The Effect of Imports from Low-Wage Countrieson French Inflation

Juan Carluccio, Erwan Gautier, Sophie Guilloux-Nefussi

Banque de France1

BdF-BoE International Macroeconomics Workshop11/10/2017

1The views expressed in this paper do not necessarily reflect the opinion of the BdF or the Eurosystem.

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Introduction

French CPI inflation. Decomposition Tradable - NonTradable Goods

-1,5

-1

-0,5

0

0,5

1

1,5

2

2,5

3

Tradable goods Non Tradable goods CPI (excl. energy)

%

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Introduction

Motivation

Large increase of imports from low-wage countries (in particularChina) in developed countries

I China’s accession into the WTO in 2001I Potential gain for consumers: having access to cheaper goods

Draghi (2017): “Falling import prices partly explain the subduedperformance of core inflation, too. This is because importedconsumer products account for around 15% of industrial goods in theeuro area”. Introductory speech, ECB forum on Central Banking,Sintra 27/7/2017.

Question: By how much do imports from LWC contribute to lower CPIinflation in France?

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Introduction

Contribution and Results

Decomposition of the effect of LWC imports on inflationI General framework allows to decompose effect into 3 channelsI Contribution of Substitution, Imported Inflation and Competition

effects

Use of detailed individual dataI Trade data to build import price indices by countries of origin and by

productI Mapping CPI and trade product classifications

QuantificationI Do imports from LWC lower inflation? Yes, by -0.11pp per year on

averageI What are the main channels?

F Substitution btw domestic and imported goods and between importsfrom HWC and LWC

F Small impact of competition channel

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Theoretical Framework

Imports and domestic inflation

Consumer price index: Pt = βPTt + (1− β)PNT

t

with: PTt = (1− ηt)Pd

t + ηtPft

Hence:

∆Pt = ∆ωt

(P ft − Pd

t

)︸ ︷︷ ︸Substitution Channel

+ ωt−1∆P ft︸ ︷︷ ︸

Import. Infl. Ch.

+ (β − ωt−1)∆Pdt︸ ︷︷ ︸

Competition Channel

+(1− β)∆PNTt

with ωt = βηt = import penetration

The rise in imports from LWCs:

1 increases import penetration (∆ωt )

2 lowers import price inflation (∆P ft )

3 affects domestic producer price inflation (∆Pdt ) (in particular via

pro-competitive effects)

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Theoretical Framework

Decomposition by origin

P ft = γtP

LWCt + (1− γt)PHWC

t

Hence

∆Pt = γt∆ωt

(PLWCt − Pd

t

)+ (1− γt)∆ωt

(PHWCt − Pd

t

)︸ ︷︷ ︸Substitution Channel

+ ωt−1

[∆PHWC

t + ∆γt(PLWCt − PHWC

t

)+ γt−1

(∆PLWC

t −∆PHWCt

)]︸ ︷︷ ︸Imported Inflation Channel

+ (β − ωt−1)∆Pdt︸ ︷︷ ︸

Competition Channel

+(1− β)∆PNTt

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Data

Trade Data

Exhaustive administrative file collected by the French Customs.

Values (in euros) and quantities of imports and exports (by country oforigin and product) for all firms over the period 1994-2014.

Restriction to consumer goods (i.e. products matched with COICOPclassification)

5 different country categories according to their GDP per capita(Auer and Fischer [2010] and Auer et al. [2013]) details

I 3 main groups:F High-wage countries (above 75% of French GDP pc): EU countries,

US, Can., JapF Intermediate group of LWC (btw 25% and 75% of French GDPpc):

South America, Eastern European countries, South East Asia...F LWC (less than 25% of the French GDPpc): China, India, Vietnam and

most of African countriesI 2 separate groups for:

F ChinaF New EU member states (NEUMS)

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Data

Import Price Indices

g=country group, i=product(CN 8-digit level), c=country

At date 0.

Pgi ,0 =∏c∈g

Pγic,0ic,0

At date t, aggregation by groups of country:

πgi ,t =

∏c∈g P

γic,t−1

ic,t∏c∈g P

γic,t−1

ic,t−1

Then: Pgi ,t = Pgi ,t−1πgi ,t

At date t, import price level for product i :Pi ,t =

∏g P

γgi,tgi ,t and πi ,t = ln (Pi ,t)− ln (Pi ,t−1)

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Data

Aggregate import price inflation: πt =∑

i γi ,tπi ,t

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Imports Deflator Inflation (National Accounts)

Import price inflation - consumption goods (Insee)

Import price inflation (Customs Data)

Import inflation (Customs Data - Only consumtion goods)

(%)

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Data

Consumption Data

Consumption by COICOP products

A concordance table from CN8 classification (used to report tradestatistics) to the COICOP classification (used to construct the CPIinflation)

Aggregate consumption values are also available at the level 4 of theCOICOP classification on the period 1994-2014 from Insee.

