TRADE IN VALUE ADDED: ESTONIA

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1 TRADE IN VALUE ADDED: ONIA The international fragmentation of production in global value chains (GVCs) challenges the way we look at the global economy. Today, what you do - the activities a firm or country is involved in - matters more for growth and employment than what you sell - the products that make up final sales or exports. Understanding how GVCs work and how they affect economic performance is essential, as is determining which policies help derive the greatest benefits, and reduce the risks. The OECD-WTO Trade in Value Added (TiVA) database facilitates analysis of GVCs by measuring trade in value-added terms to generate new insights about the commercial relations among economies and the process of value creation. Drawing on the third version of the TiVA database, this note describes Estonia s trade patterns in value-added terms, with a view to informing policy debates in a range of areas, including trade, innovation, and investment. Accompanying this note is a User Guide designed to assist interpretation and provide context to the indicators presented: Key findings Estonia has a high degree of integration within global value chains with over one-third (35.1%) of total exports reflecting foreign content in This is lower than in the early 2000s which may reflect an underlying up-grading process; for example, the foreign content of has fallen significantly as the value of domestic value-added exports has risen. The largest source of both gross and value-added exports was the Transport and Telecoms sector, which had a foreign content of close to 3 in Export orientation was high in 2011, with nearly half (44.) of all activity driven by foreign demand, particularly in the Basic Metals and ICT & Electronics industries, where 9 of valueadded was exported. Nearly two-thirds of Estonia s exports reflect services content, which also contributes 4 to the value of exported manufactured goods.

2 The role of foreign and domestic value added in exports Although the foreign content of Estonia's exports picked up from the recent crisis low in 2009 (28.3%) to 35.1% in 2011, it remains significantly below levels in the early 2000s and indeed 0.9 percentage points below the rate in Figure 1. Foreign value added content of gross exports by country percent, 2008, 2009, and 2011 (right insert = time series for Estonia) Of Estonia s total exports of domestic value-added in 2011, 59. reflected exports of intermediates, slightly below the OECD average (61.5%), but higher than the share in both 2009 (57.2%) and 1995 (51.6%) (Figure 2). Figure 2. Domestic value added content of gross exports by end-use category by country percent, 1995 and Intermediate goods and services 2011 Final goods and services 2011 Total 1995 Intermediate goods and services

3 Agriculture Wood & paper Non-metallic minerals Other manufactures Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Other services Total Agriculture Wood & paper Non-metallic minerals Other manufactures Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Other services Direct exports by the Transport & Telecoms industry generated the greatest source (both direct and upstream) of domestic value added in 2011, accounting for 14.3% of the total value added of exports. The next three most important industries were Wholesale, Retail & Hotels (8.7%, reflecting tourism and upstream distribution services), Business services (6.1%), and Wood & Paper (5.), (Figure 3a). The large foreign contributions were in ICT & Electronics and also the Transport & Telecoms sectors, which together contributed 11.9% of Estonia's total exports. The foreign value-added content remained broadly stable in most industries but fell significantly (by 17 percentage points) in the ICT & Electronics sector, possibly reflecting upgrading. The three industries with the highest foreign value added shares in Estonia's exports in 2011 were ICT & Electronics, Electrical machinery, and, with 56.6%, 50.9%, and 50.6% respectively, compared to figures of 73.8%, 55.5% and 40.5% in 1995 (Figure 3b). Figure 3a. Estonia's industry share of domestic and foreign value content of gross exports percent of total gross exports, 2011 DVA contribution to gross exports, 2011 FVA contribution to gross exports, % 2 15% 1 5% Figure 3b. Estonia's foreign value added content of gross exports 1995 and 2011 FVA share of gross exports, 2011 FVA share of gross exports,

4 Agriculture Wood & paper Non-metallic minerals Other manufactures Utilities Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Other services Total Of the total value of Estonia's imports of intermediate products and services, 57.7% was subsequently embodied in exports, a higher share compared to OECD countries (39.3%) (Figure 4). This was above the equivalent figure in 2009 (50.3%). The products with highest shares were, Electrical machinery and, at 82.5%, 77.3% and 65.5% respectively. Figure 4. Estonia's imported intermediate inputs used for exports, by import category percent of intermediate imports, 2008, 2009, and The destination of domestic value added produced in Estonia Of the total domestic value added produced by the manufacturing sector in Estonia, 68.9% reflected foreign final demand in 2011, higher than the equivalent figures in 2009 (60.9%) and 2008 (61.) (Figure 5). Figure 5. Manufacturing domestic value added in foreign final demand by country, percent of total manufacturing value added, 2008, 2009, and 2011 (left insert = time series for Estonia) Note: Final demand excludes inventories: See also 3

