Monday, December 8, 2014

Global Value Chains

Where will goods (merchandise) trade go in the next 20-30 years? Will there be a revitalisation of manufactures trade as the resource intensive stage of development in China slows and as increased supply of resources leads to a period of lower prices? Or will the continuing rise of developing countries maintain an intensive trade in resources?

Or does the concept of merchandise trade miss the most significant change - the growing importance of services within production structures.

The WTO argues that measuring trade on a value-added basis reveals international supply chains (or value chains, production structures) and provides a more accurate representation of interdependence between economies.
International supply chains play a major role in today’s world economy: traded goods and services contain inputs that may come from many different countries, and traditional trade statistics misleadingly attribute the full transaction value of traded products to the last economy in the production process. This is why trade must be measured in value-added as well as gross terms.
Measuring trade on a value-added basis indicates that "almost 30 per cent of total trade consists of re-exports of intermediate inputs" a measure that has increased by about 10 per cent since the mid-1990s. The importance of services also becomes clearer when we measure trade in this way. When accounted for on a valued-added basis services trade shifts from 23 per cent to 45 per cent.
Services are key contributors to trade in goods, either in their role of facilitating international transactions or through their incorporation in the total production cost of merchandise. This has important implications for industrial and trade policies, especially those regulating services markets, and in relation to the integration of small and medium-sized enterprises in international supply chains.  
The efficient sourcing of intermediate inputs is crucial for a country’s export competitiveness. 
Economies import more and more intermediate goods and services to produce both for the domestic market and for exports. A positive correlation has been found between access to imported inputs and export performance – the more an economy integrates into international supply chains, the more its exports grow. Efficient access to imports of intermediate inputs improves the capacity of firms to increase their productivity and remain competitive in an interconnected world.
Measuring trade on a value-added basis for Australia does not result in the significant differences it does for some countries, where there is a significant amount of imports in the final value of exports. Given that Australia is a commodity exporter, its products are at the bottom of the value-added chain.

An explanation of measuring trade in value-added terms from the WTO.

They continue:
Measuring trade in value-added terms resizes world trade figures by taking out double counting and measuring only the actual economic content.

...  almost 30 per cent of total trade consists of reexports of intermediate inputs; this suggests an increased interdependence of economies. Sectors are not affected in a similar way, and as expected, it is trade in manufactured goods which shows the deepest vertical specialization.
Trade is only going to become more complex in coming years as value chains make it more difficult for us to accurately represent what is really going on.