Import Impact of Economic Growth on Regional Economies

Import Impact of Economic Growth on Regional Economies

Presentation ofMartins Priede

Xi’an-Jiaotong - Liverpool UniversityJanuary, 2012

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International Conference on Economics, Marketing and Management (ICEMM 2012) Hong Kong, 5-7 February, 2012

Introduction I Assumption◦ Increased import competition and global integration of economies

causes structural changes in people’s income◦ Europe has advanced manufacturing industries, but increased level

of sophistication of its main trade partners might cause decline of European income: as consumers switch to imported products thus causing local manufacturing to contract and thus decrease income per capita

Increased import competition is measured by two means:◦ Increase of import value (due to increased international trade

volumes – less barriers to international trade, lower transportation and communication costs)

◦ increase of import sophistication level (due to increase of import partners technological production capabilities, R&D inputs, quality improvements etc.)

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Introduction II Increase of import value can cause changes in regional income ◦ in less competitive regions – income per capita will decrease

significantly due to imports (imported goods will replace those locally manufactured - reducing demand for locally made manufacture)

◦ in more competitive regions - employment in manufacturing will not be affected by imports (increase of imported goods sophistication doesn’t cause demand reduction of local manufacture). Products imported cause competition in sophisticated market segment

Research includes import competition both from inside and outside EU. Included trade partners ◦ EU external trade partners: Brazil, China, Japan, Korea and Turkey◦ EU internal trade partners: Germany, United Kingdom, The

Netherlands and France

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Introduction III Motivation◦ Analyze competitiveness of regional economies facing internal

and global competition ◦ To observe, if income pc of inhabitants at regional level due to

competition from internal, external competitors◦ To look into firm size and industry regional concentration in regard to

increased international trade◦ Previous studies about influence of increased import sophistication

concentrated on single countries or separated regions Main goal◦ Analyze European regional economies response to increased

product sophistication of main import patterns

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Objectives Estimate changes in regional economies due to increased

economic integration within Europe and outside world in recent decade

Understand how regional economies respond to increased trade volume and import sophistication◦ Analyze if regional income pc changes significantly ◦ Analyze trade with main partners and impact of bilateral trade◦ Countries with highest import trade volume inside EU and outside EU◦ Countries with different level of trade sophistication

Analyze regional economies by using lowest level data series possible with less proxy variables

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Existing literature measuring sophistication How to measure export/import trade sophistication/product quality◦ Unit value - sales divided by quantity measurement◦ Unit value as measurement of product quality reviewed since 90’ies◦ Theoretical basis (Stiglitz, 1987; Borin, 2008), empirical (Aiginger, 1997;

Dulleck, 2005; Nielsen, 2000)◦ Concept of unit value can be also understand as price Easy to calculate

about all countries, consistent◦ Alternatives: sophistication indexes based on exporting countries GDP

(Lall, 2005; Xu, 2007) higher GDP countries export more sophisticated goods with their high wages and those are sophisticated goods which was more share in higher GDP countries trade

◦ In case of other countries Japan - falling import prices on employment in home economy (Tomiura, 2003; Sasaki, 2007) US - papers discussing import impact on wages and employment at

industry level (Hakura, 1997), competition with low wage countries (5%< US GDP) (Bernard, 2002) 6

Existing literature and contribution Papers discussing EU intra and EU extra trade◦ EU extra-trade is increasing over EU intra-trade, more entrants to market increased world integration (Anderton, 2005)

◦ EU intra- and extra-imports can be substituted in short-term European Monetary Union contribution to intra EU trade growth

(Dieppe, 2007; Chen, 2004) Intra EU growth found to be as result of reduced exchange rate

volatility (Dieppe; 2007) Contribution◦ Previously not researched EU-wide import assessment on regional

manufacturing employment◦ Analyze trends of import competition in whole EU at regional level over

10 years period, uninterrupted, yearly basis 7

AUV (Average Unit Value) AUV = total volume of imports in product group / total quantity of

imported products Arguments for AUV usage◦ Most of analyzed countries observed have high GDP and high unit

values in trade with EU - high unit values suggest more costly R&D◦ Most of high value products are patent protected, so not really

substitutes (legally) ◦ Wholesalers are “market makers” – they decide price and quantities

of product offered on market (this weakens price elasticities)◦ Easy to measure, changes reflected over time◦ Available at trade statistics lowest level◦ Motivation to create trade is mostly for items not available in own

country. For example, intra-EU AUV is lower than extra-EU trade AUV)

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Data highlights Description of data◦ Source Eurostat◦ Region specific data observed from

1995 to 2005, inclusive◦ In country case studies, import to

itself ignored - missing value◦ All import data is common euro

currency, in real terms◦ Random effect panel analysis

considered over fixed effects following to Hausman test

◦ Results are HAC consistent Limitations◦ Intra-EU and extra-EU export is not

included◦ Price elasticities are not estimated

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Trends of import value and AUV Trends of import value◦ Increasing trend observed for both EU extra and intra trade and all

analyzed trade partners◦ Average EU trade value has been increasing, on yearly basis 10.4%

for EU extra and 6.8% for EU intra trade Trends of import average unit value - AUV◦ Suggesting increase in average unit value, average increase per year