5 Agriculture Wood & paper Non-metallic minerals Other manufacturing Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Total Manufactures Total At the total economy level, 44.0 % of Estonia's domestic value added in 2011 was driven by foreign final demand, with the export orientation rising in nearly all industries since But significant differences exist across industries. (90.2%) and (89.8%) had the highest level of export orientation in Estonia, with the lowest shares in (40.1%) and equipment (40.9%) (Figure 6). Figure 6. Estonia's domestic value added in foreign final demand, percent of value added by industry, 2008, 2009, and Note: Final demand excludes inventories: See also In gross terms, Finland (22.8%), Sweden (12.7%) and Russia (9.2%) were the three most important Estonian export market destinations, which was also the case in value-added terms, again with Finland (18.8%), Sweden (9.1%), and Russia (8.5%) (Figure 7, top). For imports, Estonia's top three partners were Finland (13.), Germany (11.3%) and Russia (9.5%), while in value-added terms Germany (12.4%) displaced Finland (9.4%) in the top spot (Figure 7, bottom). Figure 7. Estonia's exports to and imports from main partner countries percent of total gross and value added exports and imports, % 2 15% 1 5% Gross exports Domestic value added embodied in foreign final demand 14% 12% 1 8% 6% 4% 2% LVA LTU Gross imports Foreign value added in domestic final demand LVA 4

6 Looking only at exports of intermediate goods and services, Estonia's major export destinations in 2011 were: Finland (21.9%), Sweden (11.8%), Russia (9.5%) and Latvia (7.9%) (Figure 8). The importance of Finland has dropped in recent years as trade with Sweden in particular has picked up, suggesting a more diversified value chain. Figure 8. Estonia's domestic value added embodied in intermediate exports to main partner countries percent of total intermediate exports, in value added terms, 2008, 2009, and % 2 15% 1 5% LVA LTU The importance of services In 2011 the service sector s share of total exports of domestic value added in Estonia was 60.5%, above the OECD average of 54.3% (Figure 9). Figure 9. Services content of gross exports by country, gross and value-added terms, percent of total gross exports, Domestic VA content Foreign VA content OECD average SNA service export share Note: SNA services export shares include re-exports in the denominator, and include any actual differences in free on board and basic prices (the distribution margin provided by resident distributors to resident exporters) in goods. 5

7 Agriculture Wood Paper, print, publsh Non-metallic minerals Other manufacturing As for exports of manufactured goods alone, 40. of the total value reflected services sector value-added, above the OECD average (36.9%). Of this share, the Business services sector accounted for 13.4% of total gross exports, with the wholesale, retail & hotels and Transport & telecoms sectors accounting for 13.1% and 8. respectively (Figure 10). Figure 10. Services value added embodied in manufacturing exports, by country percent of total gross exports, 1995 and Construction Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Other services 1995, Total 45% 4 35% 3 25% 2 15% 1 5% At the individual sectoral level, the services content of exports was highest in (51., significantly above the OECD average), (43.4%) and (42.5%), (Figure 11). In 2011, the Business services sector was the most important source of services value added embodied in manufacturing exports. Figure 11. Estonia's Services content of gross exports, by exporting industry and service category percent of gross exports by industry 2011 Construction Wholesale, retail & hotels Transport & telecoms Finance & insurance Business services Other services OECD average

8 The origin of domestic consumption In 2011, over one-third (34.8%) of Estonia's total final domestic consumption reflected foreign content. The largest contribution came from Europe with 25.9 percentage points, followed by East and Southeast Asia (3.7 pp) NAFTA (1.4 pp), South and Central America (0.4 pp), with the rest of the world contributing 3.5 pp (Figure.12). Figure 12. Foreign value added content of domestic consumption by country by source region, Europe NAFTA East and Southeast Asia South and Central America Other regions Further Information The information included in this note is based on the 2015 edition of the Trade in Value Added (TiVA) database.» Access the data at Please contact us with your questions at tiva.contact@oecd.org 7