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

February 4, 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.

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Presentation outline

• Global value chain: nature and measures• Conceptual framework and its contribution

– Three important matrices based on block-matrix formulation– Integration of other measures in the literature– Decomposition of gross exports completely into value-added

components

• Empirical results– Highlight regional differences in supply chain participation– Show differences in trade costs from multistage production

• Database improvements and limitations– Extensions of the GTAP database– Connection to official statistics

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Value chains,from a product view to a global view

• What is a global value chain? – A system of value-added sources and destinations within a

globally integrated production network

• Literature– Single product: Dedrick, Kraemer, and Linden (2008)– Single country: Hummels, Ishii, Yi (2001), Koopman et al (2008)– Asian regional chains: Pula and Peltonen (2009); Wang,

Powers, and Wei (2009)– Global snapshot: Daudin, Rifflart, and Schweisguth (2010);

Johnson and Noguera (2010)– Global time series: Erumban et al. (2010); Wang et al. (2010)

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Global value chains: Multiple measures

• Hummels, Ishii, and Yi (2001) measures of vertical trade– VS: share of imported inputs in exports– VS1: share of exports sent indirectly through third countries

• Newer measures– VAX: domestic value-added in exports (Johnson and Noguera) – VS1*: domestic value-added that returns home (Daudin et al.)

• aka “reflected” exports

• Not previously unified in a fully specified framework – turn to this next

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• All output is used as an intermediate or final good at home or abroad

Value-added framework: Gross output in a two-country world

with N goods,

Xr: (N×1) Gross output of country r

Ars: (N×N) IO Coefficient matrix giving use in country s of intermediates from r

Yrs: (N×1) Final demand: Country s’s use of final goods from country r

rsrrsrsrrrr YYXAXAX

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Production system in a two-country world

• Rearranging,

2

1

2221

1211

2221

12111

2221

1211

2

1

Y

Y

BB

BB

YY

YY

AIA

AAI

X

X

where

Bsr: (N×N) block Leontief inverse matrix, denoting the amount of total output in s required for a one-unit increase in final

demand in country r

Yr: (N×1) vector of global use of r’s final goods

• In block matrix notation

2221

1211

2

1

2221

1211

2

1

YY

YY

X

X

AA

AA

X

X

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Value added in production

• Value-added shares matrix (2×2N) decomposes value added in production of each sector in all countries

• Direct domestic value added in production:

]AAI[uV 21111 ]AAI[uV 22122 and

where

Vr: (1×N) domestic value-added coefficient vector;

element vri = 1 – intermediate input share from all countries u: (1×N) vector of ones

222212

121111

BVBV

BVBVVBVAS

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Value-added exports • Exports (2N×2) include both intermediate and final goods

2

1

E0

0EE

(See paper for value-added exports at the product level)

22221212

21211111

EBVEBV

EBVEBVVBEVAS_E

• Value-added exports matrix (2×2)

• Fully generalizable to a many-country world

VBEE_VAS

VBVAS

BYY)AI(X 1

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Incorporates all value-added measures• Vertical specialization: both direct (VS) and indirect (VS1) • Domestic value added in exports (VAX)• Domestic value added that returns home (VS1*)

Indirect (VS1): Country 1’s value added embodied in 2’s and 3’s exportsDirect (VS): Foreign value added from 2

and 3 embodied in country 1’s exports

333323231313

323222221212

313121211111

VAS_E

EBVEBVEBV

EBVEBVEBV

EBVEBVEBV

VBE

Domestic value added in exports (VAX ratio)— includes VS1*

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Completely decomposes gross exports

Further upstream in GVCsFurther downstream

Gross exports

Domestic value added in

exports (VAX)

Domestic value added that returns

from abroad (VS1*)

Foreign value added in exports

(VS)

Final goods

Inter-mediate inputs

Indirect exports sent to third

countries

Exports consumed by

direct importer

Final goods

Inter-mediate inputs

Final goods

Inter-mediate inputs

Indirect value-added

exports (VS1)