VAT rates + uniform retail distribution margin rate

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Results Channel 1

Channel 1:∆ωt

(P ft − Pd

t

)+ ωt−1∆P f

t + (β − ωt−1)∆Pdt + (1− β)∆PNT

t

Figure : Import Penetration in CPI Consumption - Total and by Country Groups

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total

High Wage countries

All LWC

% of CPI

consumption

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Results Channel 1

Channel 1: China and NEUMS import penetration

Figure : Import Penetration in CPI Consumption - Low Wage Countries

0

0,25

0,5

0,75

1

1,25

1,5

1,75

2

2,25

2,5

2,75

3

3,25

3,5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China

Other Very Low Wage Countries

NEMS

Other Low Wage countries

% of CPI

consumption

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Results Channel 1

Imported goods cheaper than domestically produced goods

Figure : Price of Domestically Produced Goods vs. Imported (Consumption)Goods

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Price ratio Domestic production / All imports

Price ratio Domestic production / LWC Imports

Price ratio Domestic production / HWC imports

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Results Channel 1

Effect through Channel 1

Substitution Channel:

γt︸︷︷︸0.3

∆ωt︸︷︷︸0.32

(PLWCt − Pd

t

)︸ ︷︷ ︸

−0.49

+ (1− γt)︸ ︷︷ ︸0.7

∆ωt︸︷︷︸0.32

(PHWCt − Pd

t

)︸ ︷︷ ︸

0.03︸ ︷︷ ︸'0

⇒ Channel 1=−0.05pp

Remark: Important heterogeneity across products.Clothing, Furnishing and Communication account for a bulk of theeffect.

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Results Channel 2

Channel 2: Lower Imported Inflation

Holding import penetration constant, what is the impact of LWC onimport price inflation?∆ωt

(P ft − Pd

t

)+ ωt−1∆P f

t + (β − ωt−1)∆Pdt + (1− β)∆PNT

t

Need to decompose import inflation by country of origin.Can do so at the product level.

∆P ft = ∆PHWC

t + ∆γt(

PLWCt − PHWC

t

)︸ ︷︷ ︸

substitution in imports

+ γt−1

(∆PLWC

t −∆PHWCt

)︸ ︷︷ ︸

inflation differential

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Results Channel 2

Figure : Contribution to Import Price Inflation: Substitution vs InflationDifferential Effects

-2

-1,5

-1

-0,5

0

0,5

1

1,5

2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Substitution contribution Inflation differential contribution

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Results Channel 2

Figure : Substitution Contribution to Import Inflation: Country CategoryDecomposition details on import shares

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China NEMS Other LWC

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Results Channel 2

Effect through Channel 2

Imported Inflation Channel:

ωt−1︸︷︷︸0.15

∆γt(

PLWCt − PHWC

t

)+ γt−1

(∆PLWC

t −∆PHWCt

)︸ ︷︷ ︸

−0.38

⇒ Channel 2= −0.05pp

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Results Channel 3

Channel 3: (β − ω)∆Pdt

Competition effect through Variable Markups

Firm j within a given industry i .

Pt(j , i) =Mt(j , i)mct(j , i) where Mt(j , i) depends on price elast. ofdeman

I Price elasticity of demand depends on firm j price and prices ofcompetitors

I In equilibrium : this information is summarized in firm’s market shareSt(j , i) ⇒Mt(j , i) =M(St(j , i))

⇒ ∆ log(Pt(j , i)) ' Γt(j , i)∆ log(St(j , i)) + ∆ log(mct(j , i))

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Results Channel 3

Channel 3: (β − ω)∆Pdt

Foreign Competition

3 firms: j ∈ {d , LWC ,HWC}.Within each sector i : St(d) = 1− (St(HWC ) + St(LWC )).

Theoretical Prediction:

∆ log(Pt(d)) =

ΨLWCt ∆ log(St(LWC )) + ΨHWC

t ∆ log(St(HWC )) + ∆ log(mct(d))

Empirical counterpart:

πdi ,t = ρLWC∆SLWCi ,t + ρHWC∆SHWC

i ,t + λt + νi + εi ,t

OLS estimates using data on producer price inflation at the 4-digitlevel of the CPA classification.

