Absolute cost advantage and sectoral competitiveness: Empirical evidence from NAFTA and the European Union

Abstract

Following the theory of absolute cost advantage, the present study aims to verify the hypothesis that, during 2000-2014, the real effective exchange rates of the United States and German manufacturing sectors vis-à-vis their North American and European partners, respectively, have been governed by the relative vertically integrated unit labour costs. To this purpose, the second generation of panel cointegration techniques to control for both cross-sectional dependence and slope heterogeneity is applied in our empirical analysis. The long-run equations are estimated by the mean group, the common correlated effects mean group, and the augmented mean group. The findings suggest that the cost-competitiveness of both US and German manufacturing sectors is positively associated with the decrease in the relative vertically integrated unit labour costs over the 2000-2014 period.