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Global Economic ReviewPerspectives on East Asian Economies and Industries
ISSN: 1226-508X (Print) 1744-3873 (Online) Journal homepage: http://www.tandfonline.com/loi/rger20
China's Emergence and Its Implications forEurope's Economies
Sandra Poncet
To cite this article: Sandra Poncet (2015) China's Emergence and Its Implications for Europe'sEconomies, Global Economic Review, 44:4, 387-419, DOI: 10.1080/1226508X.2015.1099237
To link to this article: http://dx.doi.org/10.1080/1226508X.2015.1099237
Published online: 23 Oct 2015.
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China’s Emergence and Its Implications forEurope’s Economies
SANDRA PONCET*,***Paris School of Economics, Université de Paris 1 Panthéon-Sorbonne, Paris, France, **CEPII, Paris,France
ABSTRACT This paper assesses how the competition between China and the EU in exportmarkets has affected the trade performance of European countries. It first draws on acomparison between Germany and France before turning to discuss the economic and socialimpact of China’s internationalization on Europe’s economies. The results suggest that even inthe recent years when China has gained prominence, it should not be blamed for more than halfof the measured effects for emerging countries.
KEY WORDS: Globalization; de-industrialization; China’s emergence; competition; EU
JEL CLASSIFICATION: F1
1. Introduction
In February 2011, China entered the “year of the rabbit” with its new status as thesecond largest economy in the world. As Martin and Méjean (2011) have pointedout, this reflects the prominent role in production and trade which China and otherlow-cost countries have acquired since the early 1990s. During the last two decades,China has become integrated into world trade at an astounding pace. Chineseexportsmore than quintupled between 1992 and 2007, growing faster than the domesticeconomy. The functioning of China’s economy has been radically transformed, movingfrom an isolated position with exports accounting for less than 10% of GDP in 1980 tobeing highly integrated into the world economy, with an export ratio of more than 37%in 2007. This process has been accompanied by a no-less-impressive diversification ofChina’s trade, as its manufactured exports now pervade all sectors of world trade,from low-technology textiles through to high-tech electronics and computers.One feature of this trade integration that has puzzled economists is the rapid
upgrading of China’s exports: economists (and world consumers) have noticed theimpressively broad range of China’s export products since the mid-1990s, and in par-ticular, the ability of Chinese producers to export capital- and skill-intensive products,high-technology products, and in general products that are usually considered as
© 2015 Institute of East and West Studies, Yonsei University, Seoul
Correspondence Address: Paris School of Economics, Université de Paris 1 Panthéon-Sorbonne, Paris,France. Email: [email protected]
Global Economic Review, 2015Vol. 44, No. 4, 387–419, http://dx.doi.org/10.1080/1226508X.2015.1099237
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belonging to the level of specialization of more developed countries. The success onworld markets of Chinese firms such as Lenovo, Founder, TCL and Skyworth in theIT, mobile phones and electronics sectors has been symptomatic of this evolution.It is easy to associate the rise of Chinawith the specters of unemployment and econ-
omic decline haunting Europe. Such fears have prompted reactions that sometimesseem hysterical. A best-selling book by Bongiorni (2007) describing her attempt tolive one year without buying any products manufactured in China warns the West ofbecoming dependent on Chinese exports and claims that almost everything is madein China. Part of the general public and policy-makers have become alarmed at anuna-voidable transferof activities to cheap labor inChinawhichwill leave no jobs inEurope.According to EUKLEMS (2009) statistics, the EuropeanUnion-15 (EU-15)manufac-turing sector represented 38.5 million jobs in 1990 and only 27.6 million in 2007. Overthe same period, the stock of foreign direct investment (FDI) in manufacturing (i.e.long-term participation in productive assets abroad) owned by EU-15 countries else-where increased sixfold (from $299 billion to $1970 billion) according to the Organis-ation for Economic Co-operation and Development (OECD). Available data onmanufacturing employment at home and abroad in multinationals for Germanyspeak for themselves. In 1990, Germany counted 10.4 million domestic manufacturingjobs and 819,000 in German affiliates abroad. By 2007, manufacturing employment inGermany had lost 3 million jobs while an additional 1.9 million jobs had been createdin the foreign affiliates of German firms (OECD). Even if these two figures are notdirectly comparable, they help to explain why policy-makers and the general publiccommonly believe that job losses are a result of China’s globalization.An additional fear of China’s ascendancy lies in the view that the competition
between workers around the world is so direct and head-on that our wages are inevi-tably “set in Beijing” (Freeman, 1995). Such concerns over the alleged negative effectsof globalization and intensification of competition with China concerning employ-ment and wages have important political implications. According to the Eurobarom-eter, they were the main reason for the “no” vote in the referendum on the EUconstitution in France, in 2005. Policy-makers have logically been proposing measuresaimed at limiting these types of international activities. The EU suggested imposingfinancial penalties on firms which have received EU funding but then decide to relo-cate. In May 2005, the European Parliament’s Regional Development Committedexpressed strong support for this proposal and also called for legal measures toensure that firms receiving European subsidies do not relocate abroad for a “longand predetermined” period. Various European countries adopted regulations eitherpreventing firms that transfer a substantial part of their activities abroad from acces-sing subsidized public funds (like in Italy), or offering subsidies to firms that wouldtransfer back home activities previously located abroad (like in France).Some economists even argue for trade sanctions if China does not allow its currency
to appreciate. Since misconceptions are often at the root of bad policy, it is worthreviewing what recent research shows, in trying to paint an accurate and completepicture of the consequences for Europe of China’s rapid economic development inrecent decades. This paper hence assesses how competition with low-wage economiessuch as China affects the European countries. It intends to highlight the various chan-nels (both negative and positive) of trade, and hence what the economic and socialimpacts are on European countries.
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The first section of this paper assesses how the competition between China and theEU in export markets has affected the trade performance of European countries,drawing on a comparison between Germany and France. Primary evidence suggeststhat European countries have withstood the competition from China pretty well, atleast better than those in the USA and Japan. China’s export overlap with the EU,within product markets, is indeed much greater than would be predicted, given itssize and relative level of development. However, Chinese varieties are priced lowerthan EU varieties, and Chinese relative prices have been falling over time in someindustries. Yet, detailed data analysis suggests that the emergence of China as anexporter of almost all products – even rather sophisticated ones – does not mechani-cally imply a collapse of manufacturing industries in Europe (and in other developedeconomies). As argued by Schott (2008) and Fontagné (2009), specialization occurs atfiner levels of commodity disaggregation than traditionally thought. The shaping ofthe international division of labor has left space to high-income economies, in particu-lar EU Member States, since international competition is taking place within productmarkets, across differentiated varieties, rather than across product markets. China andEuropean countries export more and more similar products according to the statisticalcategories, but they do not ship the same varieties/qualities of these products. EU-15unit values are computed to be 71% higher than in China, for the same productsshipped to the same markets within the same year (2007). Detailed analysis highlightsthat while China has made rapid progress in the bottom segments of markets, the EUis mostly present in the upper segments of markets. Notably, contrary to Japan andUSA, the EU also recently managed to defend and even to increase slightly its positionin the upper market segments of the standard goods (as opposed to high-tech goods).The EU appears to have resisted much better than other countries by adapting to com-petition from low-wage countries (like China) through dropping its least-sophisticatedgoods and moving up the quality ladder. The comparison between Germany andFrance further highlights the crucial importance of up-market positioning, so as toresist competitive pressures from low-wage emerging countries.While this suggests that Chinese ascendancy in the world trade market may not
necessarily hurt European producers, the importance of processing trade and the dom-inance of foreign-owned firms in managing trade in China further indicate that thelatter may in fact be getting the bulk of their revenues from Chinese exports. Thelast part of Section 2 stresses that close to 60% Chinese exports is produced by com-panies with foreign investment and that an almost similar proportion of Chineseexports incorporate imported components beforehand. The upshot for China is thatthe share of Chinese value-added ends up being pretty meager; most of the gainsare pocketed by foreign multinationals, including European firms.Section 3 of this paper broadens the field of study to discuss the economic and social
impact of China’s internationalization on Europe’s economies. The analysis covers thevarious channels through which trade with China affects the European labor market.Public discussion about the growing economic power of China is often limited toblaming Chinese exports for job losses and firm closures in developed economies.Media reports of job losses to China have led the general public to believe on thewhole that production is being relocated abroad as a result of trade competition(according to a broad definition of outsourcing) with low-wage economies such asChina. These claims of job losses to China not only miss the big picture, but are
China’s Emergence and Its Implications for Europe’s Economies 389
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also woefully misleading. The survey here of existing empirical assessments stressesthat such presumed negative effects of transferring part of production to cheaplabor countries are not supported by the available data. The existing literature empha-sizes that the adverse macroeconomic impact of competition with low-wage countrieson employment is concentrated on the least-skilled employees, and is in fact ratherlimited. All in all, the net trade balance with low-income countries is not likely to rep-resent much more than 1% of national industrial employment, and so accounts for20% at most of industrial losses observed over the period in Europe. The two mainsources of manufacturing decline in Europe are domestic outsourcing of some indus-trial activities into the service sector, and the structural change in the distribution ofdemand between sectors (in relation to productivity gains in economy). A review ofthe literature underlines the possibility that the emergence of low-wage countriessuch as China may in fact be an opportunity for European firms, since by producingin such countries, they manage, among other things, to reduce their production costsand to increase their productivity. Firm-level empirical studies emphasize that theeffects of investing abroad on the parent firm’s activity (employment and productivity)are very often found to be positive. In parallel, the availability of cheap imported pro-ducts from China may benefit final consumers, especially the poorest. All in all, out-sourcing should be viewed as a potential opportunity for Europe’s production andexport performance rather than as an inescapable threat.
