28 May 2001 • Measuring the Intensity of Quality Competition in Industries • Karl Aiginger

We can summarise the competitive strength of the EU with regard to quality by calculating a "quality premium". The unit value of EU exports is 31 percent higher than in its imports, giving Europe an additional export value in extra-EU trade of about ECU 160 billion. The quality premium is defined as the difference between the reported export value and the value that would result if exports were priced at import prices. More than one half of the premium is created in five industries: chemicals, machinery, food, cars and textiles. The largest contributions to the premium are made by Germany, Italy, France, the U.K. and Austria.

The quality premium is gained through trade with non-Triad countries (accession countries, emerging economies, other countries). However, many of these countries are catching up; imports from accession countries are priced at one half of Europe's exports into these regions, while the equivalent figure was one sixth in 1988. This development is contributing to a decline in the relative quality premium of the EU.

The other challenge comes from competition with high-productivity countries. The unit value for the EU for total exports is larger than that for the USA and about the same as that of Japanese exports. However, Europe has higher import unit values in its bilateral trade with both the USA and Japan. In the case of the EU and USA, the reason for this is the excellence of U.S. exports in technology-driven industries: here the import unit value for the EU is nearly double that of EU exports into the USA. This quality component furnishes the USA's share of exports in this sector with a 10 percentage points advantage over Europe's share in exports (while the EU exports more in quantities). As regards the trade between the EU and Japan, Europe has a higher export unit value in technology-driven as well as in mainstream industries, but Japan is concentrating its exports in the high-unit value sectors, such that the unit value for manufacturing exports to Europe is higher for Japan.

The EU's position within the Triad as seen from the quality indicators is better than from the perspective of productivity comparisons and from the share of high-tech industries. This comes from the excellent position of Europe in mainstream and engineering industries: 41 percent of EU production is in quality-sensitive industries, 3 percentage points more than in the USA and 9 points more than in Japan. The same ratio exists for exports. The speed of change away from price sensitive sectors is, however, slower, specifically in imports, indicating that shifts in consumption may be faster in the USA. This trend is seen specifically in technology-driven or ICT industries.

Figure: Creation of quality premium by sectors and countries 1998 (billion ECU)

Source: WIFO calculations using Eurostat. Quality premium: EU export minus hypothetical exports if they were priced at import prices.

Vienna, 28 May 2001. For further information, please refer to Mr. Karl Aiginger, phone (1) 798 26 01, ext. 247. For the full text of this article see the Internet under http://www.wifo.ac.at/