External trade statistics are of central importance to economic policy. Among other things, its foreign trade contribution shows how a country is positioned compared to its trade partners. But how much do official statistics really tell us these days? In the context of a research project the Ifo Institute compared external trade statistics with figures on actual value added.
The study finds that German surpluses with the GIPS states (Greece, Italy, Portugal and Spain) fell, while the US deficit with China also grew smaller. The study casts a new light on the competitiveness of individual countries, with consequences for economic policy.
Germany’s export surplus, which exceeded the upper limit of 6% of gross domestic product in 2012 at 188 billion euros and look set to go beyond this marker in 2013, is hotly debated on a regular basis. It is a problem for the EU Commission because the high overall surplus masks major imbalances within Europe. Moreover, official export data also include the values of intermediate products that are bought from abroad by German firms in order to make their own export products. “This phenomenon means that a euro of German exports has not represented a euro of German added value for a long time. A realistic picture of international trade emerges if domestic value added is isolated and imported intermediate goods are subtracted out of the equation” explains Prof. Gabriel Felbermayr, head of the Ifo Institute’s International Trade Department.
To determine international trade using value added, the researchers working with Felbermayr drew on the so-called world input-output table. This table shows which goods and services come from a specific country and the extent to which they are used as intermediate goods in the production of other goods and services. Using this information, researchers calculated the bilateral value added exports and imports. This enabled them to make statements on trade balances at a bilateral level that are not influenced by any third-country effects.
Germany’s Trade Surplus with Eurozone Falls, Distortions in US Deficit with China
Monitoring value-added content for 2007 instead of drawing on the official, unadjusted external trade statistics shows that Germany’s trade surplus with the deficit countries of the Eurozone was 20% lower than the latter suggested. The US deficit with China of 271 billion US dollars, on the other hand, was calculated to be around 21% too high; and in value added terms, this deficit only totaled 172 billion US dollars. However, since Chinese exports feature a large share of value added from Japan, the US deficit with Japan was estimated to be around 34%.
On closer examination of Europe, trade balances with the Netherlands tend to stand out. In this case Ifo experts found that the bilateral trade balance with Germany had been overestimated by around 71%. In absolute figures this would represent a drop of around 27 billion to around 8 billion dollars. In addition, the bilateral export flows from Germany into directly neighbouring countries were greatly overestimated, especially with regard to trade with Central and Eastern European countries like Poland (-52%), the Czech Republic (-65%), Hungary (-62%) and Austria (-56%). At the same time, the sum of Germany’s imported goods was overstated, especially since the share of value added by Central and Eastern European related to these products was very low. "The nearer the partner country is, the more intensive the trade in intermediate goods and the greater the gap between imports and value-added imports“, comments Felbermayr.
Wage and Exchange Rate Policy Has Limited Effect
The inequality in trade balances is often cited to justify economic policy measures that aim to improve competitiveness like, for example, changes in wage costs or effective nominal exchange rates. Germany was repeatedly requested to stimulate demand for imports through higher wages and thus offset the imbalances within Europe. In terms of real value added, however, only the share of domestic value added to exports would be affected. Moreover, this would also make imports of German intermediate products more expensive. The effectiveness of a devaluation of the euro must also be called into question. The extent to which a country inside the monetary union would benefit from devaluation ultimately depends on the structure of intermediate goods trade. “Countries with exports that mainly remain in Europe and which, at the same time, source a lot of pre-products from non-euro countries could be at a disadvantage,” adds Felbermayr.