2. The Effect of Competition with China in Export Markets on the EU’s EconomicPerformance
2.1. The Extent of Direct Competition Between the EU and China
As shown in Figure 1, the tremendous rise in emerging countries’ world export share,rising from 11% to 29% in the years 1990–2013, is mainly driven by the increase in
Figure 1. Share of world exports for selected countries between 1980 and 2013. Source: Chelem,http://chelem.bvdep.com/
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China’s world export share from 2% to 12%.1 This 10 percentage point (p.p.) increasein China’s world share is paralleled by a reduction in the EU-15 world export share ofan even greater magnitude (down from 44% to 29%).Although it is tempting to associate these concomitant and inverse trajectories with
the specters of economic decline haunting Europe, several elements need to beaccounted for to properly assess the extent of direct competition between the EUand China.A first element to recall is the rule of comparative advantage. The extent to which
countries specialize in different sets of goods has important implications for workers.Fears of a “race to the bottom” are especially legitimate if Chinese and Europeanfirms produce and export the same mix of goods. In this case, reductions in theworld price of goods driven by trade liberalization and Chinese growth shouldreduce European wages.By contrast, if China and the EU are not positioned in the same market segment
and hence do not compete directly, then the wages of European workers are deter-mined by goods that China does not produce. In parallel, the decline in the pricesof goods produced in China that European workers import increases the amount ofincome they can devote to other goods and services, thus raising their purchasingpower (Schott, 2008).Several studies that investigate the respective specialization of China and the EU
countries tend to lend support to the fears of a “race to the bottom”. Rodrik (2006)notes that China is an outlier regarding the overall sophistication of its exports.According to the sophistication index of Hausmann et al. (2007), which estimatesthe average “income level of a country’s exports”, China’s export bundle is similarto that of a country with a level of income per capita three times larger thanChina’s. Using an alternative indicator, Schott (2008) also finds that China’s exportbundle is increasingly overlapping with that of the world’s most-developed economies,and that this overlap cannot be entirely explained by factor endowments (see also Fon-tagné et al., 2008).Chinese exports cover nearly the whole spectrum of products classified by inter-
national statistical measures. Based on the harmonized system (HS) 6-digit productnomenclature taken from BACI, Table 1 reports that out of the 5017 products
Table 1. Overlapping exports between the EU and China (for selected years)
1990 1998 2000 2007 2013
Number of products exportedEU-15 5015 5012 5006 4953 4804France 4939 4993 4967 4863 4894Germany 5004 5000 4990 4891 4680China 4393 4920 4927 4906 4750Overlap of Chinese exportsWith EU-15 87.6% 98.1% 98.4% 98.8% 98.4%With France 86.9% 98.0% 99.2% 97.9% 97.4%With Germany 87.4% 98.0% 98.3% 97.8% 96.2%
Source: BACI nomenclature HS 1992 (see footnote 2).
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traded internationally in 1990, 4434 were exported by China, compared to 5014 for theEU-15.2
The proportion of products for which both the EU-15 and China are exporters was87.6% in 1990. This ratio rose to 98.4% in 2000 and remains at this level in 2013,mainly due to the 8% increase in the number of products exported by China overthe period (up from 4393 to 4750).Surprisingly, the share of all possible products traded inside the EU-15 (intra-EU-
15) in 1990–2013 has only slightly declined from 99.9% to 94.9%, even as the numberof Chinese products exported to the EU-15 has almost doubled (up from 2562 in 1990to 4344 in 2013), while the share of products imported by EU-15 from China jumpedfrom 51% to 95%. It is therefore puzzling to see that EU products do not appear tohave been pushed out of consumer markets, despite fierce competition from Chineseproducts.
2.2. Quality Matters
The explanation put forward in Schott’s seminal paper (2008) for US imports and con-firmed by Fontagné et al. (2008) for the increasing coexistence of Chinese productswith those from much more developed economies (such as the EU) in exportmarkets is based on vertical differentiation. Although China exports the same pro-ducts as the richer countries of the EU according to the statistical categories, it doesnot ship the same varieties of these products. Analysis of export price variationsacross countries and products using the BACI dataset reveals that manufacturingexports from China sell at a substantial discount compared to the exports of high-wage developed countries.3 The work here follows Fontagné et al. (2008) and com-putes the relative unit values at the product level between the EU-15 and China. Itis calculated as the weighted geometric median of the relative unit values ratio ofthe EU-15 over China across common HS6 positions and geographical destinationsof exports (weights are the simple averages of the shares of the export flow in thetotal exports of the EU-15 and China).4 Overall, the median of the distribution ofEU-15 prices relative to Chinese prices was 1.71 in 2007, meaning that Europeanprices were 71% higher than Chinese ones that year. The premium rises to 100% forFrench products and 117% for German products. This EU-15 premium is evenlarger at 210% in the Japanese market. Since the end of the 1990s, price differencesbetween imports from the EU-15 and China have remained roughly stable, confirmingthe finding by Fontagné et al. (2008) that the outcome of a specialization in varietieswithin products is a rather stable pattern. Notable exceptions exist, such as in the caseof textile products. The average Chinese price was 63% of the EU-15 price in 1997,falling to 55% in 2007.The existence of such large price differences indicates that China and the EU-15
are not positioned in the same market segment. For consumers to carry on purchas-ing imports from both China and the EU-15, despite the price premium of EU-15products, the latter products need to possess attributes such as higher quality orsuperior features for which consumers are willing to pay more. For example,more fashionable designs, more sophisticated technology, a richer set of amenitiesor superior workmanship are added features that justify a higher price in theeyes of consumers, even in the face of stiff competition by cheaper products. In a
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word, competition is taking place at the level of quality-differentiated varieties andnot just products.The implications are considerable, especially when considering the likely social and
economic impact of Chinese growth on Europe countries. In particular, if varietiesexported by China and Europe are different enough not to be in direct competition,then following Schott (2008), European workers are insulated from the low wagesof Chinese workers. Overall, the less substitutable the different (low and high sophis-tication) varieties are, the weaker is the link between export prices and wages, and themore one should be wary of drawing dismal predictions such as the inexorable declineof EU industrial basis following the ascendancy of China.Analyses performed at a highly disaggregated product level in fact indicate that the
EU has coped pretty well with the reinforced competition from emerging economies,such as China. Cheptea et al. (2010), who provide the most recent account of how theEU fared in the ongoing redistribution of world market shares, suggest that the Euro-pean countries in fact performed better than the USA and Japan, thanks to areinforced position on upper market segments.Table 2 reproduces results from Cheptea et al. (2010) and shows that the market
share of European countries (whether looking at the EU-25 or the EU-15) has onlybeen slightly affected by the rise of China.For 1994–2007, China’s world export market share rose by 10 p.p., making China
the first world exporter overtaking the USA. It is notable that during the 2000s,when Chinese competitive pressure intensified, European countries slightly reinforcedtheir world presence (plus 1 p.p.), while Japan and the USA lost, respectively, 3 p.p.and 6 p.p. of market shares.The comparison of the performance between Germany, France and the UK high-
lights the heterogeneity among EU countries: many of the gains recorded by the
Table 2. Changes in world export market shares, 1994–2007
Exporter
World market shares(%) Δ in world market shares (p.p.)
1994 2000 20071994–2007
1994–2000
2000–2007
EU-25 (excluding intra-EUtrade)
19.7 18.1 19.3 −0.34 −1.58 1.23
EU-15 (excluding intra-EUtrade)
19.1 17.5 18.0 −1.06 −1.62 0.56
Germany 5.50 4.67 5.52 0.02 −0.82 0.85France 2.77 2.41 2.29 −0.49 −0.36 −0.12UK 2.85 2.57 1.95 −0.89 −0.28 −0.61USA 18.5 18.3 12.5 −5.97 −0.23 −5.74Japan 14.8 11.7 8.6 −6.23 −3.12 −3.11China 5.8 8.0 16.1 10.26 2.17 8.09India 1.0 1.1 1.7 0.61 0.09 0.51Brazil 1.5 1.3 1.6 0.10 −0.27 0.37
Note: The change in market shares is given in percentage points (p.p.).Source: Cheptea et al. (2010).
