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Lecture 3 Global Value Chain and Trade in Value Added

Lecture 3 Global Value Chain and Trade in Value Added. Hyun-Hoon Lee Professor Kangwon National University. 1. Contents. 1. Global value chain (GVC) – The concept 2. GVC and trade in intermediate goods 3. Conventional trade statistics and GVCs 4. An Anatomy of GVCs using TiVA

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Lecture 3 Global Value Chain and Trade in Value Added

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  1. Lecture 3 Global Value Chain and Trade in Value Added Hyun-Hoon Lee Professor Kangwon National University 1

  2. Contents 1. Global value chain (GVC) – The concept 2. GVC and trade in intermediate goods 3. Conventional trade statistics and GVCs 4. An Anatomy of GVCs using TiVA 5. Reasons for Fast Expansion of GVCs 6. Implications of GVCs 2

  3. 1. Global value chain (GVC)– The concept ■ A value chain (VC) is a set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service for the market. (Wikipedia) ■ The concept comes from business management and was first described by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. (Wikipedia) ■ Global value chain (GVC) emerged in the late 1990s as multinational enterprises (MNEs) or transnational corporations (TNCs) increased overseas investment. ■ To enhance efficiency, MNEs locate “R&D, design, production of parts, assembly, marketing" activities in different countries around the globe (i.e. international fragmentation of production). ■ East Asia and Europe have been particularly at the center of GVC.

  4. 1. Global value chain (GVC)– The concept ■ Labour-intensive tasks such as assembly in GVCs take place primarily in developing economies with abundant labour, while knowledge-intensive activities such as R&D and design and marketing are concentrated in developed economies.

  5. 1. Global value chain (GVC)– The concept

  6. 1. Global value chain (GVC)– The concept

  7. 1. Global value chain (GVC)– The concept

  8. 2. GVC and trade in intermediate goods ■ A firm’s production process can be fragmented in various ways.

  9. 2. GVC and trade in intermediate goods ■ Trade in GVCs involves extensive flows of intermediate goods and services.

  10. 3. Conventional trade statistics and GVCs • How conventional trade statistics is calculated • Total value of all (final and intermediate) goods passing through customs • Problems with conventional trade statistics • It is exaggerated because of double counting. • When a country exports, only domestic value-added contributes to GDP. • A new measure: Trade in Value Added (TiVA) • In May 2013, the OECD and the WTO released its first version of Trade in Value Added (TiVA) database, integrating national input-output tables with trade data. • It includes “decomposition of gross exports by industry into their domestic and foreign content”, “bilateral trade balances based on flows of value added embodied in domestic final demand”, etc.

  11. 3. Conventional trade statistics and GVCs ■ Value-added components of gross exports

  12. 3. Conventional trade statistics and GVCs ■ Global value added in trade

  13. 3. Conventional trade statistics and GVCs ■ Value added trade: how it works

  14. 4. An Anatomy of GVCs using TiVA ■ Domestic valued added content of gross exports, % Source: OECD-WTO TiVA database

  15. 4. An Anatomy of GVCs using TiVA

  16. 4. An Anatomy of GVCs using TiVA ■ Foreign content of gross exports, electronics and transport equipment, % (2009)

  17. 4. An Anatomy of GVCs using TiVA ■ The level of participation in GVCs differs among industries. ■ Intermediate imports embodied in exports, % of total intermediate imports (2009)

  18. 5. Reasons for Fast Expansion of GVCs • Liberalization of Trade • GATT/WTO • Economic Integration • Development of Transport • Sea Transport • Air Transport • Development of Telecommunication • Telephone • Internet • Expansion of MNEs and Foreign Direct Investment (FDI)

  19. 5. Reasons for Fast Expansion of GVCs ■ GVC Participation rate is higher in countries with more FDI stock.

  20. 5. Reasons for Fast Expansion of GVCs ■ Global trade, by type of Trans-national corporations (TNC) involvement

  21. 5. Reasons for Fast Expansion of GVCs ■ Developing countries have become more important in GVC. ■ Share of outflows and inflows of FDI, 1998-2012

  22. 6. Implications of GVCs ■ Manufacturing trade is relatively smaller, and services trade relatively larger, when measured in value-added terms. Johnson, R. C. (2014), “Five Facts about Value-Added Exports and Implications for Macroeconomics and Trade Research”, Journal of Economic Perspectives, 28(2), 119-142.

  23. 6. Implications of GVCs ■ Bilateral trade balances measured in valued added terms are different form those measured in gross terms: eg., China

  24. 6. Implications of GVCs ■ Countries with rapidly growing GVC participations are growing faster.

  25. 7. Possible topics for further studies ■ Implications for trade policies. ■ China’s role in GVC and its implications for neighboring Asian countries.

  26. Hyun-Hoon Lee hhlee@kangwon.ac.kr

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