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Chapter 1
Introduction
Yuqing Xing
Modern international trade of manufacturing products is based on global value chains (GVCs). Many firms located in various countries are involved in production processes from product design, manufacturing parts, assembly, to distribution. The proliferation of GVCs has been integrating the world economy like an invisible hand. Supply chain trade differs from the trade observed by the British economist David Ricardo in a variety of aspects. As numerous countries are involved in producing a single product using imported intermediate inputs, gross trade values generally exaggerate export capacity and domestic import demand of nations, and this problem is particularly severe for countries specializing in final assembly (Xing and Detert 2010). Supply chain trade has transformed the relationship between trading nations from the traditional producerāconsumer relations into partnerships, and bilateral trade relations have turned into multilateral ones.
Multinational enterprises (MNEs) are at the forefront of GVC growth. Innovation and outsourcing activities of MNEs have been performing a decisive role in creating and amplifying global trade. For instance, rising trade flows along value chains of iPhones are induced by technological innovations and outsourcing activities of Apple. Geographic trade patterns and bilateral trade balances have changed and are continuing to change dramatically with the proliferation of GVCs. Under supply chain trade, the national origins of traded goods are increasingly blurred. Rules of origin are the criteria used to determine the national source of a product, to implement trade measures and determine preferential treatment. However, for goods produced within GVCs, it is difficult, and in many cases almost impossible, to define country origins. Further, the impact of exchange rates on bilateral trade balances is weakened. The currency appreciation of a country can only affect the value added generated by that country, not the whole value of the product. Besides, fluctuations of currencies of other countries participating in the same value chain either enhance or mitigate the impact. Protectionism is even more damaging to supply chain trade. Protection measures undermine the welfare of all countries involved in GVCs. The welfare reduction affects not only consumers, but also producers of the country imposing trade protection measures. Therefore, unilateral actions are not effective in solving bilateral imbalances.
To understand the distinctive features of value chain trade and the challenges to the principles of conventional trade rules, it is critical to introduce new trade statistics to trace the distribution of value added along GVCs. The Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), World Trade Organization (WTO), Organisation for Economic Co-operation and Development (OECD), and other institutions have begun the process of establishing a new global database on trade in value added. This book attempts to introduce and synthesize the frontier of the research on measuring trade in value added. It is a compilation of papers presented at the international conference āProduction Networks, Value-Added, and Trade Statistics Reforms,ā held at Peking University in Beijing, Peopleās Republic of China (PRC) in September 2012. The conference was jointly organized by the Asian Development Bank Institute (ADBI), IDE-JETRO, and the National School of Development of Peking University.
In Chapter 2, Christophe Degain and Andreas Maurer of the WTO discuss three issues: (i) factors driving the proliferation of GVCs, (ii) approaches to measuring trade flows within GVCs, and (iii) policy implications of GVCs for international trade and commercial policies. The authors point out that trade liberalization, foreign direct investment (FDI), pro-business policies, infrastructure development, and innovations in logistics services are principal forces facilitating the worldwide development of GVCs. Trade liberalization under the leadership of the WTO has significantly reduced tariffs on non-agricultural goods. In 2010, the average tariff of developed economies on non-agricultural goods was 2.5%, while that of developing countries was 8.4%. The sharp reduction in the tariff level substantially promoted cross-border flows of goods, which is essential for manufacturing goods along GVCs. MNEs generally lead GVCs and optimally allocate tasks of product design, manufacturing, assembly, and marketing across countries where GVCs are built and extended. The invention of standardized cargo containers has improved the efficiency of transportation and lowered the costs of moving intermediate inputs along GVCs.
The new trade paradigm unambiguously shows that conventional trade statistics are inconsistent with trade along GVCs. New trade statistics are needed to reflect actual contributions of countries participating in GVCs. The authors introduce three basic approaches to estimating trade flows taking place within GVCs: (i) case studies and microeconomic data, (ii) direct approaches by utilizing existing data on intermediate goods, and (iii) the indirect measurement of using international inputāoutput tables. They also outline critical advantages and disadvantages of the three approaches. Case studies provide a clear sample of value added distribution over the tasks performed by economies. Compared with numerous goods traded in the global market, however, case studies cannot outline the overall picture of GVCs in global trade. The intermediate material approach faces the difficulty of distinguishing goods between intermediate and final uses. International inputāoutput (IIāO) tables trace origins and use of goods and servicesāinputs between countries and industries and can be used to analyze trade flows between both downstream and upstream partners of GVCs. It can also be linked with standard systems of national accounts. On the other hand, value added measurements derived with IIāO tables are estimates, not actual values, and based on strong assumptions that the intensity of imported intermediate inputs is the same between production for domestic consumption and for exports.