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EU-25 during the second sub-period (69%) were due to Germany’s excellentperformance.Also, changes in market shares vary considerably across sectors and across product
qualities. Table 3 reproduces computations from Cheptea et al. (2010) on the evolutionof world export market shares, differentiated by level of technology and quality.5 Threemarket segments are identified (up-market, mid-market and low-market), based on therelative unit value ratios.Two striking findings emerge from Table 3. First, the 21.2% share in high-tech pro-
ducts in 2007 (in parallel to a much smaller share in the up-market segment reportedby China), confirms the perceived specialization of China in low-quality varieties ofrather technological products (such as in electronics). China is predominantlypresent in the middle and the bottom segments of the market, and this pattern hasreinforced itself over the past 15 years.Second, the European countries stand out in their up-market positioning. The EU-
15’s market share in top-range products is twice that in the middle or low segment.While this pattern is similar to that of Japan, it differs from that of the USA whichhas the same market share in up- and mid-market products (around 13%). Moreover,the EU-15’s share in up-market products was rather stable between 1994 and 2007,contrasting with the USA and Japan which suffered from market share declines inall three market segments. It is striking to see that China stands out as the country ben-efiting most from the world reallocation of market shares but that most of its gains areconcentrated in the middle and bottom segments of the markets. The up-market sharegain by Chinese exporters is half as big (+6 p.p. to 7.6%) as in the two inferior seg-ments (+ 12 p.p. to reach 15.5% and 22.9%, respectively). When defined using 25countries, the EU has even gained market share in high-tech products (a 0.81 p.p.gain) and in the up-market range (a 0.83 p.p. gain), which has to be compared to a
Table 3. Changes in world export market shares by quality market segments, 1994–2007
Exporter
High-techproducts Up-market Mid-market Low-market
2007(%)
1994–2007(p.p.)
2007(%)
1994–2007(p.p.) 2007
1994–2007(p.p.)
2007(%)
1994–2007(p.p.)
EU-25 16.9 0.81 28.8 0.83 16.8 −1.51 16.1 0.25EU-15 15.7 −0.02 27.5 −0.16 15.6 −2.18 14.6 −0.24NewMemberStates 10
1.2 0.83 1.3 0.99 1.2 0.68 1.5 0.49
USA 13.7 −11.15 13.5 −6 13.5 −3.2 10.5 −5.39Japan 8 −12.68 9.8 −9.76 8 −10.79 8.5 −1.34China 21.2 17.79 7.6 5.94 15.5 11.37 22.9 10.67India 0.6 0.39 1 0.52 1.9 1 1.9 0.5Russia 0.4 0.14 0.9 0.59 2 0.9 1.5 0.22Brazil 0.6 0.32 0.9 0.12 2.1 −0.2 1.7 −0.19
Note: The change in market shares is given in percentages points (p.p.).Source: Cheptea et al. (2010).
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0.34 p.p. drop for all products together (column 4 of Table 2). The better performanceof the EU-25 compared to the EU-15 has been interpreted by Fontagné (2009) as thebenefit of intra-EU outsourcing or, more broadly, intra-EU manufacturing relocation(Marin, 2006).Overall, the EU performance appears satisfactory, given the pressure of the new
competitors such as China and India. To analyze better the resilience of the EUmarket shares, Cheptea et al. (2010) investigate the respective contribution of struc-tural effects (due to the sectoral and geographical positioning of the exporters) and ofa competitiveness effect. Relying on a shift-share analysis over the period 1994–2007,they identify that composition effects (due to geographic orientation and the productstructure) contribute positively to the evolution of market share for developedcountries (the USA, Japan and the EU), but negatively for China and Brazil.However, these effects are systematically overtaken by inverse competivenesseffects. They compute that the US and Japanese world export market sharesshrank over the period, while China’s rose. This suggests that intrinsic performance(beyond the composition effect) was much lower for the USA and Japan thansuggested by the simple decline in market share. The reverse is true for China, inline with very good intrinsic export performance that makes up for the adverse struc-tural effects. Interestingly, the case of the EU is intermediate. While on average theEU has suffered from a decline in intrinsic competitiveness (though to a lesser extentthan the USA and Japan), this has been compensated by a favorable sectoral orien-tation (dynamic world demand for its products, notably for technological products)which is much stronger than that for other developed countries. All in all, itappears that the greater capacity of the EU to resist the competition of big emergingtraders relative to Japan and USA is due not only to its superior relative export per-formance (the smaller deterioration), but also to a more pronounced specialization inproducts with growing import demand.In comparison to the USAwhich has the same market share in up- and mid-market
products, the EU’s relative specialization in the up-market is much stronger. In fact, itis rather similar to Japan’s. What is especially striking is the resilience of EU worldmarket shares in the upper segment of the market, contrasting with Japan or theUSA. The latter both lost ground in all product ranges between 1994 and 2007.Drops in market shares are especially important in the up-market segment: 6 p.p.and 9.76 p.p., respectively (as shown in the fourth column of Table 3). Even largermarket share reductions are reported by these two countries in high-tech products,respectively, 11 p.p. and 13 p.p. (as shown in the second column of Table 3), twiceas large as for all products. All in all, these figures highlight the fact that the EUhas better resisted the competition of big emerging traders than other developedcountries, thanks to better market positioning. Its more pronounced specializationin top-range products, for which the EU cumulates good performance and favorablestructural effects due to a buoyant world demand, has enabled the EU to withstandthe competitive pressure of China.The crucial role of strong up-market positioning in the trade resilience of an
economy is further borne out by the comparison of France and Germany in the fol-lowing sub-section.
China’s Emergence and Its Implications for Europe’s Economies 395
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2.3. A Comparison of France and Germany
Table 2 already highlighted the contrasting performance between Germany – the EU’smost successful exporter (a fifth of the EU world market share of 18% in 2007) – andFrance whose total exports value is half as high. Between 1994 and 2007, amid strongcompetitive pressures from low-wage economies like China, Germany successfullydefended its world market share (even regaining ground between 2000 and 2007),while France continuously lost global market share.Figure 2 clearly illustrates that until the end of the 1990s, France and Germany dis-
played a similar export performance. Since then, Germany has clearly outperformedFrance and the rest of the OECD. This differentiated performance cannot be due tofactors such as the evolution of the euro which both countries share. Explanationslie in the difference in quality range positioning between the two countries.France and Germany display the same specialization at the product level: the
overlap between products exported by the two countries is almost 100%. However,a first difference appears when looking at the destination markets served by the twocountries. The average probability that both France and Germany sell a given HS6product to a given country of destination in a given year is only around 70% in2007. Let us define this product–country pair as an “elementary market”, followingFontagné and Gaulier (2008). This overlap is 50% of the average export value ofthese two countries.These figures reflect first that France and Germany have different geographical
orientations for their exports. Fontagné and Gaulier (2008) suggest that Germany’sdestination countries are on average more buoyant markets. Second, France exportsto fewer elementary markets than Germany: 307,867 and 373,632, respectively, in2007. When further differentiating products exported by both France and Germanyaccording to price similarity, Germany’s comparative advantage in up-marketproduct exports stands out. The average probability that both France and Germanysell into a given elementary market at a comparable price (absolute difference ofunit value below 25%) is only 18% in 2007. Hence, the two countries’ products in a
Figure 2. Share of the world export market (1995 = 100). Source: Chelem, http://chelem.bvdep.com/
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similar price/quality range only compete directly in one out of five elementary markets.The price differential is most often in favor of German products. This upper position-ing has clearly contributed to the better resistance of Germany’s exports to the com-petitive pressure of a country like China.
Figure 3. Comparison of France and Germany for exports overlapping with China’s:distribution depending on the price range (number of elementary markets). Source: Author’s
computation based on BACI (see footnote 2).
Figure 4. A comparison of France and Germany for exports overlapping with China’s:distribution depending on price range (value in $ million). Source: Author’s computation based
on BACI (see footnote 2).
China’s Emergence and Its Implications for Europe’s Economies 397
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Figures 3 and 4 concentrate on the elementary markets (product and destinationcountry pairs) for which Germany and France are competing with China. Thenumber of elementary markets for which this occurs is, respectively, 268,540 and224,199 for Germany and France. Three types of competition with China can bedefined depending on the relative price positioning of EU goods. We refer to compe-tition as low, high or similar, depending on whether the price applied by the Europeancountry is lower than 75% of the Chinese price, higher than 125% of the Chinese priceor between those two bounds (between 75% and 125% of the Chinese price). Figure 3indicates that Germany had an upper positioning compared to China in more than23% of elementary markets compared to France in 2007 (up from 11% more in1990). Figure 4 indicates that these markets generated export sales of $446 millionfor Germany, compared to $170 million for France.More notably, the export sales of high price range products increased 25-fold
between 1990 and 2007 for Germany compared to a 12-fold rise for France. Thus,in 2007, they accounted for 42% of German export sales and 39% of French salesinto elementary markets where they compete with China.By contrast, the export value shares for low-price range products were 22% and 29%
for Germany and France, respectively, in 2007. All in all, we can conclude thatGermany benefits from a better positioning than France in the upper range of theexport spectrum which tends to reinforce itself over the period. This observation isin line with computations by Fontagné and Gaulier (2008). They find that on thehigh-tech segment, Germany was able to raise its world market share (from 8% to8.2%) between 1995 and 2005, which contrasts with a sharp decline for that ofFrance (down from 6.6% to 4.9%). They stress the capacity of Germany in buildingsome impregnable market positions, while France’s market shares are much morefragile. This contrasting situation appears in part to derive from the better geographi-cal positioning of German exports (German goods being exported into relatively moredynamic consumer markets than French goods).Most importantly, Germany’s success in up-market product exports rests on two
complementary factors. First, it reflects the much better perception of German pro-ducts worldwide in “non-price” qualities such as technological innovation andquality, compared to French products. The second key factor is outsourcing, mostnotably of cheap intermediate component parts from the new EU member countries(Fontagné, 2009). Curran and Zignago (2009) emphasize that the increased inte-gration of Germany’s industrial structure on an extended European basis and thereshaping of production processes to promote repositioning in up-market varietieshave been key to preserving competitiveness.
