Q-Tool Extension: Competitiveness

1. Agenda

2. Definitions and Indicators

3. CGE Implementation

4. Conclusions

1. Agenda

Specification of „Competitiveness“

• Firm level (cost structure, innovation potential, ...)• Sectoral level (market shares, mark-ups, ...)• Country level (terms-of-trade,...)

Review of existing indicator systems

• Input/output-based indicators• Data availability

Compatibility with quantitativemodeling framework

• Implementation of indicators in CGE core-model• Illustrative policy application (here: EU leadership in climate policy)

Agenda

2. Definitions and Indicators

Firm level:

• „A firm is competitive if it can produce products [...] of superior quality or lower costs than its domestic and international competitors. (US-President`s Commission on Industrial Competitiveness 1985, S. 6)

National level:

• “Competitiveness [...] is understood to mean a sustained rise in the standards of living of a nation and as low a level of involuntary unemployment possible.”(European Competitiveness Report 2004)

Sectoral level:

• ... Position of a sector in relation to other sectors or to the same sector in other countries in terms of market share and productivity.

Selected Definitions

Output / Performance Input / Policy

“ex-post” “ex-ante”

• Market share• Profitability• Productivity

• R&D Expenditures• Stock of Human Capital• Cost Structure• Innovation Potential

Based on:

Firm level:

Sectoral level:

• (Relative) market shares - RMS

• Revealed Comparative Advantage - RCA

• Productivity / Profitability

• R&D expenditures• Investment flows (FDI)• Innovation Potential

(Patents)

Indicators (1)

National level:

• Real Exchange Rate• Terms of Trade• Constant Market Shares (CMS)• Productivity• Per Capita Income• Balance of Current Account

• Labour unit costs• R&D expenditures• Investment Flows (FDI)• Innovation Potential

Indicators (2): Country Level

Indicators: RCA

Revealed Comparative Advantage – RCA (Balassa 1965)

3. CGE Implementation

Application: EU Leadership in Climate Policy

• Unilateral EU carbon emission constraints (e.g. EU-ETS)

• Alternative emission reduction targets:

• Impacts on international competitiveness

Policy implementation:

Issue:

• Global environmental effectiveness (carbon leakage)

- 5,10,15, 20, 25, 30% cutback of CO2 emissions compared to BaU

• Endogenous tax differentiation:

- Tax rates discriminated in favour of carbon-intensive industries - Tax ratios between other sectors and carbon-intensive industries:

1 (uniform), 2, 5, 10, 20, inf (exemptions)

Parameterization of Static PACE Version

• Base year: 2001

Data base of global economy: GTAP V6

• Coverage: 87 regions, 57 sectors, 5 factors

Aggregation:

Stylized Model Structure

Results (1): Welfare

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-2.5

-2

-1.5

-1

-0.5

0

Welfare change (in % HEV from BaU)

Results (2): Differentiated Carbon Values

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

0

50

100

150

200

250

300

Carbon tax (in USD per ton of carbon)

Results (3): Terms-of-Trade

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

Terms of trade change (in %)

Results (4): Output of Carbon-intensive Industries (EIS)

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-8

-7

-6

-5

-4

-3

-2

-1

0

Output change for EIS (in % from BaU)

Results (5): Output of Other Industries (OTH)

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

Output change for other industries (in % from BaU)

Results (6): RCA Change for Carbon-intensive Industries (EIS)

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-10-9-8-7-6-5-4-3-2-1 0 1

Change in competitiveness for EIS (in % RCA)

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

Change in competitiveness for other industries (in % RCA)

Results (7): RCA Change for Carbon-intensive Industries (EIS)

Results (8): Excess Cost of Tax Differentiation

05

1015

2025

30Emission reduction target 1

25

1015

20inf

Tax ratio

-10

-5

0

5

10

15

20

Cost implications of tax differentiation (in %)

Conclusions

• Trade-off between indicators at different levels (e.g. sector / nation)

Cautious Use of Competitiveness Indicators:

• Trade-off between indicator at the same level (e.g. sectors)

• At sectoral level: RCA, RWA, etc.

CGE Implementation of selected competitiveness indicators:

• At national level: (Per-capita) income, Terms of Trade, etc.

“ Competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous”. (P. Krugman (1994), Foreign Affairs, 1-17)