Moreover, Degain and Maurer suggest that disaggregating trade into value added provides a new angle to measure service activities, bilateral trade balances, employment creation of international trade, and international competitiveness. Preliminary results of the WTO analysis cited in the chapter shows that the contribution of services in world trade would be doubled, while the trade surplus of Mexico with the United States (US) would be reduced by 35%. The authors show the geographical fragmentation of the Boeing 787 Dreamliner and argue that rules of origins are blurred in supply chain trade and āMade in the Worldā might be a better label for the country origin of goods manufactured along GVCs.
In Chapter 3, Norihiko Yamano of the OECD first briefly explains how inter-country inputāoutput (ICIO) tables are constructed. The underlying data sources are national inputāoutput tables, national accounts series, and estimated bilateral trade coefficients. The resulting ICIO tables include comprehensive information on international trade, consumption, investment, sales, and procurement by industries. Besides the application on trade policy,Yamano suggests that ICIO tables are useful in examining ecological footprints and the transmission mechanism of macroeconomic shocks. Unprecedented globalization and asymmetric stringency of environmental regulations among nations may lead to relocation of polluting industries from countries with strict oversight to countries with lenient environmental regulations. ICIO tables can be used to trace the movement of pollution such as carbon emissions due to FDI. The gross value of exports and imports are used in open macroeconomic models to gauge spillovers of domestic macroeconomic shocks to trading partners. In supply chain trade, imports contain a substantial portion of intermediate inputs required for producing exports, thus exaggerating domestic demand for foreign goods and services. The author suggests that value added in trade estimated with the ICIO tables would give rise to a better understanding on the transmission of macroeconomic shock spillovers.
Using ICIO tables to estimate value added in trade depends on the availability of national inputāoutput tables and bilateral trade coefficients. It also requires strong assumptions, such as homothetic preferences and identical input bundles between domestic sales and exports. Questions arise as to how reliable the estimates are and whether they are acceptable with insignificant statistics errors. In Chapter 4, Yuqing Xing of National Graduate Institute for Policy Studies in Tokyo introduces a direct method to estimate trade in value added and applies the method to the case of the PRC. He finds that the domestic value added of the PRCās processing exports and processing high-tech exports gradually increased from 30% and 25% to 44% and 45%, respectively, during 1997ā2012. On the other hand, the domestic content of processing exports with supplied materials over the same period fell to 14% from the peak level of 35%. By 2012, the domestic value added of the PRCās exports remained below 77%.
Xingās approach relies on aggregate data of imports used for manufacturing exports. Processing imports recorded by PRC customs usually do not include imported oil, natural gas, coal, and other minerals. Therefore, the estimates tend to overestimate domestic value added. However, they can be used as an upper limit to evaluate the reliability and accuracy of the estimates derived from ICIO tables. He compares the results with those of the OECD Trade in Value Added (TiVA) and finds that the latter significantly overestimates the domestic value added of the PRCās exports. In addition, Xingās analysis reveals that the time trend implied by the OECD TiVA is inconsistent with the fact that the share of processing exports decreased gradually as a proportion of the PRCās total exports. The assumption of homothetic preferences among consumers of the PRCās trading partners may be one of the reasons for the inconsistency, as the share of processing exports varies significantly between high- and low-income economies.
Production fragmentation has been analyzed extensively in the international trade literature. Currently, empirical studies measuring the intensity of production fragmentation have been lagging. For instance, vertical specialization indexes cannot provide a complete picture of the entire production chain, as they are not able to trace the sequence for more than two consecutive stages. In Chapter 5, Satoshi Inomata of IDE-JETRO proposes a new method to measure the magnitude of production fragmentation based on average propagation lengths: a technique of inputāoutput analysis. The new measurement includes both direct and indirect linkages among sectors. Specifically, it captures all necessary indirect feedback occurring in a complete production process. Hence, the new approach covers every aspect of the vertical sequence in production fragmentation.
The author employs the Asian International InputāOutput Table developed by IDE-JETRO and finds that the machinery, electronics, and automobile sectors have the highest level of production fragmentation among the 12 sectors investigated. The cross-country empirical analysis indicates that the participation in production fragmentation varies between countries, with Singapore, Malaysia, the Philippines, and Thailand having the highest fragmentation among the East Asian economies.
