Recent French relative export performance: Is there a competitiveness problem?

Abstract

French economic activity is significantly affected by economic activity in the rest of the world. In recent years, the export performance of France relative to its own past and relative to a major trading partner, Germany, deteriorated. That deterioration seems related to the trend growth of exports (both by geographical destination and by product composition). Using a structural generalized dynamic factor model, this study shows that faced with an increase in unit labor costs or in its terms of trade, France adjusts relatively less via price and wage changes, and more via employment changes. French exports benefit relatively less than German exports from positive shocks either in a geographical or in the Standard International Trade Classification product classification. Given that the convergence of the French guaranteed minimum wage (SMIC) operated between 2003 and 2006 resulted in a significant increase in unit labor costs, the study supports the view that the foreign sector difficulties might be structural. The importance of trade flows as well as the policy constraints imposed by the euro area, highlights the relevance of structural reforms that increase markets flexibility. In addition, the analysis stresses the importance of policy measures that increase productivity, and the desirability of avoiding SMIC adjustments unrelated to productivity.