11 International fragmentation of production trade in value added global value chain (GVC)

• conventional measure of trade show total global exports and imports of USD 210

• Only USD 110 of value-added has been generated

Example: China assembles iPhone for USA firms who provide components —> trade deficit for US

BUT: China only adds small share of domestic value-added to iPhone (assembly work) —> upstream input supplier not considered

A global value chain breaks up the production process across countries. Firms specialize in a specific task and do not produce the whole product.

• Series of stages in the production of a product or service for sale to consumers

• Each stage adds value, and at least two stages are in different countries

• A firm participates in a GVC if it engages in (at least) one stage

Customs data only provide information on where the transacted good or service was produced, not how it was produced, so which countries contributed value to it

• Tracing value-added trade flows with global input-ouput tables:

  • Combination of customs data and national input-output data

• Limitations of Global input-Output tables

  • Rely on aggregated IO-data

  • Researches are forced to impose strong assumptions to back out some bilateral intermediate input trade flows that cannot be read from customs data or national input-output data

• Backward GVC Participation:

  • A country’s exports embody value added from previously imported

• Forward GVC Participation:

  • A country’s exports are not full absorbed in the importing country and instead are embodied in the importing country’s exports to third countries.

Four types of GVC Participation, classified on:

1. The goods and services exported

2. The extent of GVC participation (measured as Backward Integration of manufacturing)

3. Measures of Innovation

Types:

• Commodities

• Innovative activities

• Advanced manufacturing and services

• limited manufacturing

Manufacturing share of total domestic value added in exports is less than 60% and

o   Small countries: Backward Manufacturing is less 20%

o   Medium Countries: Backward Manufacturing is less 10%

o   Large Countries: Backward Manufacturing is less 7.5%

• Measured with Intellectual property (IP)

• Research and Development (R&D)

Share of manufacturing and business services in total domestic value added in exports is equal to or greater than 80 percent and

o     Small countries: Backward Manufacturing is  30%

o     Medium Countries: Backward Manufacturing is  20%

o     Large Countries: Backward Manufacturing is  15%

Rest of sample

empirical regularity

• Shuttered factories in China hit other nations via “supply-chain contagion”

• As Chinas economy got rolling again, the fast spread of covid in America and Germany created reverse supply chain contagion

• International coordination may reduce chances that multiple waves of supply chain contagion hobbles global manufacturing

Illustrating trade-linked contagion:

• On the demand side, a drop in one nation’s income will reduce its imports from its trading partners.

• On the supply side, a supply disruption in one nation’s production shows up as a reduction in its exports to its trade partners.