The PRC is the largest source of US imports. āMade in Chinaā products are available in all corners of the US market. The PRC firms perform only a part of the tasks in the GVCs where the US is the destination market. US firms provide the necessary retail logistics and transportation services for delivering these products to US consumers and businesses. Therefore, a part of the US consumption of such products goes to locally produced services. In Chapter 6, Galina Hale and Bart Hobijn of the US Federal Reserve Bank apply inputāoutput tables to evaluate the share of imports and commodities in US consumption and investment. They conclude that 82% of expenditures by US consumers go to goods that are entirely produced domestically. Furthermore, 55% of consumer spending on goods labeled āMade in Chinaā actually covers the costs of the domestic wholesale, transportation, and retail components. Hence, only 1.9% of the consumer spending reflects the costs of the goods imported from the PRC. In the same fashion, the authors find that 20% of US private fixed investment spending goes to imported goods, of which 4.2% goes to imports from the PRC. Despite the advent of unprecedented globalization, the US economy remains relatively closed.
Most studies on GVCs focus on cross-country production fragmentation. The sheer size and diversity of regional economies in the PRC imply that the regional economies may be integrated with domestic value chains (DVCs). In Chapter 7, Bo Meng of IDE-JETRO extends existing studies on GVCs to DVCs and estimates domestic trade in value added by using the interregional inputāoutput tables of the PRC. The domestic trade in value added is defined as one regionās value added induced by another regionās final demand. The empirical analysis indicates that the regional value added of the PRCās north coast exports to the southwest region accounted for 94% in 2002, while those of the east coast to the south coast was only 40%. From 2002 to 2007, shares of value added decreased for all regions, suggesting improvement in the participation of regional value chains and further enhancement in domestic market integration. The author also employs the estimates of domestic trade in value added to examine revealed comparative advantages, as gross trade flows generally lead to distortions of measuring regional comparative advantage.
In Chapter 8, Guoyong Liang of the United Nations Conference on Trade and Development has coined the term āFoxāAppleā to represent their inter-firm relations. Foxconn is the exclusive assembler of iPhones and iPads, invented and owned by Apple. The author argues that the FoxāApple alliance shows distinctive features of GVCs: (i) the cooperation is āborn globalā rather than the result of an evolution process from vertical integration, to domestic subcontracting, and eventually to foreign contract manufacturing; (ii) it is a partnership between two leading firms at two key stages of the value chain ā product design and manufacturing; and (iii) āGlobal Value Treeā may be a better interpretation of the GVC value chain defined by FoxāApple. In the tree representation, the top is the distribution network controlled by Apple, the middle is Foxconn, and the bottom is the production network ā suppliers connected to Foxconn. FDI and contract manufacturing are the two foremost channels through which GVCs are formed. He argues that FoxāApple is a typical example of contract manufacturing.
The studies in this book suggest that conventional trade statistics are not suitable for analyzing trade under GVCs. Tracing trade in value added is crucial for a better understanding of the fundamental changes brought by GVCs. Many issues such as bilateral trade balances, revealed comparative advantage, and rules of origin require re-examination in the context of GVCs. International inputāoutput tables provide a convenient tool to measure trade in value added. However, the results of IIāO tables are the estimates derived with strong attached assumptions. Caution is warranted in utilizing the data for analytical studies.
Reference
Xing, Y. and N. Detert. 2010. How the iPhone Widens the United States Trade Deficit with the Peopleās Republic of China. ADBI Working Paper No. 257. Tokyo: Asian Development Bank Institute.
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Chapter 2
Implications of Global Value Chains for Trade
Statistics and Trade Policy
Christophe Degain and Andreas Maurer*
The last three decades saw the creation and intensification of global value chains due to changed business models. Today, the production of final goods often requires performing several tasks across countries. This chapter describes the factors that have led to ātrade in tasksā and explains the biases of traditional trade statistics in depicting this new trade reality. Approaches to correct these biases by estimating trade in value added are described with their respective statistical challenges. Changing the perspective from a āgrossā reporting to a āvalue addedā angle has implications on trade indicators. Some common considerations are revisited, such as the importance of services, interpretation of trade balance, export competitiveness, and risks associated with increased interdependencies between economies. Traditional rules and principles may also be put into question. The chapter concludes with some directions for trade policy to foster participation in global value chains.
2.1. Introduction
Technological progress, reduced transportation costs, and market-opening incentives have all contributed to build a new business model, leading to the development of globally integrated value chains (Figure 2.1). Mass consumption, mainly in industrialized countries, matches with production capacity in developing countries. This development has had a marked impact on international trade statistics and has also influenced the revision of international statistical standards such as the Balance of Payments (BOP) and the System of National Accounts (SNA). Trade indicators, derived either from customs statistics or other statistical frames, also need to be reinterpreted.
Figure 2.1. Global value chains and world trade ā ins and outs.
Source: World Trade Organization.
This chapter outlines several topics that are explored within the āMade in the Worldā initiative (MIWI) launched by the World Trade Organization (WTO) in 2011.1 It also exploits preliminary findings ...
