THE PRICE ELASTICITY OF EXTERNAL DEMAND OF PORTU- GUESE EXPORTS: A COMPARISON WITH OTHER EURO AREA COUNTRIES*

Transcription

1 THE PRICE ELASTICITY OF EXTERNAL DEMAND OF PORTU- GUESE EXPORTS: A COMPARISON WITH OTHER EURO AREA COUNTRIES* Sónia Cabral** Crisina Maneu** 73 Aricles Absrac We compue he price elasiciy of exernal demand of Poruguese expors in he period , comparing i wih oher euro area counries. This proxy of he expor price elasiciy is calculaed as a weighed average of he impor demand elasiciies in each individual counry-produc desinaion marke, using he elasiciies of subsiuion across impored varieies of Broda e al. (2006). Overall, Porugal ends o expor o individual markes ha have, on average, a lower price elasiciy han he markes where oher euro area counries expor o. Therefore, he produc and geographical composiion of Poruguese expors reduces heir exposure o relaive price flucuaions. 1. Inroducion Trade elasiciies are imporan parameers in inernaional economics ha have been exensively sudied for several decades. A presen, he empirical lieraure provides a wide range of esimaes for rade elasiciies wih differen mehodologies and a differen daa breakdown levels. The price elasiciy of demand for expors measures he change in a counry s expors wih respec o changes in he price of expored goods relaive o he prices of compeing goods in desinaion markes. This aricle compues a proxy of he price elasiciy of expors as a weighed average of impor demand elasiciies using deailed rade daa from 1995 o 2009 for Porugal and oher euro area counries. The saring poin is o measure he price elasiciy of exernal demand of Poruguese expors in a sample of individual desinaion markes, which are defined as produc-counry pairs. The basic assumpion is ha, for each imporing counry and each produc, impors supplied by differen counries are differen varieies of he produc, as in Armingon (1969) s formulaion of produc differeniaion by counry. Under cerain condiions, he price elasiciy of demand facing all he exporers of a given produc in each imporing counry is given by he willingness of consumers in he imporing counry o subsiue among foreign producs, ha is, he elasiciy of subsiuion among impored varieies. A measure of he elasiciy of a counry s exernal demand can be obained by aking he weighed average of hese impor demand elasiciies across individual expor desinaion markes. The esimaes of he impor demand elasiciies are obained from Broda e al. (2006), who repor elasiciies of subsiuion for a sample of 73 counries esimaed using he mehodology originally proposed by Feensra (1994) and exended by Broda and Weinsein (2006). In each imporing counry, hese elasiciies of subsiuion are he same for all counries exporing a given good and are also assumed consan over ime. Therefore, he differences among counries in erms of he price elasiciies of * The auhors hank João Amador, Anónio Anunes and José Ferreira Machado for heir commens and suggesions. The opinions expressed in he aricle are hose of he auhors and do no necessarily coincide wih hose of Banco de Porugal or he Eurosysem. Any errors and omissions are he sole responsibiliy of he auhors. ** Banco de Porugal, Economics Research Deparmen.

