A static and dynamic Input-Output-Analysis of Trade Flows on the Example of Germany

The state budget crisis in the Eurozone has raised the issue of international trade imbalances prevailing in Europe. Whereas Germany holds a strong trade surplus other neighbouring countries show a deep trade deficit. The result is that some economies in Europe have built-up high debts in order to purchase foreign products, whereas others – like Germany – have immensely profited from export-induced growth. In early 2010, former French finance minister and current head of International Monetary Fund, Christine Lagarde, has expressed her dislike of the German growth model: by reducing labour unit costs, Germany has raised its international competitiveness to the disadvantage of other countries’ exporting industry. This argument was backed-up by other economists like Jean-Paul Fitoussi who observed that Germany has followed a non-cooperative economic policy. The analysis can be more complex than thought of, when looking in more detail on the composition of exports by products and by analysing specific trade flows. Export products that are produced by using imported intermediate products are not only positive for the exporting country but also for those countries that have delivered these intermediate products that are necessary for producing the final exporting product. Hence, an exporting nation with a strong turnstile function can be also beneficial for other economies. A first hint that argues in this direction can be taken from the latest input-output table of Germany from 2008: Accordingly, German total exports consist to 17% of imported final products and to 23% of imported intermediate products. Altogether, export induced imports amount to 40% of all exports. And that is only the direct induced import share. Indirectly induced imports caused by export demand, has to be considered as well. In contrast, consumption induced imports are lower: the share of consumption-based import demand only amounts to 23%. A better understanding of Germany’s incoming and outgoing trade flows is important for at least three reasons: [i] specific trade flow dynamics can be traced, [ii] international interdependencies of trade structures can be identified and [iii] future trade perspectives for specific goods can be analysed. In order to meet these goals, the paper aims to investigate whether Germany’s positive trade balance can be traced back in part to its function as a gateway to world markets for European countries. The ex-post analysis is added by an ex-ante forecast of export induced imports in Germany, taken into consideration country-specific growth paths of the main trading partners of Germany. Further, a simulation is aimed to be calculated in order to test the extent to which a declining or reduced positive trade balance of Germany affects the export demand of countries from whom Germany is importing. The ex-post analysis is performed by applying a static input-output analysis on the German case. The latest input-output information from 2008 is used to underpin the hypothesis that Germany holds an important function as turnstile for products of other nations; export-induced final and intermediate imports cannot be marginalized. The static input-output analysis is complemented by a macro-econometric model. In order to determine the origin and destination of incoming and outgoing trade flows of Germany, the model is extended by implementing OECD’s bilateral trade balances of Germany in a macro-econometric input-output model. This paper uses and extends the existing macro-econometric model INFORGE. INFORGE is a national model, where export demand depends on an exogenously given world trade dynamic and import demand is a function of domestic production. Both trade flows do not explicitly consider their place of destination (export) or of origin (import). In this respect, two important add-ons to the INFORGE model are implemented: First, by applying bilateral trade matrices, import and export demand is tied to Germany’s specific trading partners. Second, the model is configured in such a way, that each country-specific import demand depends on real production. The integration of a more explicit trade module in a national input-output model allows for conducting policy scenarios that are able to quantify direct and indirect effects on inter-industrial level as well as on the demand and supply sides of the economy. Above that, they do consider effects on sector level which are extremely important for the evaluation of the impact analysis. The dynamic macro-econometric input-output model INFORGE uses regression analysis to describe economic behaviour of different economic agents (consumers, producers, exporters, importers, investors). Inter-industrial relations are explicitly used and change over time. Accounting consistency is assured in all time; on the production side as well as on the demand side. The bottom-up approach is characterized by a high disaggregation on sector level, enabling a detailed modelling by industries and goods. The integrated structure of the model allows a complex and simultaneous solution due to the absolute accounting consistency. Input-output tables are fully implemented in the national accounts allowing linkages between industrial interdependencies, distribution of income, the redistribution effects of the state and the usage of income for goods. Production is determined by the demand side of the economy via the Leontief-equation; all determinants of demand depend on relative prices which are again a function of firm’s unit costs and import prices. The inter-industry forecasting model for Germany – INFORGE – has been developed by the Institute of Economic Structures Research (GWS) and can be applied for economic forecasts as well as for simulation analysis. The hypothesis of the analysis is that that export-driven growth in Germany is more beneficial for other economies than thought of. It is expected to obtain the following results: first, Germany’s export-induced import demand is relatively high – especially with respect to intermediate products – and it is higher than consumption-induced import demand. Second, albeit the Eurozone is the most important buyer of Germany’s exports, the fastest growing foreign market for Germany are the BRICS nation – among them China as most dynamic trading partner. Third, import demand in Germany is likely to slow-down when export-demand is slowing-down as well. As a consequence, negative effects on countries with strong trading relations to Germany are expected. The extent of the effect and the classification of those countries with the highest trade effect are yet to be identified.