III. Developments in France’s External Competitiveness—an Update1
This note reviews developments in France’s external competitiveness and discusses the evolution of its export performance, including after the 2008 financial crisis. In the first part, the note finds that—consistent with many previous studies—France has been losing export market shares. Specifically, while France remains more competitive than some other key Euro Area economies—such as Italy and Spain—it has been outperformed by Germany. Furthermore—like other advanced economies—France has been losing competitiveness to emerging economies. In the second part, the note shows that France’s export developments during the recovery have largely reflected the evolution of demand from its trading partners, with the real exchange rate having played a secondary role.
1. Like many other countries, France’s exports tumbled after the 2008 financial crisis. Total French exports lost over one third of its value in 2009:Q1 relative to the peak levels in 2008 before rebounding subsequently. Meanwhile, over a longer horizon—as indicated in many other previous studies such as Kierzenkowski (2009) as well as Kabundi and Nadal De Simone (2009)—France is losing competitiveness and export market share.
2. This note seeks to revisit France’s competitiveness and discuss the evolution of France’s export performance during the financial crisis and subsequent recovery. With regard to the longer trend, the first part of the note compares the country’s competitiveness with its European peers as well as emerging and developing economies. In the second part, the note aims to econometrically assess the contributions of the traditional determinants of trade to the short–term evolution of exports in the aftermath of the financial crisis as well as shed light on the effect of euro depreciation on exports.
3. The rest of the paper proceeds as follows: Section B presents some stylized facts in relation to France’s export performance; Section C examines France’s changes in export market share—both by regions and by products—aiming to shed light on developments of France’s competitiveness against the backdrop of the crisis and recovery; Section D quantifies the dynamic contributions of price competitiveness and foreign demand to exports using an error–correction model; finally, Section E concludes with policy implications.
B. Stylized Facts
4. After peaking at the second quarter of 2008, French exports sharply declined following the financial crisis and then gradually recovered after bottoming out in 2009:Q1. From the peak to the trough, French exports lost over one third of its value in US dollar terms, with the decline in exports to Euro Area and non–Euro Area roughly of equal magnitude (Figure 1). The decline in volume, however, is much less pronounced, partly reflecting of the impact of euro–dollar exchange rate movements on export valuation.
Figure 1.Export Value (in USD) and Volume (2006Q1=100)
Source: IMF staff calculations.
5. The impact on GDP growth, however, has been more moderate than in many other European economies (Table 1). This partly reflects France’s smaller degree of trade openness. In fact, the contribution of exports to GDP growth has been relatively small, averaging to around one percent per annum during 2000–07—roughly one third of that in Germany and half of the Euro Area average. Consequently, the impact of the drop in international trade associated with the financial crisis took a smaller toll on the overall economy compared to its European peers, averaging to around negative 2.7 percent of GDP during 2008:Q3–2009:Q2 on a year–on–year basis, approximately half of the impact that Germany suffered during the same period. Conversely, the subsequent normalization of world trade also plays a relatively smaller role in France’s recovery.
6. Over a longer time span, the growth of France’s exports has significantly lagged behind those of other major economies (Figure 2). Between 2000–04 and 2005–09, French exports of goods and service grew by 1.9 percent on an annualized basis, compared with 6.6 percent for Germany and 4.2 percent for the Euro Area during the same time frame. The difference is even more pronounced when comparing France’s export performance to that of emerging and developing economies, whose growth rate was almost five times that of France.
Figure 2.Export Growth, Average of 2000–04 to Average 2005–09
Source: IMF staff calculations.
7. The composition of France’s export destinations has been relatively stable over the past two decades, although there is some sign of a shift towards emerging economies after the crisis. France’s exports have been primarily geared towards advanced economies, which account for over three quarters of the French exports during 2000–09. Among advanced economies, the Euro Area is France’s principal export destinations, with half of the French exports designated for its euro partners. Exports to emerging and developing economies have gained importance towards the end of the 2000s—in part due to the faster recovery of emerging markets in the aftermath of the 2008 crisis—especially to developing Asia and the Middle East, although these continue to account for a relatively small share of total French exports.
|Exports to Advanced Economies||72||79||77||74||73|
|Exports to Euro Area (aggreg.)||38||45||50||50||49|
|Emering & Developing Economies||24||18||21||24||25|
C. Is France Losing its Competitiveness?
8. With sluggish export growth, French exports have been gradually losing market shares over the past few decades, although they have somewhat stabilized in recent years. Compared with the past decade, France has lost around 1½ percentage points of world export market share. But the decline in export market share is not unique to France, and appears to have been a negative shock common to most advanced economies, which have lost ten percentage points of market share altogether to emerging economies over the past decade. Nevertheless, the extent of France’s loss appears to be more severe than for its peers in the Euro Area, which has collectively lost around 3.3 percentage points of global export market share, despite a much higher base. In particular, Germany—the largest exporter of the Euro Area—has only lost around ½ percentage point of market share (Table 3). After the financial crisis, France export market share has picked up slightly.
|Emer. & Develop. Eco.||23.5||20.6||30.8||32.6||33.7||35.7||34.9|
9. The extent of market loss, however, varies significantly across markets, both in terms of regions and products. Specifically:
Across regional markets—Much like other advanced economies, France has lost market share in every region. Among markets in advanced economies, France’s loss in the Euro Area is the most significant, given that this market accounts for half of the French exports (Table 4). Concerning emerging and developing economies, France’s loss in market share is most pronounced in Africa and Middle East. To some extent, like many other advanced economies, France’s loss in market shares reflects keener competition from emerging economies, particularly China, which has gained substantial market shares both in the Euro Area and elsewhere 2. However, at the same time, Germany’s loss in market shares—both in the Euro Area and a few key emerging markets—has been rather limited.
