet  1 Global Export Demandt
Speed of Adjustment     0.63
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
Exportst   0.14 Real Effective Exchange Ratet  0.78 Global Export Demandt  3.84 Value Addedt
 0.10
 0.08
1.06
Speed of Adjustment : xgr   0.43 , reer _ u  0.26 , and ind _ va   0.08 .
 0.11
 0.11
 0.03
Expanded model with improved fit
 Low real exchange rate elasticity


Global demand elasticity less than unity


Consistent with weakening of traditional channel
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
Export growth
Actual
Model
Residual
Model Table 6.B
Model D2
Model Table 6.B
Model D2
Model Table 6.B
Model D2
Memorandum items
Long run parameters
Model Table 6.B
Model D2
6.01
6.01
4.99
4.64
1.01
1.36
83.1
77.3
16.9
22.7
…
…
37.1
49.3
…
…
…
…
Global demand
Total
Adv. country
German
common
specifc
(Average annual growth rate)
3.99
3.27
0.72
3.95
3.24
0.71
Percent of export growth explained by
Reer_ulc
Ind_VA
0.08
0.11
0.93
0.58
66.4
54.4
12.0
1.3
65.8
53.9
11.8
1.8
Percent of market share increase explained by
…
…
26.2
2.8
…
…
25.7
3.9
15.4
9.7
0.78
0.7707
-3.84
-0.84
0.78
0.7707
0.78
0.7707
-0.14
-0.1926
33.9
21.1
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


Differentiation by types of goods


Inputs, capital, and consumption goods
Comparability over time


But high level of aggregation (1-2digit)
At least 15 years (quarterly frequency)
Cross country comparability

Capture institutions, regulation, and economic
structure