Divers Twins: The Impact of China on Italian and German Manufacturing Exports

Germany and Italy are two major manufacturing producers and export a substantial part of their products – over 70 per cent- to OECD countries. While they share many characteristics, in term of specialization and destination markets, they are also “diverse twins”. Italy has a productive structure still largely based on so-called “traditional” sectors, while Germany specialized mainly in high tech goods. Italy is therefore more likely to be more vulnerable to the competitive pressure by emerging economies, and especially China, which experienced a strong increase in its export market share during the last decades. This paper addresses the issue of the impact of China on the export performance of Italy and Germany to their main trading partners to assess how well they withstood competition. Using data for the period 1995-2009, we implement a longitudinal multilevel model on quantiles to take into account two very important data characteristics: their hierarchical hidden structure (captured by a multilevel model) and the heterogeneity of the export shares (captured by a quantile approach). This innovative estimation method, together with the introduction of Chinese export shares as explanatory variable to account for the potential Chinese competition, allows us to estimate the impact of China on Italy and Germany’s market shares. Results show that China has affected Italy’s and Germany’s market shares in different ways, in different sectors, characterized by different market shares. However, Italy does not seem to have been “more at risk”. These results are relevant also for their policy implications and for an ex post analysis of the “response” to the Chinese competition.