2.4. Chinese Exports Are Not So Chinese
The discussion so far has stressed the capacity of European countries to mitigate thecompetitive pressures, thanks to a differentiated (upper range) positioning of theirgoods produced at low cost, thanks to outsourcing. Another factor that downplaysthe traditional dismal vision of the “sucking sound” of jobs heading to Chinarelates to the true nature of what China exports. An important proportion of whatis exported from China is imported beforehand. Very often, this processing-tradeactivity is handled by non-Chinese firms.6 Close to 60% of Chinese exports are
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produced by foreign investment enterprises (FIEs). The share of Chinese value-addedin the operation ends up being pretty meager.The important role of foreign firms in China’s production and exports results from
the deliberate proactive policies by national and local authorities concerning FDI.China decided to accept foreign investment in 1978, and broke sharply its communistorthodoxy by establishing special economic zones in 1979 and 1980. Nationwide, theimpact of FDI was moderate until the early 1990s.As Figure 5 shows, beginning in 1992–1993, the stream of incoming FDI turned
into a flood. China moved from restrictive to permissive policies in the early 1980s,then to policies encouraging FDI in general in the mid-1980s, and on to policiesencouraging more high-tech and more capital-intensive FDI projects in the mid-1990s (Fung et al., 2004). Favorable regulations and provisions were used to encourageFDI inflows, especially export-oriented joint ventures and those employing advancedtechnology in the hope of achieving positive externalities for the economy. Foreignfirms were provided with preferential tax treatment, the freedom to import inputssuch as materials and equipment, the right to retain and convert foreign exchangewith each other, and simpler licensing procedures. Authorities also attempted to guar-antee a favorable environment for foreign businesses, sheltering them from externalbureaucratic interference and granting privileged access to supplies of water, electricityand transportation (paying the same price as state-owned enterprises), as well as inter-est-free loans.From the mid-1990s, government policies began to focus more on linking FDI pro-
motion to domestic industrial objectives such as the sectoral and geographical allo-cation. The process of examination and approval of FDI projects classified theminto four categories: Encouraged, permitted, restricted and prohibited. Favorabletax policies and selective financial support were designed so as to give priority to pro-jects encouraged in agriculture, energy, transportation, telecommunications, basic raw
Figure 5. FDI inflows to China: 1983–2013. Source: MOFCOM.
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materials and high-technology industries. By contrast, restrictions were placed on pro-jects in low-technology sectors, in those where production exceeded domestic demand;and those under State monopoly typically in valuable mineral resources. As far as thegeographical distribution of FDI is concerned, projects in central and northwesternregions were vigorously encouraged.As a result of China’s oriented promotion of FDI in accordance with domestic
industrial objectives, FDI in China has some distinctive characteristics (Naughton,2007). An unusually large proportion of Chinese FDI inflows is in manufacturingindustry, as opposed to services or mining. Another feature is the predominance ofother East Asian economies, especially Hong Kong, Taiwan and Macao as sourcesof FDI. This reflects the dominant role played by the cross-border restructuring ofexport-oriented production networks that originally developed in other neighboringEast Asian economies. As reported in Table 4, Asia accounts for two-thirds of incom-ing FDI to China. Hong Kong is indisputably the biggest investor in China, account-ing for 42% of the cumulative total since 1985.7 European countries are marginalinvestors as they accounted for only 6% of the total incoming flows in 2013 (downfrom 12% in 2000). Germany stands out as it accounts for 1.8% of the yearly FDIinflows into China, well above the other leading European economies (the UK,France or Netherlands).FDI has been at the core of China’s foreign trade expansion. It has furthermore
been a decisive factor in China’s involvement in the international segmentation ofthe production processes. The OECD (2000) has emphasized the role of FIEs in themodernization of China’s industrial structure, the diversification of labor-intensive
Table 4. Geographical breakdown of FDI inflows to China ($ millions and percentage)
1995 2000 2005 2009 2013
Total 37,806 40,715 60,325 90,033 117,586Asia 82% 63% 59% 67% 81%
Of which Hong Kong 53% 38% 30% 51% 62%Macao 0.9% 1.0% 0.9% 0.5% 0.4%Taiwan 5.6% 3.6% 2.1% 2.5% 1.8%Japan 7.2% 10.8% 4.6% 6.6% 6.0%South Korea 3.7% 8.6% 3.0% 2.7% 2.6%
Africa 0.7% 1.8% 1.5% 1.2% 1.2%Europe 11.7% 9.4% 6.1% 5.6% 5.9%
Of which UK 2.9% 1.6% 0.8% 0.4% 0.3%Germany 2.6% 2.5% 1.4% 1.3% 1.8%France 2.1% 1.0% 0.7% 0.6% 0.6%Italy 0.5% 0.5% 0.4% 0.2% 0.3%Netherlands 1.9% 1.7% 0.8% 1.0% 1.1%
Latin America 11.3% 18.7% 16.3% 9.1% 7.0%Of which Cayman Islands 1.5% 3.2% 2.9% 1.8% 1.4%Virgin Islands 9.4% 15.0% 12.5% 7.0% 5.2%
North America 11.8% 6.2% 4.1% 3.4% 3.5%Of which USA 10.8% 5.1% 2.8% 2.3% 2.4%
Oceania 1.7% 3.3% 2.8% 2.0% 2.0%
Source: China Statistical Yearbooks.
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products exports and the strengthening of China’s competitive position in rapidlyexpanding markets.An important specificity of FIEs is that while investment in Chinese firms is mostly
devoted to the expansion of production capacities, FDI incorporates much moreequipment and technology knowledge. This is consistent with findings of greater allo-cative and technical efficiency in labor utilization in production in FDI firms com-pared to domestic firms. FIEs have improved the overall efficiency with whichresources are used. Their efficiency can be judged from the level of their overall pro-ductivity, which was over 90% greater than that of directly controlled state companies(OECD, 2005). An important difference in industrial structure between FIEs anddomestic firms is that FIEs are relatively more concentrated in the newly developingand fast-growing industries such as electronics and telecommunications equipment.By contrast, domestic firms are concentrated more in conventional, basic, capital-intensive and large-scale industries.FDI is a key factor behind the sophistication of Chinese exports. As already pre-
sented above, China’s emergence is impressive not only because of the very rapidgrowth in GDP (over 10% per year since the mid-1980s) and in trade, but alsobecause of the presence of China’s goods over the entire range of manufacturing pro-ducts, including those traditionally exported by much richer countries. This capacityof obtaining an export bundle similar to that of a country with an income percapita level three times higher has fueled claims that “there is something specialabout Chinese exports” (Rodrik, 2006; Schott, 2008).A number of researchers have, however, questioned this claim and argued that
China’s intrinsic capacity to produce sophisticated goods is overestimated. The impor-tance of processing trade in China’s export sector is one reason for the overvaluation ofChinese exports’ sophistication, as many of the high-technology goods exported byChina are produced using labor-intensive processes and imported inputs. The sophis-tication of these exports thus includes the technology embedded in the importedinputs, and not necessarily any greater degree of complexity or technology in theChina’s final assembly processes. Moreover, a considerable share of high-technologyexports comes from partially or wholly foreign-owned firms (mainly operating inthe assembly-trade sector): this raises the question of whether the observed upgradingof Chinese exports reflects the genuine adoption of technology at the local level(Lemoine & Ünal-Kesenci, 2004; Amiti & Freund, 2010; Wang & Wei, 2010; Lardy,2005). These concerns are backed up by statistics on Chinese trade. In 2007, 54% ofChinese exports were in the processing-trade sector; the analogous figure was 85%for high-technology exports. Processing-trade activities are also dominated byforeign entities: in 2007, 82% of processing-trade exports, and 91% of high-tech pro-cessing-trade exports came from foreign firms.When considering the evolution of the share of high-tech products in Chinese
exports, distinguishing between domestic and foreign firms, the recent upgrading ofChina’s exports appears confined to foreign entities (which typically operate in proces-sing trade). As shown in Figure 6, the share of high-tech products for domestic firms’exports increased by a mere 7 p.p. (from 8.5% to 15.4%), while that for foreign firmsnearly doubled (from 26.1% to 48.5%) between 1997 and 2012. Jarreau and Poncet(forthcoming) show that the typical growth gains associated with the rise in exportsophistication have been limited in China to the ordinary export activities undertaken
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by domestic firms: no direct gains result from either processing-trade activities orforeign firms, even though these are the main contributors to the global upgradingof China’s exports.Koopmans et al. (2008) develop a general formula for computing the domestic and
foreign components of processing-trade exports, and calculate that the foreign share ofvalue-added in China’s exports is around 50%, which is far higher than in most othercountries. This share has been more or less constant over the past few years, althoughthe migration of the electronics components industry to China led most observers toexpect that the value-added in China’s export sector would rise over time. The foreigncontent is in fact higher in more sophisticated sectors, such as electronic devices andtelecommunications equipment (about 80%). Yao (2009) argues that once China’s pro-cessing-trade regime is taken into account, Chinese exports are no longer very differ-ent from those in other countries with similar levels of development, a point also madeby Van Assche and Gangnes (2010).A good illustration of the argument that Chinese exports are not so Chinese, which
is put forward in this section, is given by the famous example of the “made in China”computer mice produced in Suzhou (a city 100 km from Shanghai) by Logitech Inter-national SA, a Swiss–American company. As reported by The Wall Street Journal in2004, of the final selling price of $40, Logitech takes about $8, while distributors andretailers take $15. After accounting for a further $14 that goes to foreign supplierswhich provide parts for the WANDA mouse, local revenues from each mouse arelimited to $3, which cover wages, power, transport and other overhead costs. In thecase of “made in China” products reaching final consumers in Europe, the situationis no doubt the same. In short, when China exports, foreigners get the bulk of themoney, especially in the case of sophisticated goods.So far, the analysis has argued that the China’s emergence in the world market might
not doom European exporters to inevitable decline, as they are not competing head-onwithin industries. However, EU export producers will owe their salvation only to theircapacity to move up the quality ladder. High-tech products are indeed the last bastion
Figure 6. The evolution of the share of high-tech products in Chinese exports (1997–2012).Source: Author’s computation based on Chinese customs data.