Across product categories— French exports have shown a declining trend across all product categories (Figure 3). The declines in market share appear to have been more pronounced in food and beverages, industry supplies, and capital goods excluding transportation equipment. In particular, while France has traditionally had a comparative advantage on food and beverages over Germany, the latter’s market share has been catching up. In other products, the decline has been less prominent. In fact, signs of slight rebound in market shares have begun to emerge in some sectors more recently, including transportation equipment and consumer goods.
|Advanced econ ex Euro area||3.1||2.5||-0.6||6.6||6.5||-0.1||2.4||2.1||-0.3||7.4||12.5||5.1||11.3||9.3||-2.0|
|Latin America||2.4||1.7||-0.7||3.7||3.6||-0.1||2.1||1.8||-0.3||2.6||6.1||3.5||38.8||32.1||-6.7|Figure 3.France: Exports Market Share by Products, 1998–08
Source: UN Comtrade, IMF staff estimates.
10. One plausible explanation for the loss of market share could be France’s inability to capture new fast–growing regional markets. To gauge this effect, growth of France’s exports to a region is compared to the growth of the import demand of that market. The analysis suggests that:
Between 2000–04 and 2005–09, the regions with fastest growth in import demand (in values) include Africa, Developing Asia, Developing Europe, and the Middle East, with growth rates being registered at around or over 20 percent (Table 5).
While French exports to developing Asia and developing Europe 3 grew significantly during that period, exports to Africa and Middle East, significantly lagged behind demand growth, reflecting the significant loss in market share in those regions.
The main explanation for France’s loss in overall export market shares, however, lies in the sluggish growth in exports to the Euro Area—France’s most important export market.
|Destination||demand growth 1/||growth 2/||diff 3/||growth||diff||growth||diff||growth||diff||growth||diff|
|Advanced econ ex Euro area;||10||6||-4||10||0||8||-2||22||12||6||-4|
11. Price and cost competitiveness indicators portray a mixed picture for France’s competitiveness (Figure 4). Specifically,
Compared to advanced economies, France’s competitiveness has improved in terms of labor productivity, export prices, and unit labor costs. However, France saw a greater real appreciation—in terms of the CPI–based Real Effective Exchange Rate (REER)—relative to the United States since mid–2000s owing to the appreciation of the Euro, although this is likely to have been partly reversed with the weakening of the Euro in 2010.
Among the four largest economies in the Euro Area, France has lost competitiveness in terms of the evolution of price/cost competitiveness indicators only to Germany while gaining competitiveness relative to Italy and Spain. More specifically, since the onset of the 2000s, France only saw a limited real exchange rate appreciation, although Germany has achieved an even smaller real appreciation during the period. Similarly, French export prices and unit labor costs have risen more slowly the average of the Euro Area, but Germany outperformed France in these respects also. Finally, labor productivity in France increased faster than the average of the Euro Area, albeit more slowly than Germany.
Compared with emerging and developing economies, France saw smaller growth rates in wages (not shown in the chart) and export prices. In terms of movement in the real exchange rate, while France lost competitiveness to emerging and developing economies (notably China), before 2007, China’s real exchange rate has appreciated more than that of France since 2007. That said, increases in prices in emerging economies have reflected their substantial improvement in productivity, which has more than offset the impact of higher prices, thereby gaining competitiveness relative to the vast majority of advanced economies, including France.
Figure 4.France: Competitiveness Indicators vis–à–vis its Competitiors, 1999–09
Source: IMF staff calculations.
D. Econometric Analysis
12. This section seeks to explain the evolution of French exports after the financial crisis with traditional determinants of trade, namely foreign demand and price competitiveness. Using an error–correction model, reduced–form equations were estimated in two steps: first, the long–run cointegrating relation is estimated with variables in levels (in terms of logarithm) with a trend. In the second step, short–run elasticities were estimated with variables estimated in first differences along with the error correction term from the cointegrating equation in the first step.
13. The findings are consistent with economic intuition and all coefficients are of the right sign. Using quarterly data during 1990–09, results of the estimation are presented in Table 6. Specifically, the results suggest:
Every 1 percent increase in foreign demand—calculated as trade–weighted import demand of France’s main export recipients—is associated with an increase in exports of around 0.9–1.0 percent in both the short run and the long run 4;
Every 1 percent increase (appreciation) in France’s real effective exchange rate (REER) is associated with a decrease in French exports of around 0.25 percent in the short run and 0.65 percent in the long run.
|Long-run elasticities||Short-run elasticities|
|Foreign demand||REER||Foreign demand||REER||Adjustment coefficient||R-Squared|
|0.87 **||-0.65 **||0.96 **||-0.25 *||-0.16 **||0.7|
14. Using the estimated coefficients, one can decompose the evolution of exports into effects due to demand, price, and other factors by rewriting the error–correction model (Figure 5). The result suggests that:
During 2008:Q2–2009:Q2, France’s sharp decline in exports was primarily due to a plunge in import demand from its trading partners, although the depreciation of euro has mitigated the adverse impact.