- 5.3% for extra-EU and16.3% for intra-EU trade

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Trends of import value

Biggest import partners, imports from US dominates

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0

50 000

100 000

150 000

200 000

250 000

300 000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

millio

n EUR

USA

China

Japan

Canada

Switzerland

Turkey

Russia

Trends of AUV Yearly changes of AUV◦ Intra EU is growing faster than extra EU, but steady growth not

observed◦ Strong growth for US, China and Korea◦ Japan lesser growth as AUV is already very high

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Structure of transport mode Years 2000-2008 Higher AUV choose air, whereas lower AUV choose sea transport

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Methodology I Panel data, random effects model

∑ Left side: ◦ GDP – local income pc at region r, in year t, import partner country p,

number of import countries observed k, industries are j Right side◦ IIA – intra industry agglomeration, Tomiura (2003) (+) specialization leads to increase in competitiveness

◦ SCL – scale at firm level, Tomiura (2003) (+), bigger company size – assumed to be more competitive

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Methodology II ◦ AUV – value of imports for c countries (-) when increased import value decreases local income pc (+) when import increases local income pc ϵ - error term captures all other effects on regional employment

◦ Region is assumed to import goods proportional to its regional GDP share in overall country’s GDP

◦ ∑

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Data structure

Products

Industries

Regions

Countries

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country 2country 1

region 1 region 1 R1 R2 R3

Results I Specifications: ◦ 1 – 3 impact of trade volume◦ 4 – 6 impact of trade sophistication◦ 1 and 4 impact of import from major trade partners ◦ 2 and 5 impact of aggregate import from inside/outside Europe◦ 3 and 6 impact from major inside trade partners

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Results II, Import value and AUVSCL (+) average firm size

IIA (-) negative influence of industry concentration

EU intra negative effect

EU extra positive effect

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Value Value Value AUV AUV AUV

(1) (2) (3) (4) (5) (6) Intercept 7.5235a

(0.0837) 7.2451a (0.0374)

9.5881a (0.0162)

9.5563 a (0.0125)

9.8099 a (0.0118)

9.5881 a (0.0163)

Ln SCL index 0.0482 a (0.0072)

0.1109 a (0.0029)

0.0331 a (0.0078)

0.0411 a (0.0054)

0.1386 a (0.0032)

0.0328 a (0.0078)

IIA index -0.0796 a (0.0061)

-0.1043 a (0.0031)

-0.0454 a (0.0064)

-0.0533 a (0.0046)

-0.1063 a (0.0033)

-0.0455 a (0.0064)

EU intra -0.0098 a (0.0033)

-0.0171 a (0.0032)

EU extra 0.1482 a (0.0029)

0.0128c (0.0068)

0.0142 a (0.0025)

0.0129c (0.0068)

Ln Germany -0.0476 a (0.0054)

0.0004 (0.0079)

0.0044 (0.0061)

0.0004 (0.0079)

Ln Netherlands 0.0674 a (0.0061)

0.0306 a 0(.0052)

0.0443 a (0.0053)

0.0306 a (0.0051)

Ln UK 0.0707 a (0.0072)

-0.0302 a (0.0061)

-0.0441 a (0.0057)

-0.0302 a (0.0061)

Ln Brazil 0.0178 a (0.0033)

-0.0105 a (0.0037)

Ln China 0.0295 a (0.0041)

0.0066 (0.0056)

Ln Japan 0.0024 (0.0048)

0.0386 a (0.0045)

Ln Korea -0.0686 a (0.0039)

0.00848c (0.0051)

Ln Turkey 0.0161 a (0.0031)

0.0253 a (0.0037)

Ln US 0.0438 a (0.0051)

-0.0503 a (0.0055)

R squared 0.1881 0.2333 0.0097 0.0222 0.0646 0.0097 Log likelihood -13546.76 -18802.12 -17370.31 -16498.53 -21721.81 -17370.31

Results III, AUV and conclusion For import value: Negative for Germany, but positive for Netherlands and UK Positive and significant for other outside economies: Brazil, China, Japan, Turkey

and US. Only negative with KoreaFor import sophistication: For internal trade partners inconclusive: Germany – insignificant, positive for

Netherlands, and negative for UK For external trade partners: negative for Brazil and US, positive for Japan, Korea and

Turkey, insignificant for China Possible reasons for AUV positive influences observed for imports from Japan,

Korea and Korea: intra firm imports, imports of licensed technology, imports of inputs Possible reasons for AUV negative influences: import is substituting local production In contrary to popular belief, results show positive effect of trade sophistication on

regional GDP per capita, which did not suggest import substitution, but can be as a result of complementary or intra-firm trade

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