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as they are the least exposed to Chinese exports. The success story of Germany high-lights the role of focusing on the upper quality range activities, thanks to the develop-ment of trade in intermediate products from low-price sources such as the new EUMember States or indeed China. This evolution can but have labor marketrepercussions.The next section of this article therefore turns to the social and economic conse-
quences of outsourcing. It first assesses the reality of the perceived inevitable loss ofindustrial jobs to China and other low-wage countries, as a result of world trade com-petition. Then it looks at additional benefits that competition from low-wage countriesmay bring.
3. The Social and Economic Consequences of Outsourcing to Low-wage Countries
This section adopts a rather broad definition of outsourcing. A typical firm faces fourdifferent options in its decision concerning: (1) to “make” or “buy”, and (2) to do so“at home” or “abroad”. The four different cases are: (1) an integrated process (make athome); (2) traditional sub-contracting (buy at home); (3) offshoring (make abroad)and (4) outsourcing (buy abroad). As explained by Fontagné (2009), this taxonomyhardly addresses the complex reality of outsourcing, such as when a plant is shiftedabroad to a low-cost country, so that offshoring is also outsourcing. Hence, strictlyspeaking, outsourcing can also be defined as the relocation of a factory abroad (firstclosing factory at home, then opening abroad) from where it produces to sell locally(displacing previous domestic exports) or to export back to the home country(imports). Nevertheless, in a less strict sense, it can correspond to any decision tolocate part of the production process abroad, in low-wage countries and in an evenlooser way to the mere importing from low-wage countries. As we shall see, outsour-cing in the strict sense does not have a major impact on European economies. In con-trast, there is no doubt that competition from producers of low-wage countries such asChina has a negative effect on employment in certain sectors of the European industry.This section of the article intends not only to provide a quantification of the impact ofoffshoring/relocation in its strict sense, but also discusses the broader economic impactof trade with emerging countries.Competition with low-wage countries such as China is typically viewed with
extreme pessimism by civil society in the developed world, because of the believedinexorable relocation of production to China and its association with employmentdestruction in the traditional industrialized countries. By contrast, economists areless alarming: they argue that while costs matter, other determinants of locationsuch as the market access, the quality and presence of complementary factors (infra-structure, institutions, labor force, etc.) have taken the upper hand. As an illustration,an increasing number of Chinese firms invest in European countries (Fontagné & Py,2010). Various factors such as the presence of sunk costs and the difficulty of mana-ging arm’s length production overseas seem to explain why outsourcing is in fact alimited phenomenon. Indeed, it is also argued that outsourcing is beneficial to EUfirms with minor repercussions on the labor market. As identified in the comparisonof Germany and France set out above, outsourcing may in fact help firms to keepactivity at home. The existing literature reviewed here suggests that outsourcing
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actually has a limited impact on domestic employment in developed economies, incontrast to the usual fears raised.
3.1. Measures of the Employment Impact of Trade with Low-wage Countries
Existing evaluations of the employment destruction effect of outsourcing operationsadopt different empirical strategies and different delimitations of the phenomenonstudied. Fontagné and Lorenzi (2005) provide a rather extensive survey of this litera-ture, recently updated in Fontagné and Toubal (2010).A pretty direct approach of relocation activities (offshoring) is proposed by the
EuropeanMonitoring Center on Change which has tracked the extent of restructuringactivities in Europe since 2002.8 The European restructuring monitor report (2007)concludes that the scale of offshoring is smaller than might be expected, and thatthere is no sign of an upward trend, let alone a major expansion in the number ofcases. The report claims that between 2003 and 2006, a rather small proportion (amaximum of 10% of cases and 8% of employment cuts) was due to plant relocation:this is based on an examination of almost 3500 cases of restructuring involving jobslosses in the EU Member States. Total job cuts are estimated to have been close to2.5 million. Subsequently, during the recession of 2008–2009, this proportion isfound to have declined to 3% of the job losses announced (ERM Report, 2007).The other reasons invoked are internal reorganization, plant closures and mergers.These calculations may underestimate the employment losses for two reasons. First,they are based on surveys restricted to sites of at least 250 workers which experiencedgross creations or destructions of at least 100 jobs. Second, they do not identifywhether internal restructuring, bankruptcies or mergers (and therefore related joblosses) are in fact due to increased international competition, especially that fromlow-wage countries.Two studies in the French context (Aubert & Sillard, 2005; Barlet et al., 2007) in
part solve these latter problems as they focus on “presumptions of relocation”: thatis, cases when a firm closes a facility in France or significantly reduces the numberof its employees over a short period of time (a decline in employment of at least25% over three years) and simultaneously increases its foreign imports of the same cat-egory of goods that was previously produced in the French facility. This approach hasthe merit of identifying cases of replacement of domestic production by either pro-duction in a foreign subsidiary or sub-contracting abroad. Estimates are of 13,000job losses per year between 1995 and 1999, of which 5000 went to low-wage countries.These figures are pretty low, especially when compared with the average one million ofyearly gross job destructions measured in France and the average yearly 70,000 indus-trial employment decline over the 1980–2000 period.9
When looking at the recent evolution, two trends emerge. First, the number of jobsoffshored increased slightly to 15,000 per year between 2000 and 2003. Second, theproportion of jobs outsourced to emerging markets rose sharply from 37% to 57%(to reach 8550 job losses yearly between 2000 and 2003). China is driving thispattern as jobs outsourced to it represent 48% of the jobs outsourced to low-wagecountries between 2000 and 2003, up from 30% between 2000 and 2003. In anycase, the number of jobs outsourced to China despite its increase from 1459 per
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year between 1995 and 1999 to 4114 between 2000 and 2003 points to a rather limitedphenomenon.