During 2009:Q3–2009:Q4, France’s recovery of exports has largely reflected the recovery of the global economy and therefore import demand of France’s trading partners while, conversely, the slight strengthening of the Euro during that period has somewhat limited the export rebound.
Figure 5.Contributions to Export Growth during the Recovery
Source: IMF staff calculations.
15. Over a longer time frame, however, the evolution of exports has also reflected factors other than foreign demand and the REER (Figure 6). Indeed, during the 2000s, these unexplained factors were mostly negative, suggesting loss of competitiveness due to non–price factors, which are likely related to structural issues. Part of the negative residuals could be due to outsourcing—where French firms produce goods abroad—as well as measurement errors.5 However, some of these residuals could also reflect loss of efficiency, inability to make a breakthrough in new markets, insufficient research and innovation, loss of technological edge and labor/product market rigidities. However, as discussed in the previous paragraph, nonprice factors seem to have been dominated by demand factors during the recent global crisis.
Figure 6.Contributions of Factors Other than Foreign Demand and REER
Source: IMF staff calculations.
16. Looking forward, the effect of a euro depreciation on exports would depend on the context. A nominal depreciation would help improve France’s competitiveness by correcting the overvaluation of France’s real exchange rate. However, a depreciation of the euro is likely to have limited benefits on exports in the context of a collapse of confidence in the Euro Area, particularly in the absence of confidence–boosting policy measures in the Euro Area. More specifically:
Exports to markets outside the Euro Area— While depreciation of the euro can have a positive price effect on French exports, the short–run elasticity of exports with respect to the real exchange rate is relatively small. Over the medium term, given that the long–run price elasticity of exports is larger, euro depreciation could have a stronger impact on net exports.6 That said, a euro depreciation is likely to be accompanied by an increase in inflation, which would partly offset some of the impact of the nominal depreciation on the real exchange rate, thereby dampening some of benefits of the real depreciation over the longer run.
Exports to markets inside the Euro Area— Most importantly, a sharp depreciation in the context of heightened sovereign risks in the Euro Area would suppress activity and import demand of the region. In such a scenario—given that half of French exports go to the euro zone—the decline in exports to countries within the Euro Area may well offset the increase in exports to those outside the Euro Area.
E. Concluding Remarks and Implications
17. France has been losing export market shares over the past decade, which point to a need for corrective policy measures to boost its competitiveness, particularly vis–à–vis its main competitor—Germany 7. Against this background, wage moderation and structural policies to raise productivity, lower cost, and increase product and labor market flexibility are crucial. This would in turn require policies to foster research and development, promote innovation, reduce the tax burden on economic activity, boost competition, as well as create favorable conditions for doing businesses.
18. France should also strive to explore new export markets in emerging economies, where imports have been growing much faster than those in advanced economies. In particular, given that growth in advanced economies—including the Euro Area—is likely to remain sluggish in the period ahead, France’s exports should reorient its focus towards emerging economies. This will require new marketing strategies and an acceleration of structural reforms to reduce costs and enhance both labor and product market flexibility, in order to allow exports to adjust more rapidly to shifts in global demand.
European Commission, 2010, “The Impact of the Global Crisis on Competitiveness and Current Account Divergences in the Euro Area,”Quarterly Report on the Euro AreaVolume 9, No.1 (2010).
Fontagné, Lionel and GuillaumeGaulier,2008, “Performances à l’exportation de la France et de l’Allemagne,” Rapport Conseil d’Analyse Économique.
Kabundi, Alain and Francisco Nadal-DeSimone,2009, “Recent French Export Performance: Is there a Competitiveness Problem?” IMF Working Paper No. 09/2.
This note was prepared by Kevin C. Cheng.
France’s loss in market share during the 2000’s also reflected the appreciation of Euro.
France’s slower exports growth to emerging Europe relative to that of Germany might be due to its different strategy of off–shoring the entire production process, rather than outsourcing intermediate production stages. See Kierzenkowski (2009) as well as Fontagné and Gaulier (2008) for details.
The size of the adjustment coefficient shows the speed at which exports return to their equilibrium value. In this case, an estimate of 0.16 implies that half of the disequilibrium is corrected in one year in France.
Specifically, unlike German firms, which outsourced intermediate stages of the production process abroad, French firms typically outsourced the entire production process, resulting in a smaller export figure.
Macroeconomic models used by the French authorities suggest that the net impact of a depreciation of euro on GDP is positive over the medium term.
Fontagné and Gaulier (2009) find that the probability for a French exporter to be in competition with a German firm for the same product in the same country is very high (79% in 2004).