discussion papers FS IV 91-4 Trade Performance of the Main EC Economies Relative to the USA and Japan in 1992-Sensitive Sectors Kirsty S. Hughes January 1991 ISSN Nr. 0722-6748 Forschungsschwerpunkt Marktprozeß und Unternehmensentwicklung (IIMV ) Research Unit Market Processes and Corporate Development ( U M)
W i s s e n s c h a f t s z e n t r u m B e r l i n f ü r S o z i a l f o r s c h u n g R e i c h p i e t s c h u f e r 50 D -1 0 0 0 B e r l i n 30 T e l. : (0 3 0 ) 2 5 4 9 1-0
ABSTRACT Trade Performance of the Main EC Economies Relative to the USA and Japan in 1992-Sensitive Sectors Tnis paper analyses the trade performance of Germany, France, the UK and Italy relative to the US and Japan in the sectors the EC has suggested will be sensitive to completion of the internal market relative to the insensitive sectors. The paper utilises 4- digit ISIC export and import data from 1980 to 1987. The trade performance of each country in the sensitive sectors relative to the insensitive sectors can be distinguished. In general, performance is better in the sensitive sectors. However, performance of the EC countries relative to the US and Japan is worse in the sensitive than the insensitive sectors - deteriorating with respect to Japan and improving with respect to the US, such that by 1987 the four EC countries have similar relative performance to Japan as to the US. ZUSAMMENFASSUNG Die Außenhandelsposition der größten EG-Länder im Vergleich zu den USA und Japan in ausgewählten Wirtschaftszweigen (S 1992-Sensitive Sectors") Ergebnisse und Struktur des Außenhandels der Bundesrepublik Deutschland, Frankreichs, Großbritanniens und Italiens werden in diesem Beitrag mit denen der USA und Japans verglichen. Der Vergleich bezieht sich auf jene Wirtschaftssektoren der EG, die von der Vollendung des Binnenmarktes besonders betroffen sind. Analysiert werden dabei Daten über die Aus- und Einfuhr dieser Länder, die einer vierstelligen internationalen Klassifikation der Industriezweige (ISIC) entsprechend für die Zeit von 1980 bis 1987 vorliegen. Für jedes Land kann dabei die Außenhandelsposition nach sensitiven und nicht sensitiven Sektoren unterschieden werden. Generell ist das Außenhandelsergebnis in den sensitiven Sektoren besser. Das Ergebnis der EG-Länder im Vergleich zu dem der USA und Japan ist in den sensitiven Sektoren schlechter als in den nicht sensitiven, mit einer tendenziellen Verschlechterung im Vergleich zu Japan und einer Verbesserung im Vergleich zu den USA. Für 1987 läßt sich für die vier EG Länder eine ähnliche Außenhandelsposition im Vergleich zu Japan und den USA festeilen.
1 TRADE PERFORMANCE OF THE MAIN EC ECONOMIES RELATIVE TO THE US AND JAPAN IN 1992-SENSmVE SECTORS Introduction The EC has argued that the impact of the completion of the internal market - the 1992 programme - will vary across sectors (EC 1989, Buigues, Ilzkovitz and Lebrun 1990). It has identified 40 sectors that it considers are sensitive to the 1992 process, where the removal of non-tariff barriers will allow for a variety of technical and economic efficiency gains. In its most recent study (Buigues, Ilzkovitz and Lebrun 1990) it has analysed in detail the position of these sensitive sectors for the individual EC member states, allowing cross-country comparisons of the potential effects of 1992. However, on the basis of the EC study comparisons can be made within the EC but not relative to its main competitors. In this paper we assess the trade performance of a number of these sensitive sectors, comparing the four largest EC economies with the US and Japan in the 1980s. Such an analysis of trade performance relative to the EC s two largest competitors in the sensitive sectors compared to the insensitive sectors can provide many insights into the possible effects of 1992 on relative European competitiveness. 1.1 The 1992-sensitive sectors The EC adopts a number of criteria in order to identify the 40 sensitive sectors (Buigues and Ilzkovitz 1988, EC 1989, Buigues, Ilzkovitz and Lebrun 1990). The main criteria are that sectors with higher non-tariff barriers and higher degrees of price dispersion across the member states will be more sensitive to the completion of the internal market. Other criteria include the extent of import penetration and the potential for scale economies. Forty out of 120 sectors on the EC s NACE classification are identified, accounting for 50 per cent of EC value-added. These forty sectors are further sub-divided into four separate groups to identify more precisely the different effects of 1992. However, all are expected to benefit in efficiency terms from the increased competition and greater scale economies that 1992 is predicted to allow. Relative to the EC s main competitors - the US and Japan - these sectors are considered by the EC to have suffered from a lack of integration. Disagreement exists as to the likely outcomes of 1992 - whether the EC view is correct, whether 1992 will have relatively little impact (see for example Davis et al 1989), whether it will have a greater impact than predicted (Baldwin 1989) or whether it will allow increased dominance