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Decomposition of gross exports

0 20 40 60 80 100Share of Gross Exports

World average

MexicoEU accession countries

South AfricaRest of the world

Rest Latin AmericaBrazil

Russian Federation

TaiwanKorea

Hong Kong

PhilippinesMalaysiaThailandVietnam

ChinaIndonesia

Rest of East AsiaSouth Asia

India

CanadaEFTA

United StatesEU 15Japan

Australia, New Zealand

Domestic VA Domestic VA returned

Foreign VA

Advanced economies

Other emerging

Asia NICs

Emerging Asia

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Supply chain participation:Key differences by region

0 20 40 60 80 100Share of Gross Exports

World average

MexicoEU accession countries

South AfricaRest of the world

Rest of AmericasBrazil

Russian Federation

TaiwanKorea

Hong Kong

PhilippinesMalaysiaThailandVietnam

ChinaIndonesia

Rest of East AsiaSouth Asia

India

CanadaEFTA

United StatesEU 15Japan

Australia, New Zealand

Domestic VA Domestic VA returned

Foreign VA

Advanced economies

Other emerging

Asia NICs

Emerging Asia

East Asia has the most foreign content in its own exports

US uses lots of imported inputs in its exports; imported value supplied by Canada, Mexico, and US itself

E. Asia has the longest chains–little of its exported value is absorbed by direct importer (see table 3)

Integration in NAFTA makes Mexico an outlier among non-Asian economies

Japan sends much of its domestic value to final suppliers indirectly through third countries (see table 3)

Trade costs of multistage production

• East Asia pays a price for its long chains and relatively high tariffs

• Advanced economies have low foreign content and, hence, low costs

0 5 10 15 20 25 30 35

Canada

EFTA

EU

Japan

United States

Hong Kong

Korea

Taiwan

China normal

China processing

Malaysia

Thailand

Vietnam

India

Brazil

EU accession

Mexico normal

Mexico processing

Russian federation

Trade costs on imported inputs

Trade costs (tariff + transport), as a share of export value

Trade costs on exports

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Database development:Estimating a global Inter-Region IO table

• Start with 2004 GTAP global trade and prod’n database • Add additional detail on source and use of intermediate

inputs and final goods (elements of Ars)• Use end-use categories of detailed trade data (HS6) to

improve imported intermediate use coefficients – UN Broad Economic Classification (BEC) distinguishes

intermediate inputs from final goods in imports from each source in each sector

– BEC is better than the alternative: Proportional method assumes the intermediate share in imports from each source is the same as in the home country’s domestic supply

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BEC shows substantial export heterogeneity

0 10 20 30 40 50 60 70 80 90 100

Proportion method

JapanEU 15EFTA

Canada

IndiaRest of East Asia

IndonesiaChina

VietnamThailand

Philippines

Hong KongKorea

Taiwan

RussianBrazil

EU accessionMexico

Intermediate share of U.S. electronic machinery imports, by source

Share from US import use table (54.2%)

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Benefits and limitations of end-use classifications

• End-use classifications improve estimates of intermediate inputs entering the importing country

• Still have to assume proportionality to allocate intermediate inputs to each industry within the importing country– Required data not reported by most national statistical agencies– Problem noted by Committee on Economic Statistics of the

American Economic Association (Feenstra et al., 2010)

• Industry-level estimates of value-added trade may be unreliable with unknown biases, despite their theoretical tractability

Conclusions

• New value-added framework– Generalizes and harmonizes all measures in the

literature– Accounts for the entirety of gross trade– Provides new detail on regional differences in supply

chain activity and costs

• It is now possible to measure trade in value-added terms consistent with official statistics– Ideal database would be consistent with both official

trade statistics and national income accounts

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Questions/Comments?

• Contact information– Bill Powers– Research Division, Office of Economics– U.S. International Trade Commission– william.powers@usitc.gov– (202) 708-5405

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