2 II 74 BANCO DE PORTUGAL ECONOMIC BULLETIN Winer 2013 exernal demand are oally deermined by he produc and geographical srucure of heir expors. This feaure allows us o analyse o wha exen he produc and geographical composiion of Poruguese expors exposes hem o a relaively more/less elasic demand han oher euro area counries. Our resuls indicae ha he secoral and geographical specialisaion of Poruguese expors does no expose hem o markes wih a more elasic demand compared wih oher euro area counries. This aricle is also relaed o oher sudies on he specialisaion of Poruguese expors. Over he las decades, he relaive produc composiion and he geographical disribuion of Poruguese expors had a negaive impac in he evoluion of oal marke shares in world expors, as Porugal was relaively more specialised in individual markes han ended o grow below average. 1 In addiion, here is also evidence ha he produc specialisaion of Poruguese expors is relaively more similar o ha of he new players in inernaional rade han oher developed economies. 2 These facors can creae exra challenges for Poruguese expors, increasing he compeiion in hird markes from low-cos rading parners wih similar paerns of comparaive advanage. The aricle is organised as follows. Secion 2 briefly presens he mehodology and describes he daabase used. Secion 3 sars by comparing he price elasiciies of exernal demand of Porugal wih hose esimaed for oher euro area counries. The remaining of he secion deails he resuls along he produc and geographical dimensions, comparing Porugal wih Spain, Greece and Ireland in he period. Secion 4 presens some concluding remarks. 2. Mehodology and daa In his framework, he response of he exernal demand of a counry s expors o changes in relaive prices depends on he willingness of consumers in imporing counries o subsiue among foreign goods. We sar by defining ha a specific good produced and expored by a paricular counry is a variey. This is he sandard definiion of variey applied in several inernaional rade papers, using Armingon (1969) s formulaion of produc differeniaion by counry. To give a concree example, a good consiues a paricular produc, e.g., clohing, while a variey consiues a given good produced by a specific counry, e.g., Poruguese clohing or Ialian clohing. The nex sep is o describe he preferences of consumers in imporing counries. As in Broda and Weinsein (2006), consumers have a ase for variey in he sense ha hey prefer o consume a diversified bundle of varieies of he impored good. The elasiciy of subsiuion among impored varieies of good i by counry j, s, is inerpreed as he price elasiciy of demand for a good i expored by any origin counry o desinaion counry j. Using our example, if s is he elasiciy of subsiuion beween Poruguese and Ialian clohing for French consumers, hen s is also he price elasiciy me by Poruguese and Ialian clohing producers exporing o France. The domesic producion of good i in counry j is no considered as a compeing variey, so s only capures he subsiuabiliy beween impored varieies of good i. The elasiciy of subsiuion beween impored varieies reflecs he degree of differeniaion among hem. When s is low, consumers in counry j see he impored varieies of good i as imperfec subsiues, ha is, as differeniaed varieies ha are o some exen subsiuable, based on acual physical produc differences or oher characerisics such as purchasing convenience, afer-sales service or even consumers percepions of inheren unobservable qualiy. In conras, when s is high, varieies of a paricular good are assessed as more alike and consumers will easily subsiue one for anoher when relaive prices change. 1 See, for insance, Amador and Cabral (2008). 2 See, for insance, Cabral and Eseves (2006).

3 The price elasiciy of exernal demand direced o a counry s expors can be obained as a weighed average of s, aggregaed boh across goods and desinaion markes. More precisely, he elasiciy of he exernal demand faced by Poruguese producers in period can be obained as a weighed average of he elasiciies of impor demand in each individual produc-counry desinaion marke, ha is, h = åå q s, (1) i j 75 Aricles where s is he elasiciy of subsiuion beween impored varieies of good i in imporing counry X j, assumed o be consan over ime, and q = is he share of expors of produc i o åå i jx desinaion counry j in oal Poruguese expors in period. The produc and geographical dimensions of he exernal demand elasiciy can be examined separaely. The conribuion of each secor k o his price elasiciy in period can be compued as: X æ X öæx ö k h = s s, k åå = q s k k iîk j i jx åå = iîk j i jx X åå çèåå øèç k ø where K is he se of all i goods of secor k, X, k k = å å X are oal expors of secor k in period iîk q is he share of expors of secor k in oal expors in period, demand of secor k in period and h = å h. k k j s is he elasiciy of impor k The conribuion of each counry of desinaion c o he exernal demand price elasiciy in period can be compued as: X æ ic X öæ c X ö ic h = s =, c ic s q s ic c c i i jx i i jx ç = åå ç X èåå ø ç è c ø å å (3) where X are expors of produc i o desinaion counry c in period, ic X c = å X are oal expors o counry c in period, q is he share of expors o counry c in oal expors in period, s is he elasiciy of impor demand of counry c in period and c The price elasiciy of impor demand c h = å h. c c s is assumed consan across all exporing counries. Thus, all exporers compeing in a given individual produc-counry marke face he same elasiciy of demand by assumpion. Carrying on wih our example, he elasiciy of subsiuion beween Poruguese and Ialian clohing in he French marke is he same as he elasiciy of subsiuion beween Chinese and Poruguese clohing or Chinese and Ialian clohing in he French marke. This assumpion is a drawback given he large differences found in uni values across origin counries, even wih highly deailed produc daa (see Scho (2004)). These differences in impor uni values poin o differences in pricing power across exporers ha can derive from differences in qualiy of he goods or any oher non-price compeiiveness facors, which are no capured by our framework. As a resul, differences in he esimaed elasiciies of exernal demand across counries resul only from differences in heir secoral and geographical specialisaion of expors, a composiion effec. Therefore, our analysis canno be used o sae ha Poruguese expors face a more or less elasic demand due o heir own inrinsic characerisics. i ic