2 and strategic behaviour by large multinationals (Cowling 1990, Hughes 1990). However, on the weak assumption that it has some effects, it is relevant to assess the current position of the sensitive sectors in order to be able to predict how they will change after 1992, whether under the EC or alternative scenarios. A related question is whether, given their higher non-tariff barriers and so forth, it is possible to distinguish the performance of the sensitive sectors relative to what we shall here refer to as the insensitive sectors. A failure to differentiate would imply that the factors identified by the EC as differentiating these sectors are not of central importance in their performance. This question is our primary concern in the current paper. 1,2 International Competitiveness The aspect of performance we focus on in this paper is international competitiveness as reflected in export shares of international markets and net trade. Many of the insensitive sectors are already exposed to strong international competition and will not achieve any further scale economies subsequent to 1992. We might then predict that the trade performance of these insensitive sectors will be superior to that of the sensitive sectors since the latter have yet to achieve their full efficiency potential. Here, therefore, we analyse some descriptive statistics of trade performance in the sensitive and insensitive sectors. However, there are many determinants of industries trade performance of which EC non-tariff barriers and the intensity of competition are only two. Further, the main emphasis of the EC s analysis is that the sensitive sectors perform less well than they could relative to the US and Japan, not relative to the insensitive sectors. As a second part of our statistical analysis, therefore, we look at each EC country s trade performance relative to that of Japan and of the US in the sensitive sectors compared to relative performance in the insensitive sectors. Thus, we ask whether relative trade performance is worse in the sensitive sectors relative to the insensitive sectors. This holds constant any country-specific factors that may influence relative trade performance of all sectors and it holds constant any industry-specific factors that cause different performance in the two groups of sectors across all the countries considered here. 2,1 The Data The EC s classification of sensitive sectors is done according to the NACE classification. However, there are no international trade statistics on this classification that allow comparison between EC countries and the US and Japan. Here, we use a database of manufacturing exports
3 and imports for the US, Japan, West Germany, France, the UK and Italy on the 4-digit International Standard Industrial Classification (ISIC) from 1980 to 1987. This gives a disaggregation level of 80 manufacturing industries. It is not possible to classify directly all the NACE sensitive and insensitive sectors into corresponding ISIC classes. Consequently, we construct three ISIC groups - sensitive, mixed and insensitive - where the mixed group contains both sensitive and insensitive NACE sectors. This gives 20 sensitive sectors, 21 mixed sectors and 39 insensitive sectors. Further information on the sectoral classification is given in the appendix. We use two measures of trade performance to analyse each economy s performance in the three groups. The first is the share of OECD exports: ( l) X S ik = where.'x denotes exports; i denotes sector group - sensitive, mixed or insensitive; k denotes country - US, Japan, Germany, France, UK or Italy; and TX denotes total OECD exports. The second is the net trade balance: (2)NTBlk - x.. - M.. ik lk X.. + M., ik ik where: M denotes imports. 2.2 Trade structure, trade performance and 1992-sensitivitv Tables one and two present information for total export shares and net trade balances of manufacturing for each country and for the four EC economies to provide a benchmark comparison for each group. The EC four is calculated from the sum o f the four separate economies
4 exports and imports and so includes trade between the four. Germany has the largest export shares in 1987 followed by Japan and the US. The slowdown in EC growth in the early 1980s reflected in falling export shares can be clearly seen together with the recovery to 1987. Japan has the largest net trade balance followed by Germany and Italy. The other three economies all have deficits by 1987 - the US exhibits the worst performance and greatest deterioration followed by the UK. Table three shows the relative importance of the three groups - sensitive, mixed and insensitive - in each country s total manufactured exports. In 1987, for all countries except the US, the mixed group is the largest proportion of exports. The US s largest proportion - 41.2 per cent - is in the sensitive group. The next two highest proportions in the sensitive group are Japan and the UK. All six are moving out of the insensitive sectors during the 1980s, the sharpest shift being the case of Japan. Except for Germany, they are all moving more strongly into the sensitive group than the mixed group. Of the EC four, the UK has the highest proportion of its exports in the sensitive sectors. Given the UK s weak trade performance, it may be of concern that the strongest 1992 effects are expected in an area where it has a relatively large export presence. The EC takes a