William Powers
United States International Trade Commission with Robert Koopman, Zhi Wang, and Shang-Jin Wei
February 4, 2011
The views expressed here are solely those of the presenter. This presentation is not meant to represent the views of the USITC or any of its Commissioners.

• Global value chain: nature and measures
• Conceptual framework and its contribution
– Three important matrices based on block-matrix formulation
– Integration of other measures in the literature
– Decomposition of gross exports completely into value-added components
• Empirical results
– Highlight regional differences in supply chain participation
– Show differences in trade costs from multistage production
• Database improvements and limitations
– Extensions of the GTAP database
– Connection to official statistics
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• What is a global value chain?
– A system of value-added sources and destinations within a globally integrated production network
• Literature
– Single product: Dedrick, Kraemer, and Linden (2008)
– Single country: Hummels, Ishii, Yi (2001), Koopman et al (2008)
– Asian regional chains: Pula and Peltonen (2009); Wang,
Powers, and Wei (2009)
– Global snapshot: Daudin, Rifflart, and Schweisguth (2010);
Johnson and Noguera (2010)
– Global time series: Erumban et al. (2010); Wang et al. (2010)
2

• Hummels, Ishii, and Yi (2001) measures of vertical trade
– VS: share of imported inputs in exports
– VS1: share of exports sent indirectly through third countries
• Newer measures
– VAX: domestic value-added in exports (Johnson and Noguera)
– VS1*: domestic value-added that returns home (Daudin et al.)
• aka “reflected” exports
• Not previously unified in a fully specified framework – turn to this next
3

• All output is used as an intermediate or final good at home or abroad
X r

A rr
X r

A rs
X s

Y rr

Y rs with N goods,
X r
: (N ×1) Gross output of country r
A rs
: (N ×N) IO Coefficient matrix giving use in country s of intermediates from r
Y rs
: (N ×1) Final demand: Country s ’s use of final goods from country r
4

• In block matrix notation


X
X
1
2





A
A
11
21
• Rearranging,


X
X
1
2





I


A
A
11
21
A
12
A
22




X
1
X
2





Y
11
Y
21


Y
12
Y
22


I


A
12
A
22



1 

Y
11
Y
21


Y
12
Y
22





B
11
B
21
B
12
B
22




Y
1
Y
2

 where
B sr
: (N ×N) block Leontief inverse matrix, denoting the amount of total output in s required for a one-unit increase in final demand in country r
Y r
: (N ×1) vector of global use of r ’s final goods
5

• Direct domestic value added in production:
V
1
 u [ I

A
11

A
21
] and V
2
 u [ I

A
12

A
22
] where
V r
: (1 ×N) domestic value-added coefficient vector; element v ri
= 1 – intermediate input share from all countries u : (1 ×N) vector of ones
• Value-added shares matrix (2×2N) decomposes value added in production of each sector in all countries
VAS

VB



V
V
2
1
B
11
B
21
V
1
B
12
V
2
B
22


6

• Exports (2N × 2) include both intermediate and final goods
E



E
1
0
0
E
2


(See paper for value-added exports at the product level)
• Value-added exports matrix (2×2)
VAS_E

VBE



V
V
1
B
2
B
11
E
1
21
E
1
V
1
B
12
E
2
V
2
B
22
E
2


• Fully generalizable to a many-country world
X

( I

A )

1
Y

BY
VAS

VB
VAS _ E

VBE
7

• Vertical specialization: both direct (VS) and indirect (VS1)
• Domestic value added in exports (VAX)
• Domestic value added that returns home (VS1*)
Domestic value added in exports
(VAX ratio) — includes VS1*
VAS_E

VBE





V
V
V
1
2
3
B
11
E
1
B
B
21
31
E
E
1
1
V
1
B
12
E
2
V
2
B
22
E
2
V
3
B
32
E
2
V
V
2
B
23
E
3
V
1
3
B
13
B
33
E
3
E
3




Direct (VS): Foreign value added from 2 and 3 embodied in country 1’s exports
Indirect (VS1):
Country 1’s value added embodied in
2’s and 3’s exports
8

