The segmentation of production between countries inflates the value of trade because imported intermediates goods and services are counted several times, namely each time they cross borders. To reduce multiple counting in trade statistics and answer the question “who produces for whom in the world economy?”, one needs a new measure of international trade based on the value added produced by each country taking part in the production process of a good or service. This report aims at stocktaking the recent initiatives to compile a measure of trade in value added, both by the academic community and international organisations. The main outcome of this report is that this new measure is essential to assess trade competitiveness or equilibrium exchange rates, to understand trade interdependencies between countries and bilateral imbalances or to gauge the impact of macroeconomic shocks and measure environmental footprints. However, this measure cannot replace standard trade statistics, which describe the “physical” flow of goods and services and help in calculating transport and insurance costs.
The compilation of value added trade statistics does not require new data collection, but would benefit from improvements in the quality of existing data. First of all, strengthening the quality, frequency and timeliness of national input-output tables would improve our understanding of production processes across the world. Second, linking trade and business statistics at the firm level would help analysing the specific production patterns of exporting firms in contrast to domestically selling firms. Third, international cooperation and the implication of international organisations will be essential to tackle the well-known issue of asymmetry of trade statistics. Finally, a new statistical tool in form of a satellite account could be developed to complement national accounts. This tool would bring together a country’s foreign activities with respect to trade, investment and labour in one presentation – similar to tourism satellite accounts.
This report is an output of the e-Frame (European Framework for Measuring Progress) project.
e-Frame is a major international project which aims to provide a European framework for the debate over the measure of well-being and progress. The project involves a broad range of activities including conferences and workshops, as well as research and the development of guidelines. It is led by two major European National Statistical Institutes (NSIs), ISTAT (in Italy) and the CBS (in the Netherlands), and includes amongst the partners two other NSIs (the French INSEE and the UK ONS), the OECD, and several universities and civil society organisations. It is funded by the EU FP7 Work Programme.
The expansion of international trade since the end of the 1980s has largely been caused by the emergence of a new international production scheme based on cross-border production. Different stages of production are spread across a range of sites in multiple countries. The segmentation of production (by off shoring and global outsourcing in services) is becoming increasingly subtle, in order to make the best of the “kaleidoscope” of each country’s comparative advantages. The emergence of this global value chains has deeply changed the landscape in the world trade and whole sectors are exposed to this new trade competition.
This new international division of labour has induced an acceleration of trade flows as a growing number of inputs cross borders several times. Trade ratios have risen and developing countries play an increasing role in the global market. South-South trade, in particular, has more than quadrupled over the past fifteen years. This leads to a multiple counting of intermediate goods and services that inflates the gross value of trade flows. There is a need to distinguish between the “domestic value added content” and the “foreign content” of a country’s exports.
Several studies have illustrated the concept of value-added trade using Apple’s emblematic devices: first the iPod and then the iPhone and the iPad. All these hi-tech products are assembled in the People’s Republic of China and so make a significant contribution to China’s gross exports. But Chinese value-added represents only a small share of the value of these electronic devices that incorporate components from Germany, Japan, Korea and other economies that manufacture intermediate inputs. These countries are “first level suppliers” and just above China on the global value chain (“processing countries” are by definition at the bottom of the international supply chains).
However, this does not tell the full story. The intermediate inputs produced by the German, Japanese and Korean firms will themselves have used intermediate imports in their production or sourced intermediate goods from domestic suppliers who in turn would have used intermediate imports. Identifying these flows is equally important, particularly, in the context of the example above, because some of those imports may have originated in China.
To fully decompose the value added of the iPhone and ascribe it to individual countries, one cannot rely on a list of component suppliers. Information on all of the suppliers and their suppliers, and their suppliers’ suppliers, and so on, is needed. What is needed therefore is a dataset that is able to link production processes within and across countries; in other words a set of international input-output tables with bilateral trade links (a global input-output table).
Last year, the OECD and the WTO have launched the “Made in the world” initiative “to support the exchange of projects, experiences and practical approaches in measuring and analysing trade in value added”. Because today, companies divide their operations across the world, from the design of the product and manufacturing of components to assembly and marketing, more and more products are “Made in the World” rather than “Made in the UK” or “Made in France”. “The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counter-productive, decisions. The challenge is to find the right statistical bridges between the different statistical frameworks and national accounting systems to ensure that international interactions resulting from globalization are properly reflected and to facilitate cross border dialogue between national decision makers.”
On 16 January 2013, the OECD and the WTO released in Paris the first version of the “OECD-WTO Trade in Value Added (TIVA) database” that has been compiled by linking trade statistics with international input-output tables. The new global input-output tables (GIOs), developed by the OECD, describe interactions between industries and consumers for 58 economies, reflecting 95% of global output. The new tables and the measurement methodology draw on earlier work by the OECD and the WTO as well as other organizations active in this field, such as the Institute of Developing Economies (IDE-JETRO), the US International Trade Commission (USITC) and the World Input-Output Database (WIOD).
This report aims at stocktaking the recent initiatives carried out to come up with the “Trade in Value Added” measures. The first section will focus on why it is important for policy purposes and describe the needs and requirements of different stakeholders. The second section will address topics related to the definition and measurement of the indicators, as well as data availability. The third section will report on the main problems still unsolved, construction hypothesis that impair the quality of the data and future statistical needs to improve the accuracy of the data. The last section will summarize recommendations for stakeholders and statisticians on the use of the indicators and suggestions for data improvements.
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Christine Rifflart and Danielle Schweisguth, Observatoire français des conjonctures économiques