Trade Specialization in the Eurozone

The ECB's research department has an interesting paper out on the Eurozone's trade specialization in relation to increasing international competition. The abstract goes as follows:

As a major player in world trade, the euro area is strongly influenced by globalisation, but is far from being a passive spectator. The paper analyses how the euro area’s trade specialization has changed in response to stronger international
competition and the emergence of new global players, evaluating results and possible challenges ahead. The message remains mixed. On the positive side, the export specialisation of the euro area is increasing in some mediumhigh
or high-tech sectors where productivity growth is strong and demand robust, such as pharmaceuticals, also by a more intensive recourse to importing intermediate goods from low-cost countries. On the other hand, in comparison to other industrialised economies, the euro area has been somewhat slower in moving towards research-intensive goods and away from labour-intensive sectors. While this could reflect data classification issues, it may also be a sign of structural rigidities in the euro area, which hinder adjustment processes.

I think, the paper addresses an important question and generally I think it is important to track the changing patterns of trade in a world where the countries' path through the different stages of development (or the demographic transition actually) occurs asymmetrically. Just recently for example we learned that China was moving rather rapidly up the value chain in terms of exports. In terms of the Eurozone countries the paper draws our attention to the relative inertia relating to Eurozone countries' ability to specialize in medium to high tech sector industries. Of course, there has been some development in this regard as is also reported in the paper. Actually, I am bit surprised the authors don't use value added as an operationalization. The point would then be that although the Eurozone countries indeed have responded to international competition through the development of a comparative advantage in more research and technology intensive exports this development has been relatively slow compared to the same process in the US and Japan. Value added can add to this analysis as we could that the US and Japan have been faster than Eurozone countries in the shift towards higher value added export activities. However, this picture might not hold to scrutiny in the sense that it needs differentiation take account of the rather complex anatomy of the global value chain in terms international trade. A notable example is the recent debate on German exports and more specifically the socalled 'Bazaar theory' and as such Sebastian Dullien's note on this features a graph which shows that Germany adds considerable more value in the manufacturing sector as percentage of GDP than both Japan and the US. This of course brings into question the absolute valued yielded in manufacturing relative to other industries but still it might differentiate the big picture.

Another thing which I find interesting is the paper's mentioning of the pharmaceutical sector as basis for microlevel evidence. As such, the paper notes how Eurozone countries are moving up the value chain in this sector. Note particularly here how moving up the value chain here denotes a move away from labour intensive production towards more research intensive production. I have done research on this in the context of the French pharmaceutical context and as noted we need to look at input variables to production in specific industries ... the following is an excerpt from the paper. Of course our analysis is somewhat at odds with the ECB but still the points on input variable and value added are important I think.

In order to construct a coherent argument on factor conditions which relates to the definition of human, knowledge and capital resources we introduce value added as a function of input variables as a measure of competitiveness in the pharmaceutical industry derived from the work of three Italian scholars. In Porter's context input variables to production are coined as either human (labour), knowledge or capital inputs. The crucial distinction in this context is the distinction between labour inputs to production (human resources) on the one hand and non-labour input (capital resources and knowledge resources) on the other. In a context of the pharmaceutical industry where the amount and efficiency of R&D is crucial it consequently means that non-labour inputs are relatively more valuable than labour inputs when it comes to the creation and sustainability of competitive advantage. Applying the concept of value added it means that labour inputs to production in the pharmaceutical industry yield less value added than non-labour inputs. Crucially, this furthermore allows us to coin important distinction between generalized/basic factors and advanced/specialized factors. Hence, labour inputs (human resources) represent the former whereas non-labour inputs (capital and knowledge resources) represent the latter.

... and our conclusion in a French context;

Consequently we can make two important conclusions: Firstly, we see that the activities conducted in the French pharmaceutical industry must be considered as relatively low value added because of the French industry's high amount of labour input. That furthermore translates into the fact that France's factor creating mechanism is relatively weak. This is because it is not very good at creating the factors which result in high value added production in the pharmaceutical industry and thus are important to create and sustain a national competitive advantage; namely non-labour inputs coined as capital and knowledge resources. Secondly, we observe that France's competitive national advantage in the pharmaceutical industry is less sustainable because it is vested in basic/generalized factors.

In the end this is an important aspect of international trade and crucially also in terms the analysis of countries' export performance.