Value Added Content of Trade
International trade has become increasingly fragmented, as different stages of production are now regularly performed in different countries. As inputs cross borders multiple times, their value is carried forward from one production stage to another. Within a supply chain, each producer purchases inputs and then adds value, which is passed on to the next stage of production. Trade in intermediate inputs accounts for as much as two thirds of international trade, according to a paper by Robert C. Johnson and Guillermo Noguera.
However, the flows of goods and services within these global production chains are not always reflected in conventional measures of international trade. Standard measures of bilateral trade balances are based on gross trade. Current trade statistics are measured in gross terms and include both “intermediate” and “final” products, they “double count”, as they record the value of intermediate inputs several times as they cross international borders along the value chain. Trade statistics are also becoming increasingly less reliable in measuring the value contributed by each economy. As a result new measures and methods have been proposed to measure the actual (domestic) value added contribution of each economy. One of the recent developments to improve trade statistics is the introduction of the concept of Trade in Valued Added (TiVA), which could properly measure exports of an economy.
In most economies, around one-third of intermediate imports are destined for the export market, according to the WTO. Country A exports $100 of goods, produced entirely within A, to country B that further processes them before exporting them to C where they are consumed. B adds value of $10 to the goods and so exports $110 to C. Conventional measures of trade show total global exports and imports of $210 but only $110 of value-added has been generated in their production. Conventional measures also show that C has a trade deficit of $110 with B, and no trade at all with A, despite the fact that A is the chief beneficiary of C’s consumption. If instead we track ows in value-added, C’s trade deficit with B reduces to $10 and it now runs a deficit of $100 with A.
Global Value Chains (GVCs) is a phenomenon where the making of a product is spread across countries, regions and continents benefiting from comparative local cost advantages to become globally competitive. The development of GVCs has been mainly driven by multinational companies in their pursuit of competitive advantage and profits. By carrying out specific parts of the production process in certain countries, costs are minimized through economies of scale as well as specialization in addition to local cost advantages. According to a paper by The Asia-Pacific Research, 80 percent of gross exports are currently linked to international production networks of transnational companies.
Adjusting the trade balance to account for the value-added content of exports cuts the US trade deficit with China in half, to about 1 percent of GDP. This is broadly equivalent to the US trade deficit with the European Union. The OECD estimates that about one-third of the content of Chinese exports is foreign, compared with just 15 percent of US exports. Although China has been trying to increase its domestic consumption and move up the value-added chain, the latest data suggests that even in key growth markets—computer equipment, electronics, and electrical machinery—the foreign content of goods assembled and re- exported from China is still roughly 50 percent.
For example, Apple (NASDAQ:AAPL) iPhone is an American product, it’s assembled in China and all iPhones, and are counted as China’s exports to U.S. According to the study called Capturing Value in Global Networks, it is a common misconception that China, where the iPhone is assembled, receives a large share of money paid for electronics goods. That is not true of any name-brand products from U.S. firms. The biggest beneficiaries in the iPad and iPhone supply chains are Korean companies such as LG and Samsung, who provide the display and memory chips, and whose gross profits account for 5% and 7%, respectively, of the sales price for the iPhone and iPad.
The iPhone and iPad are assembled in mainland China factories owned by Foxconn, a Taiwan-based firm. Many components, such as batteries and touchscreens, receive their final processing in China in factories owned by foreign firms. Researchers estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit, the The value added in China is around $10. If all iPhones were assembled in the US then US export figures would rise by the same amount that China’s do now.
Today, a car’s engine might be made in one country and the leather for car seats in another. The car might be assembled in a third country, depending on what each location does best. Take the example of a “Mexican” automobile exported to the United States. In the export statistics used to construct traditional trade balance measures, Mexico is assigned the full value of any car assembled south of the border that is sent to the United States. Not included in those statistics is that under the hood of that Mexican car there are engines, seats, and software that were made by US workers on US soil in US factories that had been exported to Mexico for final assembly. Indeed, when taking these factors into consideration, the corrected “value-added” measure of the US bilateral trade deficit with Mexico is only half as large as the numbers to which US politicians refer.