Give credit where credit is due: Tracing value added in global

production chains

William PowersUnited States International Trade Commission

with Robert Koopman, Zhi Wang, and Shang-Jin Wei

November 18, 2011

The views expressed here are solely those of the presenter. This presentation is not meant to represent the views of the USITC or any of its Commissioners.

2

Presentation outline

• Global value chain analysis: Two IO-based approaches• Conceptual framework for ICIO-based analysis from

Koopman et al. (2010)• Applications

– Country and regional integration into global value chains– Direct and indirect exports of services– Bilateral trade deficits

• Conclusions and “wish list” for APEC

3

Value chain analysis based on IO-tables: 2 alternatives

• Single country models– Often based on Hummels, Ishii, Yi, 2001– Advantages: up-to-date; easy to measure foreign input in domestic

production and exports– Disadvantage: cannot determine sources of imported value

• Inter-Country Input-Output (ICIO) models– Major databases: IDE-JETRO, WTO, OECD, World Input-Output

Database, GTAP-based (e.g., Koopman et al. 2010; USITC 2011)– Advantages: Can track ultimate source and destination of value in

global production networks– Disadvantages: Complex, latest databases only through 2007

Value-chain analysis with single-country (U.S.) IO table

1977 1981 1985 1989 1993 1997 2001 2005 2009

0

0.5

1Foreign services (top 5) in U.S. inputsForeign services (all) in U.S. inputs

5

10

20

30

%

Foreign content in U.S. manufacturing inputsForeign content in U.S. exports

4

• No estimates of foreign content in U.S. exports existed for recent years• USITC put together an estimate for 1998–2009 relatively quickly

Source: USITC, 2011, Import Restraints.

5

• For simplicity, start with a 2-country framework• All output is used as an intermediate or final good at home or abroad

Value chain analysis with ICIO: Gross output

Xr: (gross output of country r); Yr: (output of r’s final goods)

Ars: (ICIO Coefficient matrix: use in country s of intermediates from r)

rsrsrrrr YXAXAX

• Put in block matrix notation and rearrange

2

1

2221

1211

2

11

2221

1211

2

1

YY

BBBB

YY

AIAAAI

XX

Bsr: (Block Leontief inverse matrix: the amount of total output in srequired for a one-unit increase in final demand in country r

6

ICIO framework: Value added in exports

Vr: domestic value-added coefficient vector: gives r’s direct domestic value added in production of each sectorEr: official gross exports includes exports of both intermediate and final goods

22221212

21211111

EBVEBV

EBVEBVVBEVAS_E

• Value-added in exports of each sector in all countries:

• Not standard application of Leontief inverses to final demand, but• Completely decomposes official trade flows into VA components • Generalizes existing measures, such as HIY’s vertical specialization• Fully generalizable to many country world

– Tracks indirect flows through third countries (e.g., Japan China US) – Tracks indirect flows through other sectors

7

Completely decomposes gross exports

Exported in intermediates re-exported to third

countries

Exported in intermediates

that return home

Exported in final goods

Domestic value added

Foreign value added

Gross exports

Exported in intermediates absorbed by

direct importer

8

Completely decomposes gross exports

Advanced economies

Other emerging

Asia NICs

Emerging Asia

0 10 20 30 40 50 60 70 80 90 100Share of Gross Exports

World average

Mexico - ProcessingMexico - Normal

Mexico - Total

China - ProcessingChina - Normal

China - Total

BrazilRest of AmericasRest of the World

Russian FederationSouth Africa

EU accession countries

Rest of East AsiaRest of South Asia

IndiaIndonesia

VietnamThailandMalaysia

Philippines

Hong KongKorea

TaiwanSingapore

Australia, New ZealandEFTA

CanadaEU

United StatesJapan

DVA in direct final goods DVA in intermediates absorbed by direct importer Indirect VA exports to third countries

Reflected VA trade Foreign VA

Advanced economies

Asian NICs

Emerging Asia

Other emerging

China

Mexico

Source: Koopman et al. (2010)

Indirect exports of value-added: business services

• IO tables track value created in one industry but exported by another • Indirect exports are more important for some countries than others• Value-added measures can change our impression of comparative

advantage

9

Direct ExportsBusiness services(e.g., accounting, legal, IT)

Business services

Motor vehicles

Machinery

Electronics

Etc.

Indirect Exports

• Revealed comparative advantage (RCA) is often used as a measure of export competitiveness

• Measured with gross exports, India has a strong RCA because of its high share of business services exports in its total exports

• Measured with value added, advanced economies have strong RCA in the sector, because of their high value of indirect business services exports

Source: Koopman et al. (2010) 10

Value added can change our impression of comparative advantage

Examples:•China and Mexico use inputs from many countries to produce exports, so VA exports are smaller than official gross exports hence the U.S. bilateral trade deficits shrink in VA terms•Japan sends substantial value through third countries (as do Russia, Australia, and NICs), so U.S. bilateral trade deficits are higher in VA terms•The overall U.S. trade deficit is the same in value-added or gross terms

11

Value added can change our impression of bilateral trade deficits

U.S. Bilateral Trade Deficits , 2004 (billion $)

Gross trade deficit

Source: USITC, 2011, Import Restraints

Conclusions• Single-country IO frameworks can play a role• But ICIO can provide substantial insight, especially when

measures are consistent with official trade flows– Bilateral trade balances– Export strength and revealed comparative advantage– Reliance of exports on imports– Reliance on foreign demand and foreign supply

• “Wish list” for APEC– Disaggregation of all APEC countries and their major trading

partners in ICIO databases– Extension of survey-based ICIO coefficients to additional countries– Better understanding of changes in sources and destinations of

inputs over time 12

Questions/Comments?

• Contact information– Bill Powers– Research Division, Office of Economics– U.S. International Trade Commission– william.powers@usitc.gov

• Sources– Koopman et al., 2010, “Give Credit Where Credit is Due,”

http://www.nber.org/papers/w16426 – USITC, 2011, “The Economic effects of significant U.S. import

restraints,” http://www.usitc.gov/publications/332/pub4253.pdf 13