# **4.4 Comparing GVC incomes and gross exports**

The finding of declining competitiveness of Germany in the previous sections might be surprising given its much touted success in export markets. In this section we explain more indepth how rising exports do not necessarily correlate with increases in GVC incomes. For a good understanding of the differences between gross exports and GVC income it is important to reiterate two distinguishing characteristics of the GVC income concept. First, it indicates to what extent a country can compete with other nations in terms of _activities_ related to global manufacturing, rather than competing in manufacturing _products_ as measured by exports. It is measured through value added, not gross output. Second, it is a reflection of an economy’s strength to compete in both domestic and global markets. Countries might gain income by serving foreign demand, but might at the same time loose income in production for the domestic market. The GVC income share of a country measures the combined net effect.

Nominal gross exports of manufactures from Germany increased by 180% over the period 1995-2008, whereas manufactures GVC income increased only by 52%. This is the net effect of two main factors. First, the domestic value added content of German industrial production dropped quickly during this period due to offshoring and increasing imported intermediates. This process has been described extensively by Marin (2011) who relates Germany’s competitiveness to increased offshoring to Eastern Europe, in particular since the early 2000s. Foreign sourcing of intermediates helped to keep German output prices low, in addition to domestic wage restraints. This enabled German firms to compete in global markets, but at the same time the domestic value added per unit of output was declining prompting HansWerner Sinn to characterize Germany as a Bazaar economy (Sinn, 2006). Although this characterization is somewhat overdone as a major part of the value is still added in Germany, Sinn rightfully pointed at the increasing irrelevance of export statistics to gauge the success of a country. The second factor is sluggish domestic demand in the German economy. Due to slow GDP growth and low income elasticity, domestic demand for manufacturing goods was weak. Given the relatively large share of domestic value added in production for final domestic demand (akin to the home production bias in international trade), this depressed German GVC income. Added to this, an increasing part of domestic demand was served by imports of final manufacturing goods from China and Eastern Europe such as non-durables and electronics. The domestic demand effects held down German GVC income, but none of these effects will show up in German gross export statistics. As a consequence, the ratio of gross exports of manufactures to manufactures GVC income increased from 82% in 1995 to 153% in 2008, illustrating the dangers of relying on gross exports as an indicator of competitive strengths.

Obviously given increased fragmentation worldwide, this wedge between GVC income and gross exports is there also for other countries. In Table 3 we provide a direct comparison of the growth rates of gross exports of all manufactures and GVC incomes in production of final manufactures. We find that the former is growing much faster than the latter in all European countries. This indicates that for all countries growth in gross exports is overestimating growth in GVC incomes. The biggest differences are found for Austria, Germany, Greece and Spain. Clearly, there is a positive relationship between export and GVC income growth rates in a country, with a correlation higher than 0.9 over the 19 countries shown in Table 4 for the period 1995-2008. But this is solely driven by the Eastern European countries. They have very high growth rates of exports and GVC income, although the latter is roughly only half the former. The 28