3.2. Preliminary Concepts: Causes for Variations in Manufacturing Employment
Before reviewing estimations of the impact of outsourcing in the broad sense of theword on the labor market, it is worth clarifying why manufacturing employmentvaries. As already noted in the introduction, most-developed countries have witnesseda secular decline in manufacturing employment and in the contribution of manufac-turing sector to GDP. While total employment in the EU-15 increased by 21%between 1980 and 2007, manufacturing employment declined by 28% (EUKLEMS, 2009). Although the European economy created 31 million jobs duringthis period, the industrial sector has lost 11 million jobs (a majority of which (8.5million) disappeared between 1980 and 2000). Without exception, all major industrialsectors lost jobs, especially the traditional sectors. The largest losses were recorded inthe textile and leather sector which lost two-thirds of its jobs (down 3.5 million)between 1980 and 2007. The second largest absolute decline occurred in the basicmetals and fabricated metals industries (down 1.3 million).Changes in manufacturing employment can be attributed to three main sources: (1)
the process of domestic outsourcing of some industrial activities into the service sector;(2) the structural change in the distribution of demand between sectors (linked to pro-ductivity gains in the economy) and lastly (3) the international competition on whichthis paper focuses. The first phenomenon (domestic outsourcing toward services) cor-responds to the ongoing “outsourcing” of a significant portion of the cleaning, logis-tics, accounting and so on, that were previously performed by in-house staff inindustrial firms to companies specializing in such services. Because of the domesticoutsourcing of these activities, many jobs have switched from being classified as“industrial” to being classified as “service” sector jobs, thereby causing an artificialdecrease in the share of industry in total employment. According to recent evaluationsbased on French data (Demmou, 2010), these job transfers may be estimated at 25% ofindustrial job losses between 1980 and 2007. Hence, the “real” losses of manufacturingsectors over the period have probably been less than 75% of the apparent losses. In theFrench context, they would amount to 1.5 million jobs between 1980 and 2007, and inthe EU-15 to 8.5 million jobs.The second cause of changes in industrial employment refers to the changing struc-
ture of demand induced by productivity gains.10 The average contribution of totalfactor productivity to value-added growth in manufacturing in the EU-15 is measuredat 1.66 p.p. between 1980 and 2007 (EU KLEMS, 2009). It is three times higher thanthe average contribution for the economy as a whole (0.64 p.p.) and four times that forservices (0.4 p.p.). As emphasized by Demmou (2010), a declining share of employ-ment in industry is explained by the relationship between gains in productivity inthis sector (and more generally in the economy) and the demand behavior of agents.Indeed, for industrial employment to remain constant, two conditions are necessary:(i) the overall gains in productivity in the economy must be accompanied by an equiv-alent growth in demand addressed to all sectors and (ii) any higher productivity growthin manufacturing must be accompanied by an equivalent additional growth in demandfor this sector. In case the demand for manufacturing goods does not meet both
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conditions, productivity gains will inexorably result in an excess supply of manufactur-ing goods that will lead producers to reduce production and hence lay off workers,thereby inducing a decrease in the weight of industry in total employment.Theoretically, technological change affects the structure of demand (and hence
employment) through two main channels: an income effect (associated with overallproductivity gains in the economy) and a substitution effect (associated with differen-tial productivity gains between manufacturing and non-manufacturing sectors). Thelatter (income) effect refers to the non-uniform change in the agents’ composition oftheir consumption basket as their real income evolves. In line with the well-knownEngel’s law, empirical estimates find that income elasticities of demand for industrialgoods – as for food previously – decline with income above a certain level and are typi-cally less than unity in developed countries (Boulhol & Fontagné, 2006). Hence, inEurope, the volume of demand addressed to the industrial sector tends to grow lessrapidly than productivity gains (or equivalently the increase in income) in theeconomy. As a consequence, the labor requirements of manufacturing have declinedover time, as illustrated in the model presented in Appendix A.The substitution effect could in theory compensate for this evolution. This effect
reflects the fact that the higher productivity gains in manufacturing (compared tothe rest of the economy) depress the relative prices of manufactured goods andhence stimulates demand for them. The magnitude of the effect depends on the sensi-tivity of demand to changes in relative prices. When the elasticity of substitutionbetween manufacturing goods and services is unitary, the relative demand for indus-trial goods (in volume) grows at a rate equivalent to the price decline. If the declinein relative prices is equal to the differential in productivity gains, the lower laborrequirements induced by productivity gains are just offset by higher labor needsresulting from higher demand. However, when the elasticity of substitution is lowerthan unity, the labor requirements decrease as illustrated in a model described inAppendix B.According to Rowthorn and Ramaswamy (1999), as well as to Boulhol and Fon-
tagné (2006), the price elasticities of demand for industrial goods are less thanunity. This implies that the decline in relative industrial prices induces a less-than-pro-portional increase in the volume of industrial demand which does not make up for thedrop induced by the income effect. The evolution of manufacturing demand (driven bythe negative income effect and the positive substitution effect) is generally insufficientto compensate for lower labor requirements associated with productivity gains in themanufacturing sector. In the French context, the shift in the structure of demand awayfrom manufacturing goods is estimated to explain nearly 30% of industrial job lossesbetween 1980 and 2007, and even 65% in the last decade (2000–2007; Demmou, 2010).It now appears clearly that the third source of variation of industrial employment
(i.e. international competition) cannot be accused of being the sole driver of deindus-trialization in Europe as the two sources discussed above are found to explain, respect-ively, at least 25% and 30% of the phenomenon. Moreover, the impact of internationalcompetition should be decomposed into that coming from high-income countries andlow-wage countries such as China, respectively. A simple look at the world distributionof imports by the EU-15 casts doubt on the possibility that low-cost imports from low-wage countries play a major role in the decline in European manufacturing employ-ment. As displayed in Figure 7, EU-15 countries source a high and stable share of
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their imports from within the EU. Over the 1980–2012 period, intra-EU-15 trans-actions account for around 60% of the total value. Moreover, the share of the remain-ing 13 countries of the EU-28 almost tripled between 1980 and 2012, to reach 7% oftotal EU-15 imports.Extra-EU-15 trade is dominated by developed countries which have accounted for a
fairly constant share of 15% of imports over the period. Imports from emergingcountries, despite a very rapid rise over the period (from 5% to 17% of total EU-15imports), still represent a rather limited source of competition.11 Imports fromChina (together with Hong Kong) were virtually inexistent in 1980, but accountedfor 6% of total EU-15 imports in 2013.Similar indications that the contribution of outsourcing to low-wage countries may
be limited are provided by the geographical allocation of outward FDI by the EU-15countries. OECD countries attracted around 90% of FDI coming from Germany orFrance in 2008 (OECD stats). This figure had virtually not changed since 2000.China accounted for, respectively, less than 1% and 2% of French and Germanoutward FDI stocks, in 2008. Similar figures are obtained when looking at FDIflows. Direct estimates of the number of employees abroad in the foreign affiliatesof European firms further confirm that the pattern of the simple relocation of Euro-pean jobs to low-wage countries is rather limited. According to OECD data previouslycited, German multinationals employed 2.3 million workers abroad in 2008. Two-thirds were in OECD countries and more precisely in other European countries (theEU-27 for close to 45%). These shares remained fairly constant after 1985. Theshare of non-OECD Asia doubled over the period (1985–2008) from 7% to 14%.China appears to be the main destination of this Asian outward activity, as its shareof German affiliates’ total employment abroad rose from 3% to 9%. Even so, Chinahosted only 200,000 employees in 2007–2009. This compares to the 3 million manu-facturing jobs lost in Germany between 1990 and 2007 (EU KLEMS, 2009).
Figure 7. Share of EU-15 imports for selected countries between 1980 and 2013. Source:Chelem, http://chelem.bvdep.com/
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Admittedly, these statistics provide only an imperfect picture of the total impact ofChina’s emergence on the EU labor market, as they focus on offshoring activities (i.e.manufacturing abroad), and do not cover the extent to which European firms out-source (buying abroad) instead of locally. Our review now turns to macroeconomicanalyses which look at that phenomenon in detail, before reviewing evidence of theimpact of FDI based on firm-level information.
3.3. Macroeconomic Analyses of the Impact on Employment of International TradeCompetition with Low-cost Countries
Three methods have mainly been used to evaluate the loss of industrial jobs due toincreased trade with emerging countries: labor content measures of internationaltrade, computable general equilibrium models and econometric approaches. Whilenone of these methods is entirely satisfactory, they generally give similar magnitudes:between 10% and 20% of the industrial job losses in developed countries have occurredas a consequence of trade growth with emerging countries.The labor content approach is by far the most widely used method for measuring the
effects of international trade on employment. The intuition is that exports – and theinputs they need – represent additional production for the domestic economy, andtherefore create jobs, while imports replace domestic production, and thereforedestroy jobs. Evaluations quantify the number of European jobs “lost” to low-wagecountries as those that would be created if imported goods were made at home.This produces a “stock” measure, far from the idea of relocation which is thoughtof as a “flow” of jobs abroad. The calculation consists simply of applying anaverage coefficient, the employment content of one unit of domestic production inthe sector concerned (taken from the input–output table of national accounts), totrade flows.Given the limited weight of emerging countries’ in the trade of European countries,
this method leads to a rather imperfect estimation of the net impact on the labormarket. Demmou (2010) calculates that international trade explains around 13% ofindustrial job losses observed in France between 1980 and 2007. These estimates arein line with those computed by Kucera and Milberg (2003) for a period runningfrom the late 1970s to the mid-1990s, for six EU countries (Denmark, France,Germany, Italy, the Netherlands and the UK) and Australia, Japan, Canada andthe USA. They conclude that manufacturing employment at the end of the periodwould have been higher by 3.5 million in the absence of changes in trade with low-income countries trade, so that manufacturing employment as a percentage of totalemployment would have declined by only 4.1 p.p. Expansion in trade with the non-OECD is therefore estimated to account for 21.5% of measured deindustrializationover the period.Labor content measures of trade have been criticized notably because they assume
that domestically produced goods are perfect substitutes for foreign imported pro-ducts. Moreover, the calculation is made in terms of partial equilibrium, implicitlybased on the reconstitution of economic autarky, making use of extreme simplifica-tions: among other things, the abolition of trade flows is assumed to leave thenature of goods, prices, wages, productivity, income and consumption, and so onunchanged. It is, however, likely that producing goods in Europe instead of China
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would result in higher sales prices (because of higher labor costs in Europe), which inturn will reduce the demand for these goods. In this context, the estimates of job lossesignoring this effect would be biased upwards. Some other arguments also suggest a sys-tematic overestimation of labor content measures. Notably, job gains directly relatedto the process of importing goods into Europe such as in cargo handling, transport,warehousing, along with wholesale and retail sales are ignored. Also, no account istaken of the job effects of the domestic financial services (banking, insurance andinvestment services) that handle the capital account flows. By contrast, laborcontent measures ignore possible negative repercussions of trade with low-incomecountries on productivity, wages, labor supply and demand or FDI at home.General equilibrium approaches attempt to take into account these repercussions to
some extent (Cortes & Jean, 1998). They most notably allow for an influence of tradeintensity on labor skills and productivity which suggests that increased import pen-etration from developing countries results in a rise in the proportion of skilled laborin the workforce. The incorporation of these effects does not, however, induce a signifi-cant reevaluation of the impacts, but stresses that the losses may weigh more deeply onthe least-skilled employees.Econometric evaluations obtain results very much in line with those of the other two
types of approaches. Following the reference paper (Rowthorn & Ramaswamy, 1999),this strand of literature attempts to isolate the contribution of North–South trade tothe decline in the manufacturing employment. Empirical estimations relate theshare of manufacturing in total employment to various outsourcing-related explana-tory variables such as the manufacturing trade balance, and firms’ degree of externa-lization after income per capita and investment rates are controlled for. Rowthorn andRamaswamy (1999) obtain an estimate of 20%, based on a sample of 18 OECDcountries evaluated over the 1970–1994 period. A more recent study (Boulhol & Fon-tagné, 2006) confirms this order of magnitude, as it finds that trade with emergingcountries accounted for 14% of deindustrialization between 1970 and 2002. More pre-cisely, imports from low-income countries cost 1.7% of total employment in the indus-try over the period while exports to these countries created a 0.5% gain. The greatestnet losses are computed for Italy (24% of deindustrialization), Austria (22%) andNetherlands (22%) and a smaller loss for the UK (8.3%). For France, the totallosses induced by imports from low-cost countries amount to a maximum of 9.5%in the decline of industrial employment, over the 22-year period, that is, a total of250,000 jobs. All in all, Fontagné and Lorenzi (2005) therefore conclude that local pro-duction of the net trade balance with low-income countries is not likely to representmuch more than 1% of the national industrial employment.Overall, the most pragmatic approach is to regard the three alternative methods
(labor content measures of international trade, computable general equilibriummodels and econometric approaches) as complementary, each being capable of sup-plying pointers for the analysis of the impact of international trade on the labormarket. Reassuringly, their findings demonstrate some convergence: they appear toindicate that, in the framework of traditional analysis, the labor impact of inter-national trade with the South does not warrant the prominence that it has beengiven in public debate in many western countries.Growing evidence has emerged on the possibility of a heterogeneous impact of low-
wage countries’ competition on workers depending on their skill levels. Some
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econometric estimations have emphasized that firms respond to more intense importcompetition by innovating and altering their production processes to make use ofinternational differences in the cost of factors of production to minimize their pro-duction costs. European firms typically relocate these segments of production whichmake the greatest use of unskilled labor (Feenstra & Hanson, 1996). Within a givensector, and for given levels of production, this move implies a fall in unskilled employ-ment and in the relative remuneration of unskilled workers. Strauss-Kahn (2003) cal-culates that a quarter of the negative shock endured by unskilled workers in Francewas due to the vertical division of labor (increased share of imported intermediateinputs in the production of each sector) over the period 1985–1993. A similarfinding of a significant impact of outsourcing on wage inequality within countrieshas been obtained for the UK, in the years 1982–1997. Hijzen et al. (2003) showthat it accounts for one-third of the observed divergence between skilled and unskilledworkers.Since a typical way firms split their production process to take advantage of differ-
ences in relative costs is by setting up subsidiaries abroad, through FDI, we now turnto the possibility that FDI abroad by European firms affects the domestic labormarket.