more positive view (Buigues et al, 1990) arguing that all countries are positioned in line with their comparative advantage and that the UK has an advantage in R&D-intensive products. Recent evidence (Hughes 1990b) suggests that R&D contributes very little to the UK s comparative advantage. Further, competitiveness in technology-intensive products has as much to do with absolute as comparative advantage and so the effects of increased competition in sectors where a country like the UK mostly has an absolute disadvantage could be serious. Table Four presents each country s OECD export share by the three groups. In each group, we see a reflection of the overall trend for the EC countries to lose export share to 1984 and to recover it by 1987 and the deterioration in the US s share. In 1987, the US and Japan jointly have the largest shares of the sensitive sector exports followed by Germany - though as a group the EC four dominate. However, the US share has declined over the 1980s while Japan s has increased. Germany and Italy also show an increase in their sensitive sectors export share in the 1980s. The US, Japan and the UK have export shares in the sensitive sectors that are greater than their total export shares. Germany follows its overall export share in the mixed and insensitive groups having the largest export share in both. In the mixed group, all except the US and the UK have higher shares than their total shares. All six countries have lower export shares than their total shares in the insensitive group.
5 Overall, this suggests a picture of better trade performance of each country in the mixed and sensitive sectors relative to the insensitive sectors, but worse performance of Germany, France and Italy relative to the US and Japan in the sensitive sectors. Table five presents the net trade balance for each of the three groups and each country. In all six countries in 1987, the net trade balance of the sensitive sectors is better than their total net trade balance. This is also true for the mixed sectors except for the UK and US. The trade balance of all six is worse than their total balance in the insensitive sectors. Japan, Germany and Italy have positive net trade balances in the sensitive sectors, though only Japan shows an improvement over the 1980s. Contrary to what may have been expected given the EC classification these results suggest that the worst trade performance for all countries is in the insensitive sectors. Further, there is evidence of shifts in export structures towards the sensitive sectors. There are differences across countries in their trends over the 1980, but these patterns vary between the EC economies as well as between the US and Japan. 2.3 Relative performance in the sensitive and insensitive sectors As discussed above, performance in the sensitive relative to the insensitive sectors may depend on a number of factors common to the six countries here - certain industry characteristics, strength of other competitor countries - and so it is necessary to consider relative trade performance of the EC countries and the US and Japan in the sensitive sectors relative to the insensitive sectors. We can measure relative trade performance across countries both in terms of their export shares an in terms of their net trade.
6 We construct relative exports as : (3) RX jr = X. / X. s] sk X. / X. uj uk j / k where: s denotes sensitive group, u insensitive group; j denotes Japan, the US, Germany, France, the UK or Italy; and k denotes Japan or the US. Similarly, we construct relative net trade as: (Xs j /Ms j >/(Xsk/Hsk> (4) RNT-, - (w / ( w j * k If the EC countries perform relatively better in the sensitive sectors than the insensitive sectors when compared with the US or Japan, RX and RNT should be greater than one. The results for comparing each country first to Japan and then to the US for both measures are presented in figures one to four. Figure one presents export shares relative to Japan for sensitive relative to insensitive sectors. All of the four EC countries ratios are less than one except for the UK in 1980 and decline over the 1980s. The US also declines to just below one by 1987. Figure two presents export shares relative to the US. All the EC ratios are less than one, though with little change over the 1980s and Japan just reaches one by 1987. Overall, the EC four clearly exhibit worse relative performance in these sensitive sectors relative to the US and to Japan. The changes in Japan and the U S s relative performance over the 1980s means that by 1987 the EC four had virtually the same relative level of performance to both the US and Japan - although in 1980 they performed better relative to Japan than the US in these sectors. Figures three and four present the relative net trade ratios in the sensitive relative to the insensitive sectors for Japan and the US respectively. They tell a similar story. None of the four EC countries has a ratio greater than one in either year or relative to either Japan or the US. The US deteriorates from a position of equality with Japan in 1980 to a position almost as bad as the EC countries by 1987. This is reflected in graph four where the EC countries improve relative to the US over the 1980s though their ratios remain clearly below one.