Gross exports
Domestic value added in exports (VAX)
Domestic value added that returns from abroad (VS1*)
Exports consumed by direct importer
Indirect exports sent to third countries
Foreign value added in exports
(VS)
Final goods
Intermediate inputs
Final goods
Intermediate inputs
Final goods
Intermediate inputs
Indirect valueadded exports
(VS1)
Further downstream Further upstream in GVCs
9

Australia, New Zealand
Japan
EU 15
United States
EFTA
Canada
India
South Asia
Rest of East Asia
Indonesia
China
Vietnam
Thailand
Malaysia
Philippines
Hong Kong
Korea
Taiwan
Russian Federation
Brazil
Rest Latin America
Rest of the world
South Africa
EU accession countries
Mexico
World average
0
Advanced economies
20
Emerging Asia
Asia NICs
Other emerging
40 60
Share of Gross Exports
Domestic VA
Foreign VA
Domestic VA returned
80 100
10

Supply chain participation:
Key differences by region
Australia, New Zealand
Japan
EU 15
United States
EFTA
Canada
Advanced economies
India
South Asia
Rest of East Asia
Indonesia
China
Vietnam
Thailand
Malaysia
Philippines
Emerging Asia
Hong Kong
Korea
Taiwan
Asia NICs
Russian Federation
Brazil
Rest of Americas
Rest of the world
South Africa
EU accession countries
Mexico
Other emerging
World average
0 20 40 60
Share of Gross Exports
80
Domestic VA Domestic VA returned
Foreign VA
Japan sends much of its domestic value to final suppliers indirectly through third countries (see table 3)
US uses lots of imported inputs in its exports; imported value supplied by Canada, Mexico, and US itself
E. Asia has the longest chains–little of its exported value is absorbed by direct importer (see table 3)
100
East Asia has the most foreign content in its own exports
Integration in NAFTA makes
Mexico an outlier among non-Asian economies
11

Trade costs (tariff + transport), as a share of export value
Canada
EFTA
EU
Japan
United States
Trade costs on exports
Hong Kong
Korea
Taiwan
China normal
China processing
Malaysia
Thailand
Vietnam
India
Trade costs on imported inputs
Brazil
EU accession
Mexico normal
Mexico processing
Russian federation
• East Asia pays a price for its long chains and relatively high tariffs
• Advanced economies have low foreign content and, hence, low costs
0 5 10 15 20 25 30 35 12

• Start with 2004 GTAP global trade and prod’n database
• Add additional detail on source and use of intermediate inputs and final goods (elements of A rs
)
• Use end-use categories of detailed trade data (HS6) to improve imported intermediate use coefficients
– UN Broad Economic Classification (BEC) distinguishes intermediate inputs from final goods in imports from each source in each sector
– BEC is better than the alternative: Proportional method assumes the intermediate share in imports from each source is the same as in the home country’s domestic supply
13

Intermediate share of U.S. electronic machinery imports, by source
Proportion method
Japan
EU 15
EFTA
Canada
India
Rest of East Asia
Indonesia
China
Vietnam
Thailand
Philippines
Hong Kong
Korea
Taiwan
Russian
Brazil
EU accession
Mexico
Share from US import use table (54.2%)
0 10 20 30 40 50 60 70 80 90 100
14

• End-use classifications improve estimates of intermediate inputs entering the importing country
• Still have to assume proportionality to allocate intermediate inputs to each industry within the importing country
– Required data not reported by most national statistical agencies
– Problem noted by Committee on Economic Statistics of the
American Economic Association (Feenstra et al., 2010)
• Industry-level estimates of value-added trade may be unreliable with unknown biases, despite their theoretical tractability
15

• New value-added framework
– Generalizes and harmonizes all measures in the literature
– Accounts for the entirety of gross trade
– Provides new detail on regional differences in supply chain activity and costs
• It is now possible to measure trade in valueadded terms consistent with official statistics
– Ideal database would be consistent with both official trade statistics and national income accounts
16

• Contact information
– Bill Powers
– Research Division, Office of Economics
– U.S. International Trade Commission
– william.powers@usitc.gov
– (202) 708-5405
17