Trade in value added

travitz

May 31, 2021

Trade in value added

Trade in Value Added
Definition
Trade in value added is a statistical method which allows to trace the value added of each countries and industries along the production process of goods and services (or value chains) to be exported and imported. They provide an understanding of how a country is positioned in global value chains by looking at firms’ activities from the elaboration of the product to its final delivery. There are two types of integration : backward integration, i.e. the share of foreign intermediaries in exports, translates the reliance of a country’s exports on imported products also known as foreign inputs or foreign intermediates. The import share can be particularly high for some Swiss exports. This is particularly the case for specialized products with a high technological content such as pharmaceuticals, precision instruments or watches. Forward integration, i.e. the production of intermediates for goods and services that are then re-exported, measures the importance of a country as a supplier of inputs for other countries’ exportations.
Historical context
The origins of research on trade in value added date back to 1960s when Leontief and Strout came up with a formalized approach to study the nature of global production. Two major themes have underpinned current research and measurements of trade in value added. The first is the importance of trade in intermediate goods and services as published by Sanyal and Jones in a 1982 paper, which pointed out that the majority of trade is in fact intermediate products. Inputs are not only raw materials or initial intermediates but also products that have already been processed and therefore contain initial value added. According to Miroudot et al. (2009), intermediate products represent more than half of trade in goods and near three-quarter in services for OECD (Organisation for Economic Co-operation and Development) countries.
The next theme is the concept of vertical specialization according to Hummels et al. (2001) and refers to the measure of backward integration. This measure is based on national Input-Output (IO) tables, which provide information on the quantities of goods and services used as intermediate products (Input) to produce other goods and services (Output).

As international IO tables began to be constructed, the first papers referring strictly to measures of trade in value added emerged from authors such as Daudin et al. (2009), who notably managed to decompose globally the value added generated by each country in the production chains of final goods. This is only possible with harmonized tables for a sufficient number of countries. By doing that, the authors increased Hummels' work by making it possible to compute for the first time forward integration but also the share of domestic value added in imports. Indeed, intermediates might be exported, processed by a trading partner and then imported.
In 2010, Koopman (et al.) had a big influence on value added research by providing a conceptual framework (KWW), which fully decompose gross exports into domestic and foreign value added categories. Various applications emerged such as the reevaluation of bilateral trade flows (Johnson and Noguera, 2010). There are often significant differences in comparison with conventional measures.
Current statistics
Nowadays, value added statistics have and continue to improve significantly. Several global initiatives focus on the latter. The two largest are the Trade in Value Added (TiVA) database developed by the OECD and World Trade Organization (WTO) and a project called the World Input-Output Database (WIOD), which is funded by the European Commission (EC). Measures unfortunately cannot be compared because methodologies and data scopes are diverging.
The versions of each database can also not be compared because statistical frameworks (System of National Accounts) that need to be satisfied evolve.

TiVA statistics are used in this paper as they are the most commonly used in the literature and are considered as robust indicators harmonized for enough countries.
The latest version was supposed to be published in 2020, but due to the coronavirus crisis this has unfortunately not been the case. We therefore use the latest version (2018), which covers the period 2005 to 2015 for more than 60 countries and 36 sectors. As a reminder, these data are based on global IO tables which in turn depend on national ones. The frequency of publication of these tables is relatively low. The latest IOTs from Switzerland have been published in 2014.
Limitations
The extent and variety of TiVA indicators require a considerable amount of national data, which for many countries is limited or not available. Manipulations are therefore necessary such as adjustments or extrapolations and they are also based on relatively strong assumptions. There are therefore discrepancies with official foreign trade statistics and the value added indicators should not be seen as a substitute. They mainly provide new insights into global value chains.

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Trade in value added

Trade in Value Added

Definition

Trade in value added is a statistical method which allows people to trace the value added of each countr~~ies~~y and industr~~ies~~y along the production process of goods and services (or value chains) to be exported and imported.

You can also say: "..the value added of countries and industries.."

They provide an understanding of how a country is positioned in global value chains by looking at firms’ activities from the elaboration of the product to its final delivery.

There are two types of integration : backward integration, i.e. the share of foreign intermediaries in exports, translates the reliance of a country’s exports on imported products also known as foreign inputs or foreign intermediates.

The import share can be particularly high for some Swiss exports.

This is particularly the case for specialized products with a high technological content such as pharmaceuticals, precision instruments or watches.

Forward integration, i.e. the production of intermediates for goods and services that are then re-exported, measures the importance of a country as a supplier of inputs for other countries’ exportations.

Historical context

The origins of research on trade in value added date back to 1960s when Leontief and Strout came up with a formalized approach to study the nature of global production.

Two major themes have underpinned current research and measurements of trade in value added.

The first is the importance of trade in intermediate goods and services as published by Sanyal and Jones in a 1982 paper, which pointed out that the majority of trade is in fact intermediate products.

Inputs are not only raw materials or initial intermediates but also products that have already been processed and therefore contain initial value added.

According to Miroudot et al.

(2009), intermediate products represent more than half of trade in goods and near three-quarter in services for OECD (Organisation for Economic Co-operation and Development) countries.

The next theme is the concept of vertical specialization according to Hummels et al.

(2001) and refers to the measure of backward integration.

This measure is based on national Input-Output (IO) tables, which provide information on the quantities of goods and services used as intermediate products (Input) to produce other goods and services (Output).

As international IO tables began to be constructed, the first papers referring strictly to measures of trade in value added emerged from authors such as Daudin et al.

(2009), who notably managed to decompose globally the value added generated by each country in the production chains of final goods.

This is only possible with harmonized tables for a sufficient number of countries.

By doing that, the authors increased Hummels' work by making it possible to compute for the first time forward integration but also the share of domestic value added in imports.

Indeed, intermediates might be exported, processed by a trading partner and then imported.

In 2010, Koopman (et al.) had a big influence on value added research by providing a conceptual framework (KWW), which fully decompose gross exports into domestic and foreign value added categories.

Various applications emerged such as the reevaluation of bilateral trade flows (Johnson and Noguera, 2010).

There are often significant differences in comparison with conventional measures.

Current statistics

Nowadays, value added statistics have and continue to improve significantly.

Several global initiatives focus on the latter.

The two largest are the Trade in Value Added (TiVA) database developed by the OECD and World Trade Organization (WTO) and a project called the World Input-Output Database (WIOD), which is funded by the European Commission (EC).

Measures unfortunately cannot be compared because methodologies and data scopes are diverging.

The versions of each database can also not be compared because statistical frameworks (System of National Accounts) that need to be satisfied evolve.

TiVA statistics are used in this paper as they are the most commonly used in the literature and are considered as robust indicators harmonized for enough countries.

The latest version was supposed to be published in 2020, but due to the coronavirus crisis this has unfortunately not been the case.

We therefore use the latest version (2018), which covers the period 2005 to 2015 for more than 60 countries and 36 sectors.

As a reminder, these data are based on global IO tables which in turn depend on national ones.

The frequency of publication of these tables is relatively low.

The latest IOTs from Switzerland have been published in 2014.

Limitations

The extent and variety of TiVA indicators require a considerable amount of national data, which for many countries is limited or not available.

Manipulations are therefore necessary such as adjustments or extrapolations and they are also based on relatively strong assumptions.

There are therefore discrepancies with official foreign trade statistics and the value added indicators should not be seen as a substitute.

They mainly provide new insights into global value chains.

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Excellent work!

Trade in value added