3.4. Measures of the Employment Impact in Home Countries of FDI to Low-wageCountries
The key to assessing the impact of European firms’ FDI on home-country employ-ment is the degree of substitution or complementarity between domestic businessand foreign operations, and hence the substitution or complementarity between dom-estic employment and employment abroad (Hanson et al., 2005). One can expect thatthe transfer of activity abroad reduces employment in the country of origin, while theextension of the scope of the activity at the international level instead creates jobs inmanagement activities at home. From a theoretical point of view, if the foreign oper-ation replicates the domestic business, there will be a substitution effect between dom-estic labor and foreign labor, at the expense of the former. Engaging in FDI shouldreduce firms’ domestic activity. This is the case when the leading motive for establish-ing an affiliate abroad is the “factor-seeking” (or “vertical”) motive, that is, thereduction of production costs. In contrast, when foreign activities are developed soas to extend the market of domestic firms (what is called the “market-seeking” or“horizontal” motive), foreign and domestic activities share complementarities. Itshould be noted that even in the case of vertical FDI, the impact on domestic employ-ment is not necessarily negative, as the direct negative employment effects of reloca-tion may be offset by a positive indirect effect on employment related to: (i)production complementarities due to greater coordination and management needs;and (ii) scale effects that follow from the impact of relocation on average costs. Asan illustration, Becker et al. (2005) show that the expansion of German firms’foreign activities has been accompanied by an increase in their output and employ-ment in Germany. They compute that, between 1996 and 2001, the 56% increase inthe employment of German multinational firms’ foreign subsidiaries wasaccompanied by a 50% increase in their domestic employment.
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An extensive literature relying on firm-level data focuses on the evaluation of theimpact of production abroad on the parent company’s employment. Evaluations typi-cally run econometric estimations to look at the effects on the home firms of initiatingproduction abroad. Overall, they indicate that the presumed negative effects of trans-ferring part of production to cheap labor countries are not supported by the availabledata. In fact, the effects of this investment are very often found to be positive. It isimportant to recall that the theory is ambiguous on the expected impact on a firm’sactivities of engaging in production abroad. As argued in Fontagné and Toubal(2010), whatever the primary motive for locating abroad (vertical and horizontal), aforeign presence provides access to new markets or new factors so that the sales ofthe multinational company should rise, generating an “income effect”. Hence, evenin the case of relocations (closing plants in Europe to open abroad), the net effect interms of employment (substitution versus income) is a priori undefined.Based on state-of-the-art empirical approaches that combine matching techniques
and a difference-in-difference estimator, several papers find that the causal effect ofinvesting abroad on the employment of firms is mostly positive. The results hold forFrance (Hijzen et al., 2011), Italy (Barba Navaretti et al., 2010), Sweden (Blomströmet al., 1997) and Germany (Kleinert & Toubal, 2007). Hijzen et al. (2011) show thatthe impact differs depending on the motivation to start producing abroad. Theyfind that market-seeking FDI by French firms is associated with significant scaleeffects, resulting in job creation. By contrast, investments in low-income countriesreflecting vertical factor-seeking motives are not found to have a significant effecton employment. The absence of job losses in the parent firm seems to derive from posi-tive efficiency gains and employment gains in the segments that are retained at home.Hence, relocating part of the production process abroad appears to be an efficientstrategy to withstand competitive pressures.
3.5. Additional Benefits of Competition from Low-wage Countries
A growing number of papers suggest that exposure to imported goods from low-wagecountries such as China boosts innovation (Bloom et al., 2013). Intensified compe-tition has forced firms in developed countries to reorient their production towardhigher quality and more sophisticated products that are coherent with their compara-tive advantages. This “intra-industry specialization”, as named by Schott (2008), isfound to have a positive impact on trade performance (Martin & Méjean, 2011),and on growth performance in the long run (Bloom et al., 2013; Hausmann et al.,2007).Martin and Méjean (2011) use firm-level data for France to show that, over the
1995–2005 period, tougher competition from low-wage countries actually led to arebalancing of sales in favor of high-quality firms. They calculate that throughoutthe period, low-quality producers have lost market shares in foreign markets withrespect to their high-quality competitors and that without this “creative destruction”which is driven by exposure to competition from low-wage countries, France wouldhave lost more than 40% of its aggregate share in world markets. This represents anadditional 10 p.p. with respect to its actual market share loss.Similar findings are reported by Bloom et al. (2011a) who exploit the natural exper-
iment of Chinese accession to the World Trade Organization (WTO) in 2001.
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Following this, entry quotas on most Chinese goods were eliminated, leading to asurge in trade. Their study looks at the performance of more than half a million man-ufacturing firms in 12 European countries over the past decade. It compares averagefirm-level job growth depending on the technology level of firms and their exposure tothe growth of Chinese imports. They show that low-tech plants were shrinking every-where, but they shrank much more in industries that were most hit by the China shock(20% job losses versus 10%): these industries include furniture, apparel and textiles,and so on. By contrast, high-tech plants grew by about 10% in all sectors, irrespectiveof their exposure to Chinese competition, indicating that their high productivity/quality shielded them from the “China syndrome”. They further suggest thatbeyond this pure allocative effect (between firms), there is a within-firm effect. Theyargue that “firms have responded to the threat of Chinese imports by increasingtheir productivity, through adopting better information technology, higher spendingon R&D, and increased patenting” (Bloom et al., 2011b). Bloom et al. (2011a) esti-mate that around 15% of technical change in Europe, which provides a net annualgain of almost €10 billion to European countries, can be attributed directly to thisinduced innovation in exposed firms. Their findings are consistent with a model ofinnovation in which increased competition from low-income countries reduces therelative profitability of making low-tech goods. At the same time, the model freeslabor and capital inputs for innovation, and produces new products, thus reducingthe opportunity cost of innovation (Bloom et al., 2013).There are additional benefits of Chinese trade to those that increase the innovation
rate of western economies. As has been highlighted in the US context (Broda &Romalis, 2008), increasing imports from low-wage countries has allowed consumersto enjoy lower prices. Broda and Romalis (2008) find that in sectors where Chineseexports have increased most, inflation has been negative over the last decade, whilein other sectors with no Chinese presence, prices have risen by over 20%. Moreover,they argue that China has increased the purchasing power of the poor more thanthat of the rich, hence reducing income inequality. This is because China producesgoods of relatively low quality, which are disproportionately consumed by the poor.Broda and Romalis (2008) estimate that about one-third of the price decline for thepoor is directly associated with rising imports from China. While no such evaluationexists for European countries, it is very likely that this pattern also holds.According to Bloom et al. (2011a), the emergence of China and the prospects of
bigger export markets for firms in developed countries have spurred investment.Also, it is likely that without the availability of cheap manufacturing, many of thedevices such as computer tablets or smartphones would never have been developed.