4 II 76 BANCO DE PORTUGAL ECONOMIC BULLETIN Winer 2013 The inernaional rade daa used in his aricle comes from he BACI - CEPII daabase, which provides reconciled bilaeral values (in US dollars) and quaniies a he 6-digi of he 1992 Harmonised Sysem (HS) classificaion, including over 5000 producs and 200 rading parners in each year. 3 The sample period sars in 1995 and ends in We make all compuaions a he HS 3-digi level in bilaeral erms. For he secoral analysis described above, we use a breakdown based on he secions of he HS, defined a he 2-digi level, which includes 18 secors. The mehodology originally proposed by Feensra (1994) and exended by Broda and Weinsein (2006) allows he quanificaion of he impac ha new impored varieies have on impor prices and, hence, on aggregae welfare. The main idea is ha impors of new varieies of a good lead o a decline in impor prices and his effec is no capured by convenional impor price indices based on a fixed se of varieies, leading o a measuremen bias. The mehodology assumes ha here are wo deerminans of how new impor varieies affec he price index: he magniude of he increase in varieies and he degree of subsiuabiliy among varieies. Hence, one of he key parameers of his mehodology are he esimaes of he elasiciies of subsiuion beween varieies of each impored good, which we use in his aricle wih a differen goal. 4 We obain esimaes for hese elasiciies of subsiuion from Broda e al. (2006) who repor he impor demand elasiciies a he 3-digi HS level (171 producs) for a sample of 73 counries esimaed according o he mehodology of Broda and Weinsein (2006). The se of 73 counries includes mos of he main rading counries in he world. However, counries like Belgium, Russia, Singapore and Taiwan are excluded, which, especially in he firs wo cases, can limi he coverage of he sample for some euro area counries. Some impor demand elasiciies esimaed by Broda e al. (2006) have exremely high values, signalling ha varieies of a given good are undiffereniaed. Even aking ino accoun ha he heoreical price elasiciy wih perfec subsiuabiliy is infinie, hese few exremely high values are clear ouliers and have no significan economic inerpreaion, since differences in he values of he elasiciies above a cerain level are no meaningful in economic erms (see Feleigh and Federico (2010) and Mohler (2009) for a discussion). However, hese abnormally high impor elasiciies have a large impac on he elasiciy of exernal demand of some counries. We choose o drop all impor demand elasiciies above 500 from he analysis, eliminaing 7 individual markes of he available in Broda e al. (2006). 5 In he end, he individual markes seleced represen beween 70 and 90 per cen of oal expors of each euro area counry in every year considered. For Porugal, expors in he sample represen more han 80 per cen of oal Poruguese expors in each year examined. 3. The price elasiciy of exernal demand of Poruguese expors The mehodology presened in he previous secion was applied o daa of he iniial euro area counries and char 1 displays he resuls of he esimaed price elasiciy of exernal demand of expors in he period On average, he esimaed price elasiciy of exernal demand for Porugal is lower han for mos euro area counries, wih only he Neherlands and, especially, Ireland displaying smaller elasiciies in his period. Ireland clearly sands ou by is much lower elasiciy of exernal demand han he oher euro area counries considered. Finland also has below-average values, bu slighly higher 3 See Gaulier and Zignago (2010) for a deailed descripion of his daabase. 4 For a quanificaion of he welfare gains from he growh in impor variey for he Poruguese economy, see Cabral and Maneu (2010). 5 Several addiional hresholds were esed and he resuls remained qualiaively similar. 6 Belgium and Luxembourg are examined ogeher as he BACI daabase repors only informaion for he aggregae of he wo counries.

5 Char 1 ELASTICITY OF EXTERNAL DEMAND, Porugal Spain Greece Ireland Aricles Per cen Per cen Ireland Neherlands Porugal Finland Greece Ialy Ausria (a) Average France Belgium Spain Germany (b) Annual values Per cen Per cen Germany France Ialy 4.5 Neherlands Belgium Ausria Finland (c) Annual values (d) Annual values Sources: CEPII (BACI) and auhors calculaions. han hose esimaed for Porugal in his period. The highes exernal demand elasiciy is esimaed for Germany, wih Spain and Belgium showing also high elasiciies in he period. In France, exernal demand is also esimaed o be more elasic han he average of he oher counries examined. Our exernal demand elasiciies, compued as a weighed average of impor demand elasiciies esimaed from deailed daa, are much higher han he expor elasiciies obained from aggregaed daa, which end o be closer o one. This resul is in line wih he robus finding from he empirical lieraure ha rade elasiciies esimaed from aggregaed daa are lower han hose based on disaggregaed daa (see, for insance, McDaniel and Balisreri (2002) for a discussion). One reason for he comparaive higher responsiveness of secoral expors o relaive prices is ha esimaing he response of aggregae quaniies o changes in aggregae prices implies consraining all secoral elasiciies o be he same. As discussed by Imbs and Méjean (2009), his procedure ignores ha differen goods are no subsiuable o he same exen and hereby creaes a pure economeric bias. Anoher reason for he higher esimaes obained wih deailed daa is relaed o he fac ha sudies wih disaggregaed and aggregaed daa are in fac measuring differen elasiciies. As discussed by Feensra e al. (2010), wih aggregae impor daa, he price elasiciy ypically refers o he subsiuion beween domesic goods and impors, which hey call he macro elasiciy. In conras, wih deailed rade daa, he elasiciy refers o he subsiuion beween similar goods impored from differen origin counries, ha is, he micro elasiciy.

