External Developments Division 1

EC Workshop: The effects of relocation on economic activity: An EU perspective

“De-industrialisation and the relocation of industries”: Herve Boulhol and Lionel Fontagne

DISCUSSANT*: Bob Anderton, Principal Economist ECB, Special Professor, School of Economics, University of

Nottingham, UKCopyright with the author

* The views expressed here are those of the discussant and do not necessarily reflect those of the ECB

21 June 2005

External Developments Division 2

Overview of the paper

• Boulhol and Fontagne investigate reasons behind de-industrialisation (ie, the decline in the share of manufacturing/industry in total employment or output).

• Focus on impact of trade with low-wage (emerging) countries on de-industrialisation.

• Fears of electorate/society contrasted with “rational” view of economists.

• Conclusion: trade in goods with low-wage countries account at most for 25% of de-industrialisation, and for only 15% on average across sample of OECD countries.

• When estimates are corrected for autocorrelation, upper bound of impact is only 6% with average of around 3%.

External Developments Division 3

Relocation of industry to emerging economies

• Boulhol and Fontagne hypothesis: fragmentation of production allows outsourcing to emerging countries to take advantage of their low-labour costs. This replaces domestic production in advanced/industrialised economies (relocation), so share of employment in industry declines relative to services over time.

• Test this by estimating relative output and employment share equations for a panel of OECD countries. In addition to other explanatory variables (relative prices, investment, etc), include trade variables to capture relocation of industry to emerging economies (eg, trade balance; imports from emerging countries, etc).

External Developments Division 4

Relocation of industry to emerging economies

• NIESR case studies examples of “outsourcing”:– Medical equipment (Anderton and Schultz, 1998): scalpels –

UK firms import from Pakistan for 1 pound sterling and then sell them on, while similar product made in UK sells for 25 pounds, so cost savings are large. But outsourcing concerns final products as well as intermediates.

– Ceramic tableware (plates, cups, etc) Jarvis et al, 2002 .German firms involved in significant outsourcing to new EU Member states (NEUMS). Decoration is labour-intensive, so “blanks’’ transported from Germany to eastern Europe for decoration (cheap labour) and then re-imported back to Germany for export. Again, outsourcing covers final products as well as intermediates.

• Implications: (1) authors’ use of total imports from emerging economies – rather than imports of intermediates - as proxy for outsourcing/relocation is not such an “upper bound”; (2) Productivity impacts of outsourcing vary across countries due todifferences in sophistication of engineering.

External Developments Division 5

Relocation and the internationalisation of euro area production

• Relocation and the internationalisation of euro area production described in ECB Occasional Paper no. 30 “Competitiveness and the export performance of the euro area”.

• Dutch, Austrian and primarily German firms carrying out FDI in NEUMS to use lower-cost labour in NEUMS (also partly to access markets of NEUMS).

• For example, German firms account for almost one-third of FDI stock in Hungary.

Inward FDI stocks by investing country (as a percentage of total)

Czech Rep. 1 Hungary 1) Poland 1) Slovakia 2) CEEC-8 1), 2)

Austria 11.4 10.9 3.6 14.1 8.5Belgium 4.9 2.1 3.1 1.1 . .Denmark 0.5 0.4 2.9 0.7 2.1France 6 5.3 13.8 7 8Germany 22.1 32.5 18 23.3 21.5Italy 0.8 2 4.1 8.2 2.8Japan 1.1 1.7 0.1 0.2 0.7Netherlands 34.1 14.8 24.6 16.8 22.3Russia 0.1 0.2 2.9 0 1.3Sweden 1.2 1.6 3.5 0.2 4.2Switzerland 3.5 1.3 1.7 0.8 2.3United Kingdom 2.7 1.1 3.2 7.3 2.8US 4.9 8.3 10 3.9 7.4Other countries 10.5 16.8 7.9 14.1 14

Euro area 81.7 71.4 72.2 79.5 . .EU 15 countries 86.1 74.5 82.8 88.9 80.3 Source: WIIW database.

1) 2002.

2) 2003

External Developments Division 6

Germany and internationalisation of euro area production

• Share of New EU Member States in German imports increased significantly in 1990s.

• Meanwhile, declining share of French and Italian exports in German imports.

• Also: rising share of China, fall of Japan.

• Source: IMF DOTS.

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External Developments Division 7

Boulhol and Herve methodology

• Regress share of manufacturing against imports from emerging countries and trade balance (eg, Italian share against Italian imports).

• Does this capture loss of Italian exports to Germany due to substitution away from Italy to NEUMS? Italian trade balance does not capture this (high-import intensity of exports means decline in exports also bringsdown imports, so little change to trade balance). Is it specialisation or relocation – fragmentation allows specialisation of NEUMS in many products?

• Nevertheless, authors importantly distinguish between imports from emerging countries and imports from other countries (important in “impact of trade on inequality” literature: Anderton and Brenton,1998).

External Developments Division 8

Boulhol and Herve message

• Boulhol and Herve message: impact of trade with emerging countries on de-industrialisation is relatively small. On the whole, globalisation is good as it increases competition and lowers costs. This is the “rational view” of economists.

• But difficult message to get across to the electorate. Costs to those affected negatively by globalisation may be large (ie, job losses), while perceived threat to those unaffected may also be significant.

External Developments Division 9

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