Today we are looking at Germany’s trade partners. In our mini-series on Global Value Chains (GVCs) we look at how three German key industries – motor vehicles, chemicals and machinery – are part of complex international production networks. Economist sometimes call this the ‘second wave of global unbundling’. In this series we analyze this fragmentation of production for three key German industries: machinery and equipment, chemicals, and motor vehicles.
In the first part of this series we looked at how Germany’s key industries are linked to the world. Today we discuss whether G7 countries still play an important role as Germany’s trade partners, as their outstanding position has diminished with the increasing importance of the more diverse group of G20 countries.
The G7 was established in 1975 as an informal group of the (at the time) the most developed economies, i.e.
the United Kingdom
and the United States
– well before the economic rise of China. Nevertheless, the G7 still hold an extraordinary position in the global economy and represents 46% of global nominal GDP.
1. For Supply Chains – Not So Much Anymore
In 2000, G7 countries contributed more than 40% of the foreign value added within the supply chain. This share decreased by 2014 to about 30%. This decrease went hand-in-hand with a significant increase in value added from Eastern Europe and BRIC countries which will be discussed in subsequent blogposts.
These changes cannot be attributed to shifts in buying decisions by German actors alone. It rather reflects a general trend in global trade, where the suppliers of German industries face the same make-or-buy decisions and the same shifts in global supply as the German actors themselves. The ‘foreign value added’ in Figure 1 aggregates all value added by countries outside Germany with no distinction in the supply chain step or the respective processes it takes place in.
2. Germany’s trade partners: For Work-Intensive Processes – Decreased Importance
Production processes in the key industries did not change structurally, they mainly relocated. In total, the contribution of G7 countries to the foreign value added within the supply chain decreased from around 40% in 2000 to around 30% in 2014.
Zooming into the supply chains and analyzing the different processes involved reveals that the relevance of the G7 is decreasing across all supplying processes, but that this decrease differs in magnitude. The G7 always played a more prominent role in some sectors than in others. The G7 share of value added in the ‘raw materials’ sector in 2000 was below 20%. In contrast, the sectors ‘research and development’ and ‘other services’ were key sectors for the G7 countries in 2000 with a share of about 50% across the three industries analyzed.
Looking at working hours within the foreign supply chain, the effect is even more drastic. By 2000, the G7 countries as Germany’s trade partners contributed only a little more than 10% of total working hours within the foreign supply chain across all three German key industries.
The divergence of value added and working hours, which could be seen back in 2000, continued to grow in the following years. The role of the G7 for these supply chains has decreased particularly strongly for simple, work-intensive processes. (High-value services were outsourced to other countries to a lesser degree with a larger share remaining inside the G7 countries.)
You may also enjoy reading our post on how Germany’s declining innovativeness contributes to inequality.
3. Still An Important Market – Just Not AS Important
Different sets of countries dominate the sales markets for each of the key industries as Germany’s trade partners. For German chemicals, the G7 countries
and Italy are the main markets,
followed by non-G7-countries such as the Netherlands or Austria.
For machinery, China is the most important buyer, importing nearly twice the amount the United States (ranked second) does. For the motor vehicle industry, it is once again the United States as Germany’s trade partner buying the most German products, followed by China and the two G7 countries United Kingdom and France.
The picture is most dynamic for exports of German machinery (parts), with the two leading buyers, China and USA, mainly importing final products (60-70%) and France (ranked 3rd) mostly buying intermediates (65%). Many other European countries also import intermediates to a large extent as Europe forms a rather integrated production area, with assembly processes (of German machinery and German machinery parts) scattered all over Europe.
In 2014, 26% of German exports of machinery, 33% of chemicals and 37% for motor vehicle went to G7 countries. These exports included final products as well as intermediates to further production. Despite the recent decrease in their importance, the G7 countries are still important markets for the German key industries. Nevertheless, the categorization into G7 and ‘other countries’ doesn’t quite describe the main export markets anymore.
Conclusion – Are the G7 as Germany’s trade partners still as important?
The increased relevance of emerging markets, including the BRIC countries and Eastern Europe, has impacted the importance of the G7 in the supply chain and as a market for these three key German industries. The focus is now on the G20 rather than the G7.
In this second of four blogposts we close the loop on Germany’s relevant trading partners. Next week, we will look closer at how Germany benefits from the enlargement of the EU by forging close production networks with its neighbors to the east.
All calculations are done by Systain Consulting GmbH and are based on data provided by the WIOD project (World Input-Output Database). WIOD provides international input-output tables for the period 2000-2014. 56 industry sectors across 43 countries and an additional ‘rest of the world’ region are covered.
The calculations focus on three industries which are pillars of Germany’s economic strength: ‘chemicals’, ‘motor vehicles’ and ‘machinery and equipment’. The analysis covers value added and hours worked within the respective supply chains.
Timmer, M. P., Dietzenbacher, E., Los, B., Stehrer, R. and de Vries, G. J. (2015), “An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production”, Review of International Economics., 23: 575–605