4. Conclusion
This article addresses the hot topic of the impact of competition from low-wagecountries such as China on the trade, economic and social performance of Europeancountries. It first argues that the fears raised by EU–China competition may be exag-gerated since the similarity of exports between the two is much more limited when con-sidering differentiated varieties of goods. While at the industry level, the similaritybetween Chinese and EU exports is large, at the most detailed level of the internationalclassification of products, varieties exported by European countries and China are not
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in direct competition. While China made rapid progress in the bottom segment of themarket, the EU is mostly present in the upper segment of the market and has resistedcompetition much better than other developed countries, by moving up the qualityladder. This has helped to shield European workers. Furthermore, even in the caseof offshoring of part of the production process in China, the majority of revenuesremain in the hands of the multinationals.In line with this absence of a full-frontal threat to European workers and the still
limited weight of emerging countries in EU imports, the existing literature concludesthat a small share (between 10% and 20%) of the observed reduction of 11 million jobsin EU-15 manufacturing employment, in the past 30 years, is due to trade growth withlow-wage countries. Offshoring to emerging countries – strictly defined – is unlikely toaccount for more than a fifth of that share. Even in the recent years when China hasgained prominence, it should not be blamed for more than half of the measured effectsfor emerging countries. The main sources of industrial decline in Europe are found tobe the evolution in the structure of demand induced by productivity gains and thedomestic transfer of industrial jobs to services.This paper emphasizes that a complete evaluation of the impact on the EU econom-
ies needs to account for additional benefits from trade growth with China. In particu-lar, consumer prices for the poorest members of society have declined, and the rate ofinnovation has increased.This latter effect and the associated destructive creation are likely to have profound
repercussions in terms of labor market adjustments. The decline of a sector is notalways bad news. The problem is that the costs of restructuring are typically borneby a limited number of people. Low-skilled workers are, for instance, disproportio-nately likely to be dislocated from their jobs as firms respond to international compe-tition by climbing the quality ladder. Hence, policies aimed at increasing humancapital through education and training and easing the transition of displacedworkers across jobs are essential.Repercussions are also likely to be concentrated in some sectors and territories,
while benefits are spread throughout the economy. This clearly justifies a redistributionof gains from trade – from consumers to workers – through national and trans-Euro-pean solidarity mechanisms.An obvious difficulty is thatmost estimates presented in this article are not very recent:
it is not possiblehere tomeasurewhathas happenedvery recently (in the secondhalfof the2000s), or to infer what will happen in the future, as China and India gain prominence.However, it may be feared that the shock will be at least comparable in scale to thegrowth of newly industrialized countries in Asia and that the job losses – present andfuture –will be comparable. In turn, thesemayaffectmainly labor- and low skill-intensivesectors, but some service sectors could also be impacted.Resiliencewill, as before, dependon up-market positioning and on the exploitation of niche markets, even in traditionalsectors such as textiles (eco-textiles, smart textiles, etc.).
Notes
1. The aggregate is defined as including Turkey, Union of South Africa, Ecuador, Mexico, Brazil, Argen-tina, Chile, Colombia, Tunisia, Egypt, Indonesia, India, Malaysia, Philippines, Thailand, Brunei, Ban-gladesh, Sri Lanka, Russia, China and Indochina.
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2. The BACI world trade dataset, constructed using COMTRADE original data, provides bilateral tradeflows at the six-digit product level (Gaulier & Zignago, 2010). It can be downloaded from http://www.cepii.fr/anglaisgraph/bdd/baci.htm. The flow dataset is constructed using an original procedure thatreconciles the declarations of exporters and importers. The harmonization procedure enables thenumber of countries for which trade data are available to be extended considerably, compared to theoriginal dataset.
3. See footnote 2.4. I compute the weighted median of UVk
EU-15,j/UVkChina,j, where j is the direction of exportation. The
weighting variable is w= 0.5 * (VkEU-15,j +Vk
China,j), where VEU-15 and VChina are the total exports ofEU-15 and China and UV denotes unit values.
5. High-tech products are identified based on the classification of Lall (2000).6. The terms “processing”, or “assembly” trade are used interchangeably to refer to the operations of firms
which import inputs in order to assemble them in China and re-export the finished products.7. The dominant role of Hong Kong raises the issue of “Round tripping” which refers to domestic invest-
ment in China (mainland) being routed mainly through Hong Kong and back into the mainland to takeadvantage of preferential policies available only to foreign investors. After its accession to the WTO in2001, China removed many such incentives, but there are still differences in treatment between domesticand foreign investors: for example, corporation tax is still levied at lower rates on foreign transnationalcorporations than on domestic firms (normally 5–13% on the former, compared with 25% on the latter:see UNCTAD, 2006).
8. http://www.eurofound.europa.eu9. For each 100 jobs in the French economy, there are about seven creations and seven destructions yearly,
which therefore represent just over one million of yearly creations and destructions.10. It is possible that some of the technical progress is due to pressure from international trade with emer-
ging countries (see, among others, Wood, 1994; Thoenig & Verdier, 2003). This aspect is discussed inSections 3.5.
11. See footnote 1.
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Yao, S. (2009) Why are Chinese exports not so special?, China & World Economy, 17(1), pp. 47–65.
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Appendix A. A Theoretical Prediction of the Impact on Industrial Employment of aRise in Income
Consider an economy with two sectors i and j, which, respectively, represent the manufacturing and servicessectors.Employment (L) in each sector depends on the technical conditions of production (a) and the volume of
goods produced (X )
Xi = aiLi andXj = ajLj,
Li
Lj= aj
ai
( )Xi
Xj
( ).
Consumption patterns are defined by a utility function with two goods, of the Stone Geary type. Consu-mers maximize their utility function, defined as a simple transformation of a Cobb–Douglas function, withthe introduction of a parameter γ which captures the fact that the agent wants to satisfy a minimum con-sumption volume of industrial goods before starting to consume services.Utility maximization can be written as
MaxU = (1− sj)log (Xi − g) + sj logXj,
Under the constraint that I = piXi + pjXj,
where s is an allocation parameter, p corresponds to goods prices and I denotes the agent’s income.Assuming that the income of the agent allows him/her to satisfy the minimum volume of industrial goods
consumed, maximizing the utility function leads to the following demand functions:
pjXj = pi(Xi − g)sj(1− sj) ,
piXi = pjXi(1− sj)sj + pig
.
By using the budget constraint, these functions may be rewritten as
pjXj = sj(I − pig),piXi = (1− sj) I + sj pig.
The Stone Geary type utility function implies that the income elasticity of demand for industrial goods isless than unity, while the income elasticity of demand for services is greater than unity
1I pjXj = II − pig
. 1,
1I piXi = II + pigsj/(1− sj) , 1.
Based on these demand functions and relationships that define the technology in the industry and servicessectors, the effect of a change in income on employment can be written as
Li
Lj= aj
ai
( )pjpi
( ) (1− sj)I + sj pigsj(I − pig) .
Under the assumption that prices are fixed and that productivity gains, which are identical in both sectors,are reflected primarily in income gains for consumers, then the change in relative employment can be written
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as
lnLi
Lj
( )= ln[(1− sj)I + sj pig] − ln[sj(I − pig)].
The share of industry employment decreases with the rise in the agents’ income
∂ ln(Li/Lj)
∂I= −sj pig
[(1− sj)I + sj pig]2, 0.
This result derives from the existence of an income elasticity in the industry which is less than unity.
Appendix B. A Theoretical Prediction of the Impact on Industrial Employment ofDifferences in Productivity Gains in Industry and Services
Consider an economy with two sectors i and j, which, respectively, represent the manufacturing and servicessectors.Consumption patterns are defined by a constant elasticity of substitution utility function. Utility maximi-
zation is defined as
MaxU = [(1− sj)Xir+ sjXjr]1r
,
under constraint of I= piXi + pjXj,where σ= 1/(1− ρ) corresponds to the elasticity of substitution between manufacturing i and service j goods,s is an allocation parameter, p corresponds to the goods prices and I denotes the agent’s income.Maximization yields the demand for goods expressed in terms of relative prices (p)
Xi
Xj= sj
(1− sj)pipj
[ ]1
(1− r) .
Employment (L) in each sector depends on the technical conditions of production (a) and the volume ofgoods produced (X )
Xi = aiLi andXj = ajLj,
Li
Lj= aj
ai
( )Xi
Xj
( ).
The relative labor demand can be rewritten as
Li
Lj= aj
ai
( )sj
(1− sj)pipj
[ ]1
(1− r) .
With an unchanged constant distribution parameter s, changes in relative employment can be written as
d lnLi
Lj
( )= d ln
ajai
( )+ s d ln
pipj
( ),
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then, under the assumption that the differential productivity gains between industry and service sectorsare fully transmitted to prices, it becomes
d lnLi
Lj
( )= (s− 1) d ln ai
aj
( ).
The evolution of the employment share of industry depends directly on the productivity growth differentialbetween the two sectors (here assumed to favor industry) and on the value of the elasticity of substitution σ.When the elasticity of substitution is unitary, higher productivity gains in industry (which translate into
lower industrial goods prices) are accompanied by an increase in relative demand for industrial goods ofthe same magnitude. The employment share of industry is held constant as a consequence.When goods are weakly substitutable (elasticity below unity), the reduction in relative prices in the indus-
try is not accompanied by an equivalent increase in demand. In this case, the weight of the industrial sectorin total employment declines.
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