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Results Channel 3

Impact of LWC on French Producer Inflation (OLS)All goods Consumption goods High import penetration

All Consumption(1) (2) (3) (4) (5) (6)

∆ share - China -0.102** -0.058*** -0.104** -0.063**

∆ share - NEUMS 0.036 -0.004 0.007 0.293

∆ share - other LWC 0.108 0.077 0.020 0.215

∆ share - All LWC -0.041 -0.044*

∆ share - HWC 0.051* 0.039 0.051 0.041 0.086** 0.019

Year dummies Yes Yes Yes Yes Yes YesProduct dummies Yes Yes Yes Yes Yes YesR2 0.09 0.09 0.13 0.13 0.118 0.14Nb observations 1,970 1,970 712 712 1,290 320

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Results Channel 3

Effect through Channel 3

Pro-Competitive Channel:

(β − ωt−1)∆Pdt = (β − ωt−1)︸ ︷︷ ︸

0.35

∂∆Pdt

∂∆ωLWCt︸ ︷︷ ︸

0.04

∆ωLWCt︸ ︷︷ ︸

0.22

⇒ Channel 3 < −0.01pp

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Conclusion

Conclusion

Total effect = 0.05︸︷︷︸substitution

+ 0.05︸︷︷︸imported inflation

+ 0.01︸︷︷︸competition

Mostly due to substitution effect

Channel 3 very small.

China accounts for half of the effect

What we plan to do next?IV and imported intermediate consumption

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Thank you for your attention!

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Appendix

Appendix

back

Table : List of Countries by Country Categories

Group of countries

High-Wage countries GDP per capita above 75% of France’s:EU countries, US, Canada, UK, Japan,South Korea,Australia, New Zealand, Israel...

Low wage countries GDP per capita between 25% and 75% of France’s- New EU member states

Bulgaria, Croatia, Cyprus, Czech, Estonia, Hungary,Latvia, Lithuania, Malta, Poland, Romania,Slovakia, Slovenia

- Other Low wage countriesTurkey, Brazil, Mexico, Malaysia, Russia, Argentina,...

Very Low wage countries GDP per capita below 25% of France’s- China (including Hong-Kong)- Other Very low wage countries

India, Thailand, Tunisia, Morocco, Indonesia,Philippines, Vietnam, Egypt, Pakistan, Ukraine,...

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Appendix

Table : Import Penetration by COICOP Product Categories (1994-2014)

CPI COICOP % of imports % of LWC imports % of Chineseweight category in consumption in consumption imports in cons.2014 1994 2014 1994 2014 1994 2014

0.15 01. Food 6.9 13.9 1.0 1.8 0.1 0.10.04 02. Alcohol 11.6 13.5 0.2 2.6 0.0 0.00.04 03. Clothing 33.7 76.7 17.9 54.8 3.2 24.80.14 04. Housing 4.9 6.6 0.7 1.3 0.0 0.30.06 05. Furnishings 29.5 54.7 4.0 20.8 1.2 10.60.10 06. Health 1.6 4.4 0.1 0.6 0.0 0.30.16 07. Transport 5.6 9.9 0.3 1.9 0.0 0.20.03 08. Communication 0.3 12.3 0.2 10.8 0.1 8.90.08 09. Recreation and culture 21.1 26.6 4.0 14.2 2.2 9.20.08 12. Restaurants 0.0 0.0 0.0 0.0 0.0 0.00.13 13. Miscel. 5.0 9.9 1.4 3.2 1.0 2.3

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Appendix

Table : Contribution of LWC Imports to Import Price Inflation: Comparison

Country Period Impact of LWC Sourceon import inflation

France 95-05 -0.44 pp This studyAustria 95-05 -0.66 pp Glatzer et al. 2006Finland 96-05 -1 pp BoFinland 2006Portugal 98-06 -0.2 pp Cardoso et al.2006Sweden 96-04 -1 to -2 pp Bank of Sweden 2005United States 93-02 -0.8 to -1 pp Kamin Marazzi 2006

France 00-05 -1 pp This studyUnited Kingdom 00-05 -0.7 pp Mac Coille 2008

Note: this table reports estimates of the contribution of LWC to import prices indifferent countries. These estimates are obtained using a very similar methodologypresented in section 4.2. Differences in methodologies may come from the definitions ofcountry categories and also from the level of product disaggregation. Results presentedfor France are calculated over two different periods (1995-2005) and (2000-2005).

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Appendix

Channel 1: Heterogeneity across products back

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Appendix

Figure : Price of Domestically Produced Goods Relative to Prices of ImportedGoods (Consumer Goods) - Median

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Price ratio Domestic production / All imports

Price ratio Domestic production / LWC Imports

Price ratio Domestic production / HWC imports

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Appendix

Share in total imports back

Figure : Import Market Shares over Time and by Country Category

55

60

65

70

75

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0

2

4

6

8

10

12

14

16

18

20

22China (right scale) NEMS (right scale)

LWC (right scale) Very Low Wage Countries (right)

High Wage Countries (left scale)

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