The trade war between the US and China has already slowed down growth in Europe’s export-oriented economies — including the biggest of them, Germany — even though they haven’t been slapped by any punitive tariffs. The wholesale buyers of European products, though, should perhaps be more optimistic about signing deals: Consumers attach a lot of value to the national brands of Germany, Italy and France, and that may compensate for any price increases caused by tariffs.
So far, US President Donald Trump’s trade wars have largely spared Europe, and German exports haven’t seen a significant drop.
But Germany’s economy has stopped growing, in part because trading partners’ concerns about future tariff hikes are already leading to lower factory orders. On the face of it, the worries are justified: Analytics abound that predict big hits to demand if the trade war spreads to Europe.
The models used to predict the impact of trade wars take into account lots of data on how demand in various sectors reacts to price changes. They largely ignore however, a potentially meaningful factor: the “brand value” of the country of origin.
There is surprisingly little research on how consumers’ perceptions of a product’s country of origin affect their willingness to pay. The little academic work that exists on the subject shows consumers are likely to pay more for the same product if it comes from a country they think is good at making such products. And when it comes to such perceptions, Western European countries shine.
A survey published this week by the polling firm YouGov and the Cambridge Globalism Project shows that, across 23 countries where the study was carried out, “Made in Germany” carries the greatest weight, and Italy, the UK and France also score high.
In the US, the country that seems most likely to slap high tariffs on European goods, American-made goods are the most popular, but German-made ones come second, and France and Italy enjoy some cachet, too.
The difficult part, of course, is translating these perception differences into prices. It would take detailed research into specific products to figure out what kind of cushion German, Italian and French producers have against tariff pressure. But, if previous studies of the country of origin effect are any guide, the same tariffs should hurt Chinese manufacturers much more than German or Italian ones. Unless imports from Europe can be replaced with goods made in the US, which is unlikely in the short run, German, Italian and French exporters should still be able to sell their goods to the significant percentage of Americans who attach a high value to these countries’ manufacturing prowess.
One other important finding in the YouGov survey is that European goods are disproportionately more popular in the developing world than in the US, and often even more popular than at home. If the US tries to price them out of its market, diverting the exports to the Middle East, Latin America, China and India should ultimately compensate them for American losses.
In a world of trade wars, price competition becomes more difficult and harder to predict. That increases the importance of quality, and thus of the corporate and national brands that serve as quality guarantees to consumers. Economists need to start building that into their models.