7 3 Conclusions The statistics presented here tell a fairly clear story. Firstly, the sensitive and insensitive sectors can be distinguished in terms of their trade performance. Secondly, trade performance is better in the sensitive sectors relative to the insensitive sectors. Thirdly, the performance of the EC economies relative to the US and Japan is worse in the sensitive sectors relative to the insensitive sectors. The question that remains is whether or to what extent the 1992 process will affect this relative competitive position. Figures one to four make clear that the relative position is not static. What appears to be dominating the changes in the 1980s is the US s deteriorating trade performance - which is deteriorating more in the sensitive sectors than overall and Japan s improving performance which is improving more in the sensitive sectors than overall. On current trends the EC countries will continue to improve relative to the US even in the absence of 1992. The large shifts in competitive position over the 1980s serve as a reminder that factors other than market integration are important in determining competitiveness and will continue to be important in the 1990s. Their likely relative importance to 1992 cannot be ascertained here, but the trends in the 1980s indicate that it would be unwise to assume that 1992 will be the dominant determinant of competitiveness even in the sensitive sectors. The differing performance of the US and Japan in the 1980s further indicates that any benefits they may obtain, or may have obtained in the past, from having more integrated economies is not the only or dominant factor in determining the trends in their competitiveness. A further issue is whether 1992 will benefit the EC economies in the sensitive sectors more than the US and Japan or whether it will provide a unified market within which it will be easier for the US and Japan to take advantage of their superior competitiveness. Even if it benefits the EC economies more, will this be sufficient to offset not simply Japan s superiority but its growing superiority i.e. it may simply act to reduce the rate at which Japan is improving relative to all the five other countries considered here but with the relative level continuing to deteriorate. This paper cannot answer these questions, but the statistics it presents suggest they are indeed important.
8 REFERENCES Baldwin, R. (1989) "On the growth effects of 1992" Economic Policy no.9 pp3-54 Buigues, P. and Ilzkovitz, F. (1988) "The sectoral Impact of the Internal market", mimeo Buigues, P., Ilzkovitz, F., and Lebrun, J-F. (1990) "The Impact of the Internal Market by Industrial Sector: the challenge for the member states" European Economy -Social Europe special editition. Cowling, K. (1990) "Industrial Integration, East and West: planning the market economy" mimeo EC(1989) European Economy no.42 Analytical studies, (5) Davis, E. et al (1989) 1992: Myths and Realities. London Business School Hughes, K. (1990a) "Competition, competitiveness and the European Community - a critical analysis of "the Economics of 1992"" Discussion paper FS IV 90-7 Wissenschaftzentrum Berlin Hughes, K. (1990b) "Comparative Trade performance in the 1980s - an analysis of the largest six industrial economies", mimeo
9 APPENDIX The data used in this study was obtained from the OECD s computer databank. The data comprises annual exports and imports on a 4-digit ISIC classification from 1980 to 1987 for the US, Japan, Germany, France, the UK, Italy and total OECD. The concordance from NACE to ISIC was obtained from the EC statistical office. From the NACE/ISIC concordance, we can identify ISICs that correspond entirely/only with one or more NACE sensitive sectors, those that correspond only with an insensitive sector, and those that correspond to more than one NACE group where one or more of these is sensitive and one or more insensitive. More