Measuring Value-Added Trade: Implications for Macroeconomic Policy Ranil Salgado (with Mika Saito) Trade and Policy Review Division International Monetary Fund
Outline Changing Patterns of Global Trade and Implications for Value-Added Trade Why Improving Value-Added Trade Measurement is Important Why it is NOT
The growth of trade relative to output in the last few decades is partly driven by the emergence and the growth of global supply chain.
The foreign value added (FVA) share in gross exports has almost doubled since 1970, and the growth in FVA share has accelerated in recent years. 1970 1990 1995 2005 FVA share of gross exports 0.18 0.24 0.27 0.33 Growth in FVA share 31.3 21.5 Contribution of FVA exports to growth in exports/gdp Table 3. Share of Foreign Value Added (FVA) in Gross Exports HIY (2001) 1 Update 2 Source: Fund staff estimates using OECD input-output tables. 32.5 55.9 1 Hummels, Ishii, and Yi (2001). 28 countries are included in HIY: Australia, Canada, China, EU15, Hong Kong SAR, Indonesia, Japan, Korea, Mexico, Taiwan Province of China, Malaysia, Singapore, Thailand, and the United States. 2 34 countries included in the update are: EU-15, Australia, Brazil, Canada, Switzerland, China, Czech Republic, Hungary, Indonesia, India, Israel, Norway, New Zealand, Poland, Russian Federation, Slovak Republic, Taiwan Province of China, Turkey, and the United States.
The Asia supply chain is more integrated compared to those in North America or Europe. Table 4. Hub's VA Contained in Gross Exports Total In imports from the hub 2 In imports from the neighbors 1 China 8.0 6.8 1.2 Mexico 31.3 31.0 0.3 EU accession 17.5 17.3 0.2 Source: Fund staff estimates using Koopman and others (2010). 1 For China, Australia, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and the rest of E. Asia are included; for Mexico, Canada, Brazil, and Latin America are included; and for EU accession countries, EFTA, and Russia are included. 2 For China, Mexico, and EU accession countries, hubs are Japan, the United States, and the EU respectively.
Why Improving Value-Added Trade Measurement is Important? Improve exchange rate assessments Improve our estimates of the impact of changes in relative prices, including that on global rebalancing Help us understand how disruptions to supply chains can have spillover effects Political economy considerations: bilateral balances can matter
Gross Exports (US$ billion) The extent FVA in exports of advanced countries and EMEs has contrasting implications for trade patterns and trade balance. Figure 2. Foreign Contents in Gross Exports 1200 1000 Shares above the bar chart indicate FVA share in gross exports. Shares in parentheses exclude FVA from Euro Area. 0.123 0.278 (0.196) 800 600 0.274 0.082 0.152 0.095 0.208 (0.135) Service ROW USA EA non EA 400 OEA JPN 200 0.155 CHN DVA 0 1995 2005 1995 2005 1995 2005 1995 2005 CHN JPN USA DEU Source: IMF Staff estimates using OECD Input-Output Tables, COMTRADE and OECD STAN data.
Higher FVAin exports can cushion the impact of relative price changes on downstream country s external balances Table 5. LR Impacts of Relative Price Shocks on External Balances (Percent of national GDP, unless otherwise noted) Scenario 10-percent 10-percent appreciation depreciation Country China United States Preshock Postshock Preshock Postshock Current Account Balance 9.6 5.9-4.7-2.4 o/w Trade Balance 8.0 4.2-5.8-3.5 Exports 31.7 28.9 9.1 10.2 Imports -23.8-24.7-14.9-13.8 Memorandum items (percent change from pre-shock level): Exports -10.9% 13.7% Imports 1.7% -6.7% Nominal GDP -2.3% 1.0% Sources: WEO; DOTS; and Fund staff estimates.
Simulated Impact (percent change) Adjustments to relative price changes are smaller for sectors with larger FVA shares, though the size of the sector in each country also matters 18.0 Figure 5. Simulated Impact of Exports by Sector 16.0 14.0 12.0 10.0 8.0 6.0 HT MHT MLT LT 4.0 2.0 0.0 CHN JPN USA Euro Source: UN Comtrade and Fund staff estimates.
Gross Exports (US$ billion) The EMEs have been the user of foreign inputs of the so-called high-technology exports. Figure 3. Foreign Contents in Gross Exports: High-Tech Sectors 180 160 0.485 Shares indicate FVA share in gross exports. 140 120 100 80 0.100 0.166 0.174 0.312 Service ROW USA EA non EA 60 40 20 0.201 0.215 0.241 OEA JPN CHN DVA 0 1995 2005 1995 2005 1995 2005 1995 2005 CHN JPN USA DEU Source: IMF Staff estimates using OECD Input-Output Tables, COMTRADE and OECD STAN data.
Change in Gross Exports (US$ billion) The EMEs have also been the source of foreign inputs of high-technology exports. 900 800 Figure 4. Source of Change in Exports of Advanced Countries (DEU, JPN, USA) during 1995-2005 0.368 Shares indicate the change in foreign value added exports in the overall change in exports. 700 600 500 400 300 200 100 0 0.331 0.443 0.256 0.994 Manufacturing LT MLT MHT HT Service ROW USA EA non EA OEA JPN CHN DVA Source: IMF Staff estimates using OECD Input-Output Tables, COMTRADE and OECD STAN data.
Adjustments to relative price changes are smaller for supply chain partners, revealing resilient relationships Figure 6. Contribution to Adjustment in Trade Balance (Percent) Supply chain contribution to adjustment in trade balance is smaller than its importance as a trading partner would suggest... Euro Area China Japan USA 0 10 20 30 40 50 Share of TB/GDP adjustment within supply chain Supply chain share in total trade Source: UN Comtrade and Fund staff estimates.
Bilateral balances, if discussed for political economy considerations, are better measured with value added, rather than gross, trade data. Table 1. U.S. Trade Balance (Percent of GDP) 1995 2008 World -2.3-5.8 Asia -1.8-3.0 o/w China -0.5-2.0 o/w China excl. FVA 1-0.4-1.4 o/w China excl. FVA from Asia 2-0.4-1.7 Memorandum: U.S. bilateral trade balance with China U.S. data -0.5-2.0 imports data only -0.4-1.9 Chinese data -0.1-1.2 Source: DOTS; WEO; OECD I-O Tables; and Fund staff estimates. 1 FVA contained in exports to and from China are excluded. 2 FVA from Asia contained in exports to and from China are excluded.
Why is it NOT Important? Macroeconomists focus on overall balances, not bilateral ones--that is, gross data already give us the correct information. Table 2. China's External Balance: 2008 (Percent of GDP) Gross VA 1 Trade balance 8.0 8.0 exports 31.7 23.0 imports -23.8-15.1 Current account balance 9.6 9.6 Memorandum: FVA contained in exports 8.7 0.0 Source: DOTS; WEO; OECD I-O Tables; and Fund staff estimates. 1 FVA contained in exports are excluded and imports are assumed to contain no domestic value added.