6 II 78 BANCO DE PORTUGAL ECONOMIC BULLETIN Winer 2013 The nex subsecions analyse in more deail he elasiciy of exernal demand of Poruguese expors in he period, idenifying he secors and counries ha conribued more o he resuls. A comparaive analysis of he resuls for Porugal and hree oher euro area counries (Spain, Greece and Ireland) is included. 3.1 Produc breakdown This secion idenifies he individual secors ha conribued more o he esimaed price elasiciy of exernal demand direced o Porugal using a breakdown based on he secions of he HS, defined a he 2-digi level, which includes 18 secors. Table 1 repors he secoral breakdown of he average elasiciies of exernal demand for Porugal, Spain, Greece and Ireland in he period as described in equaion 2. The firs block of columns in able 1 includes he elasiciy of impor demand of each secor, he second shows he share of expors of each secor in oal expors of each counry, and finally he las block of columns displays he conribuion of each secor o he oal exernal demand elasiciy. To faciliae he analysis, he op 3 values of each column are highlighed in able 1. In general, he differen secoral conribuions o he exernal demand elasiciies of hese counries reflec mainly cross-counry differences in erms of expor specialisaion since he impor elasiciies are relaively similar. 7 The fac ha differences in specialisaion paerns explain mos of he cross-counry variaion in exernal demand elasiciies is also repored by Imbs and Méjean (2010) and Feleigh and Federico (2010). Wha secors conribue o he lower elasiciy of exernal demand of Porugal compared o oher euro area counries in his period? The resul is mainly driven by wo secors: Apparel and clohing accessories and Machinery and elecrical equipmen. Boh secors accoun for a significan share of oal Poruguese expors (13.5 and 18.8 per cen, on average in he period , respecively) and face relaively low elasiciies of subsiuion in heir main desinaion markes. These resuls sugges ha he Poruguese specialisaion in some of he so-called radiional secor was posiive insofar as i conribued o reduce he exposure of oal expors o increases in relaive prices. However, his specialisaion probably also implied more adverse movemens in relaive prices, as hese secors are among hose mos affeced by he enrance of low price producers from developing counries in inernaional rade. 8 The very high elasiciies of subsiuion of impor demand of he secor Transpor equipmen in he four counries, wih values clearly above all oher secors, sand ou in able 1. This secor has an imporan impac in he elasiciy of exernal demand esimaed for Porugal since i represens also a large proporion of Poruguese expors. However, even in his secor, he demand elasiciy in Poruguese expor desinaion markes is, on average, lower han ha faced by mos euro area exporers. The high exernal demand elasiciy esimaed for Spain resuls mosly from he secor Transpor equipmen, which accouns for a much larger share of Spanish expors han for oher euro area counries. In conras, Ireland no only benefis from a low share of his secor in oal expors bu also from he very large expor shares of he secors Chemicals and allied indusries and Machinery and elecrical equipmen, boh of which are exposed o a relaively inelasic demand in heir desinaion markes. A large par of he difference in oal exernal demand elasiciies among euro area counries is driven by he secor Transpor equipmen (Char 2). Accouning for his secor, he elasiciies of exernal demand among euro area counries range from 4.5 per cen in Ireland o 7.6 per cen in Germany in his period. Excluding Transpor equipmen, he range of oal elasiciies in he euro area becomes narrower, beween 3.8 per cen in Porugal and 5.4 per cen in Belgium. The ranking of he counries according o he esimaed exernal demand elasiciies also changes subsanially excluding Transpor 7 For a comparaive analysis of he inernaional rade specialisaion of Porugal, see Amador e al. (2007). 8 For a deailed analysis of he exiles and clohing secors in Porugal, see Amador and Opromolla (2009).