than one ISIC category may correspond to one NACE category. This would be problematic if we wished to convert NACE data to ISIC data, since we would not know the proportions in which to split the NACE category between the two ISIC categories. Here, we only need to identify whether exports - already classified on an ISIC basis - are 1992-sensitive or not and so this usual concordance problem does not arise. In total, we identify 39 of the 40 NACE sensitive sectors in our data set - excluding NACE 493 for which we have no data. These are related to the ISIC classification as follows. We identify 20 sensitive ISIC sectors which correspond to 25 NACE sensitive sectors. For 15 of these codes it is a unique correspondence; for 10 of the codes they correspond in part to ISICs in this group and in part to ISICs in the mixed group. As explained above, this is not problematic for our purposes here. We identify 21 mixed ISICs which include 24 sensitive and 39 insensitive NACE codes. There are 39 ISIC codes that are insensitive corresponding to 62 NACE codes. The ISIC codes for the sensitive, mixed and insensitive groups are given below. Sensitive sectors ISIC codes 3119 3133 3134 3214 3512 3522 3559 3610 3620 3822 3824 3825 3831 3832 3833 3841 3842 3845 3901 3903 Mixed sectors ISIC codes 3112 3117 3121 3132 3211 3212 3219 3220 3240 3511 3513 3529 3540 3551 3691 3813 3823 3829 3839 3843 3851
10 Insensitive sectors ISIC codes 3111 3113 3114 3115 3116 3118 3122 3131 3140 3213 3215 3231 3232 3233 3311 3312 3319 3320 3411 3412 3419 3420 3521 3523 3530 3560 3692 3699 3710 3720 3811 3812 3819 3821 3844 3849 3852 3853 3902
11 Table 1: OECD Manufacturing Export Shares Year France Germany Italy U.K. EC4 Japan U.S. 1980 9.5 16.9 7.1 8.9 42.4 11.9 15.3 1984 8.0 15.3 6.9 6.8 37.0 16.1 15.8 1987 8.4 18.2 7.4 7.2 41.2 14.7 12.7 Source: See Appendix Table 2: Manufacturing Net Trade Balance Year France Germany Italy U.K. EC4 Japan U.S. 1980 0.04 0.15 0.08 0.02 0.08 0.46 0.01 1984 0.05 0.17 0.12-0.10 0.07 0.52-0.24 1987-0.02 0.19 0.07-0.09 0.06 0.47-0.29 Source: See Appendix
12 Table 3: The Distribution of Each Country's Exports Across the Three Sectoral Groups % Year France Germany Italy U.K. EC4 Japan U.S. Sensitive Sectors 1980 20.4 23.1 20.3 33.0 24.1 27.8 35.3 1934 24.1 24.5 22.6 32.3 25.6 36.1 38.9 1937 24.4 24.4 23.4 34.4 26.0 35.5 41.2 Mixed Sectors 1980 47.4 50.3 49.0 39.1 47.1 44.3 40.7 1984 45.9 50.8 47.9 39.2 47.1 42.7 40.4 1987 48.4 52.9 49.7 40.6 49.4 46.7 37.5 Insensitive Sectors 1980 32.1 26.6 30.7 27.9 28.8 27.8 24.0 1984 30.0 24.7 29.5 27.8 27.3 21.1 20.8 1987 27.2 22.6 26.9 24.2 24.6 17.7 21.3 Source: See Appendix
13 Table 4: OECD Manufacturing Export Shares by the Three Sectoral Groups % Year France Germany Italy U.K. EC4 Japan U.S. Sensitive Sectors 1980 7.8 15.7 5.8 11.9 41.2 13.4 21.8 1984 7.1 13.7 5.7 8.2 34.6 21.2 22.4 1987 7.4 16.0 6.3 8.9 38.7 18.9 18.9 Mixed Sectors 1980 10.7 20.1 8.3 8.3 47.4 12.6 14.8 1984 8.6 18.1 7.7 6.2 40.6 16.0 14.9 1987 9.0 21.3 8.2 6.2 45.0 15.2 10.6 Insensitive Sectors 1980 9.2 13.6 6.7 7.6 37.0 10.1 11.1 1984 8.1 12.7 6.8 6.3 33.9 11.4 11.0 1987 8.4 15.1 7.3 6.4 37.3 9.6 10.0 Source: See Appendix
14 Table 5: Net Trade Balance by Sectoral Group Year France Germany Italy U.K. EC4 Japan U.S. Sensitive Sectors 1980 0.02 0.21 0.14 0.12 0.13 0.59 0.24 1984 0.09 0.22 0.21 0.00 0.13 0.70-0.05 1987-0.01 0.21 0.11 0.00 0.10 0.65-0.11 Mixed Sectors 1980 0.12 0.27 0.17 0.07 0.18 0.62 0.05 1984 0.12 0.29 0.21-0.09 0.16 0.62-0.24 1987 0.03 0.28 0.14-0.11 0.13 0.59-0.37 Insensitive Sectors 1980-0.06-0.07-0.06-0.13-0.08 0.17-0.25 1984-0.07-0.06-0.04-0.21-0.09 0.16-0.45 1987-0.12 0.02-0.05-0.20-0.07 0.04-0.40 Source: See Appendix
15 Figure 4
ZITIERWEISE/CITATION: Kirsty S. Hughes: Trade Performance of the Hain EC Economies Relative to the USA and Japan in 1992-Sensitive Sectors, Discussion Paper FS IV 91-4, Wissenschaftszentrum Berlin für Sozialforschung 1991.