Shedding Light on Price‐ and Non‐price‐competitiveness Determinants of Foreign Trade in the Four Largest Euro‐area Countries

Abstract

Since the mid-2000s standard price-competitiveness indicators for euro-area countries have recently provided conflicting signals, particularly in Italy. The manufacturing unit labor cost (ULCM)-based indicator reports a major competitiveness loss in Italy. Owing to the internationalization of production processes and to the fading representativeness of labor on overall costs we argue that price-based measures are more appropriate than those based on ULCMs to assess external competitiveness and play a more important role in explaining export growth. Measuring non-price competitiveness and considering global value chains are also crucial to correctly identify the determinants of trade flows in the four largest euro-area countries.

On the Suitability of Alternative Competitiveness Indicators for Explaining Real Exports of Advanced Economies

“…They conclude that it is difficult to isolate a superior indicator, but note that the estimated elasticities of broadly defined indicators tend to exceed those of indicators that are based on manufacturing sector data only, ie unit labour costs in the manufacturing sector or the PPI. Giordano and Zollino (2016) present a similar investigation for France, Germany, Spain, and, in particular, Italy. In line with Deutsche Bundesbank (1998), they suggest that price-based measures play a more important role 1 Berman, Berthou, and Héricourt (2015) reveal another aspect of the rather complex relationship between exports and domestic demand.…”

“…In some recent studies which present estimates of export elasticities (eg Christodoulopoulou and Tkačevs (2015), or Giordano and Zollino (2016)), an equation like (2) is estimated in first differences on account of the non-stationarity of the variables. However, this approach has two disadvantages if, in particular, long-run export elasticities are to be estimated, as in this paper.…”

“…While Grimme and Thürwächter (2015) compute the sum or real imports of the partner countries, most of the other studies choose a weighted average of partner countries' real imports. Giordano and Zollino (2016), finally, use a world trade series which is common to all countries as a proxy for foreign demand.…”

Back on Track? A Macro–Micro Narrative of Italian Exports

“…In the case of Italy whereas the former signal an overall moderate gain, the latter indicate a loss of over 1 percentage point (Table A5 in Annex A). Although both theoretically and empirically no deflator proves to be optimal (Turner and Van't Dack, 1993;Chinn, 2006;Giordano and Zollino, 2016), PPIs of manufactured goods have the advantage of proxying for developments that encompass all production cost pressures, not only labour costs, in the sector of tradable goods. PPI-deflated REERs prove in turn to be strongly correlated with both GDP deflator and CPI-based indicators (as shown in Fig.…”

What is the import intensity of global aggregate demand?

“…It involved both slower-than-expected growth domestically in developed and developing economies, as well as weaker links between these countries, as reflected in the reduction of the rate of growth of international capital and trade flows relative to the pre-crisis state [International Monetary Fund…, 2016]. The weakness in economic activity, initially confined to European countries (during the crisis of the euro-zone in [2011][2012][2013] [Christodoulopoulu, Tkacevs, 2014;Giordano, Zollino, 2016] has been spreading to emerging market economies (2014)(2015)(2016), some of which fell in recession (Brazil, Russia). Economic activity also softened in China, as prior excesses unwind, and the economy is rebalancing into a consumption-based one [Cheung et al, 2012].…”