7 Table 1 SECTORAL BREAKDOWN OF THE ELASTICITY OF EXTERNAL DEMAND, AVERAGE Impor elasiciy Expor share Conribue HS codes Descripion PRT ESP GRC IRL PRT ESP GRC IRL PRT ESP GRC IRL 1-5 Live animals and animal producs Vegeable producs; Fas, oils and waxes Foodsuffs, beverages and obacco Mineral producs Chemicals and allied indusries Plasics and rubber Raw hides, skins, leaher and furs Wood, cork and sraw Pulp, paper and paperboard Texiles and exile fibres Apparel and clohing accessories Foowear and headgear Sones, plaser, ceramic, glass and glassware Base meals Machinery and elecrical equipmen Transpor equipmen Opical, precision, medical and musical insr Miscellaneous manufacured aricles Toal excluding ranspor equipmen Toal Sources: CEPII (BACI) and auhors calculaions. Noe: HS refers o he 1992 Harmonized Sysem classificaion. 79 Aricles

8

9

10 II 82 BANCO DE PORTUGAL ECONOMIC BULLETIN Winer 2013 low elasiciy obained for Porugal only indicaes ha Poruguese expors are relaively more specialised in individual markes (produc-counry) ha have, on average, a lower price elasiciy of demand for impors. In secoral erms, his resul is mainly driven by wo secors: Apparel and clohing accessories and Machinery and elecrical equipmen. These secors accoun for a large share of oal Poruguese expors and Poruguese exporers face relaively low elasiciies of subsiuion compared o oher euro area counries. Even in he secor Transpor equipmen, which is characerised by exremely high impor demand elasiciies for all euro area counries, he demand elasiciy in Poruguese expor desinaion markes is lower han ha faced by mos euro area counries. Regarding geographical markes, he lower elasiciy of exernal demand of Porugal compared o oher euro area counries in his period resuls mosly from hree desinaion counries: Spain, France and he USA. Porugal benefis from is specialisaion in hese markes ha have relaively inelasic demands for Poruguese expors. References Amador, J. and Cabral, S. (2008), The Poruguese expor performance in perspecive: A consan marke share analysis, Banco de Porugal, Economic Bullein-Auumn, Amador, J., Cabral, S. and Maria, J. R. (2007), Inernaional rade paerns in he las four decades: How does Porugal compare wih oher Cohesion counries?, Banco de Porugal, Working Paper 14. Amador, J. and Opromolla, L. D. (2009), Texiles and clohing exporing secors in Porugal - recen rends, Banco de Porugal, Economic Bullein-Spring, Armingon, P. S. (1969), A heory of demand for producs disinguished by place of producion, Inernaional Moneary Fund Saff Papers 16(1), Broda, C., Greenfield, J. and Weinsein, D. (2006), From groundnus o globalizaion: A srucural esimae of rade and growh, NBER Working Paper 12512, Naional Bureau of Economic Research. Broda, C. and Weinsein, D. (2006), Globalizaion and he gains from variey, The Quarerly Journal of Economics 121(2), Cabral, S. and Eseves, P. S. (2006), Poruguese expor marke shares: an analysis by seleced geographical and produc markes, Banco de Porugal, Economic Bullein-Summer, Cabral, S. and Maneu, C. (2010), Gains from impor variey: he case of Porugal, Banco de Porugal, Economic Bullein-Summer, Feensra, R. C. (1994), New produc varieies and he measuremen of inernaional prices, American Economic Review 84(1), Feensra, R. C., Obsfeld, M. and Russ, K. N. (2010), In search of he Armingon elasiciy, mimeo, UC Berkeley and UC Davis. Feleigh, A. and Federico, S. (2010), Measuring he price elasiciy of impor demand in he desinaion markes of Ialian expors, Temi di discussione 776, Bank of Ialy, Economic Research Deparmen. Gaulier, G. and Zignago, S. (2010), BACI: Inernaional rade daabase a he produc-level The version, Working Papers 23, CEPII Research Cener. Imbs, J. and Méjean, I. (2009), Elasiciy opimism, CEPR Discussion Paper 7177, Cenre for Economic Policy Research. Imbs, J. and Méjean, I. (2010), Trade elasiciies: A final repor for he European Commission, Economic Papers 432, European Economy.

11 McDaniel, C. A. and Balisreri, E. J. (2002), A discussion on Armingon rade subsiuion elasiciies, Working Papers A, U.S. Inernaional Trade Commission, Office of Economics. Mohler, L. (2009), On he sensiiviy of esimaed elasiciies of subsiuion, FREIT Working Paper 38, Forum for Research on Empirical Inernaional Trade (FREIT). Scho, P. K. (2004), Across-produc versus wihin-produc specializaion in inernaional rade, The Quarerly Journal of Economics 119(2), Surgeon, T. J., Memedovic, O., Biesebroeck, J. V. and Gereffi, G. (2009), Globalisaion of he auomoive indusry: main feaures and rends, Inernaional Journal of Technological Learning, Innovaion and Developmen 2(1), Aricles