China’s love for product quality
Third, Germany may have benefited more than the US from China’s rise because exports to China expanded rapidly offering workers new job opportunities that lost their job due to Chinese imports. Surprisingly, the study by Dauth et al. (2014) does not find any positive employment effect from German exports to China. This is puzzling. Their analysis covers the period from 1988 to 2008, during which German exports to China increased six-fold. However, in the five years after the financial crisis of 2009 German exports to China almost doubled, a stronger increase than in any other country, while in 2013 German exports to Eastern Europe had not yet recovered to their pre-crisis level. What explains this rapid rise of Germany's exports to China? Why have the Chinese such a love for German goods?
In Marin et al. (2015), my co-authors and I show that German firms introduced a decentralised management style, delegating decision power to lower levels of the firm hierarchy. We argue that decentralised management provides incentives for workers to improve product quality, which helps firms to compete in quality rather than price. Workers at lower levels of the firm hierarchy are better informed about market demands. Giving these workers more autonomy in decision making empowers them to adapt the product characteristics to meet the market demand. We indeed find that German exporters increase their export market share of top quality goods by a factor of almost three when they operate with a decentralised less hierarchical firm organisation. The focus on product quality has a high appeal to the rising Chinese middle class purchasing German cars as well as to Chinese firms importing machine tools from Germany.
In sum, Germany fared better than the US with the rise of China because (i) on the import side, trade adjustment to low-cost competition had already happened before the rise of China; (ii) the rise of Eastern Europe offered new export opportunities for German firms; and finally (iii) China’s love for product quality found a perfect match in German products.
References
Autor, D, D Dorn and G Hanson (2013), “The China Syndrome: Local Labor Market Effects of Import Competition in the United States”, America Economic Review 103(6).
Dauth, W, S Findeisen and J Suedekum (2014), “The Rise of the East and the Far East: German Labor Markets and Trade Integration”, Journal of the European Economic Association 12(6).
Dollar, D, Satoshi Inomata, C Degain, M Bo, Z Wang, N Ahmad, A Primi, H Escaith, J Engel, D Taglioni, C Heuser, A Mattoo, M Kidder, M Ruta, and J G Reis (2017), Measuring and Analyzing the Impact of GVCs on Economic Development, International Bank for Reconstruction and Development/The World Bank
Marin, D (2010a), “The Opening-Up of Eastern Europe at 20: Jobs, Skills, and Reverse Maquiladoras in Austria and Germany”, Bruegel Working Paper No. 2010/02.
Marin, D (2010), “Germany’s Super Competitiveness: A Helping Hand from Eastern Europe”, VoxEU.org, 20 June 20.
Marin, D, J Schymik and J Tscheke (2015), “Europe’s Export Superstars – it’s the organisation”, Bruegel Working Paper No. 2015/05.
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