Domestic value added content of exports: a cross-country comparison for the major

European economies

Rita Cappariello

Final WIOD Conference: Causes and Consequences of Globalization

Groningen - 24, 25 and 26 April 2012

The views expressed in the paper and in the presentation are those of the author and not necessarily those of Bank of Italy.

Outline of the presentation • Concepts: some metrics of the value added and the labour income (“compensation of employees”) content of manufacturing exports

• Measurements: opportune methodology to estimate the level and the change in value-added content and labour share for France, Germany and Italy.

• Results: description of the relationship between gross trade and its value added components.

• Some clues on the extent at which domestic value added is generated in the upstream sectors (industrial and services), that is, the ones providing inputs to manufacturing.

Motivation: why measure value added? • Given the development of the global production chains,

are the conventional trade statistics still good indicators of a country’s gains from exports? Probably not.

• Focus on the value-added (GDP) content of exports and its main component, compensation of employees, that is, on the aptitude of manufacturing exports to generate domestic value added and labour income.

Literature • Hummels, Ishii and Yi (2001) introduced the concept of import

content of export (“vertical specialisation”) using I-O tables.

• Many papers follow the HIY approach to distiguish the foreign and the domestic value added content of exports (especially for China) [Chen et al. (2007), Koopman et al.(2008), Dean et al. (2007)].

• A more recent line of research focuses on trade flows in value added using an international I-O framework [Daudin et al. (2009), Johnson and Noguera (2010) and Koopman et al. (2010)]

Definitions and measurements

Definitions • Direct value added content of exports is the sum of the value added generated by each manufacturing sector’s exports within its own sector Value added of exports (VAX)

• Direct and indirect value added of exports (HIY approach) considers also the value added contained in the domestic inputs (goods and services) of production of exported goods Domestic value added of exports (DVAX)

• Quantify the indirect component of value-added of exports: OECD and WTO (2011) “this break-up is particularly important when identifying the sources of national competitiveness, which may rest in up-stream sector which are not considered as exporters by traditional statistics, or measuring the employment impact of export production”.

• Direct value added of exports (VAX)

with Xi the gross exports in industry i and vai the value added content of one unit of product i.

[ ]∑ ⋅=i

ii vaXVAX

The underlying assumption in the paper is that in each sector the value added embodied in a good produced for export (vai) is equal to the value added of the same good produced for domestic consumption. The same assumption holds for labour compensation content.

• Domestic value added of exports (DVAX)

∑ ∑∑∑∑∑∑

++++=

i j

Dji

k s

Dkj

Dsks

j

Dji

k

Dkjk

j

Djijii aaavaaavaavavaXDVAX ...

By using a different formulation, DVAX can be calculated by removing from the gross exports the “direct” and “indirect” imported inputs.

∑ ∑∑∑∑∑∑

++++−=

i j

Dji

k s

Dkj

Dsk

Ms

j

Dji

k

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j

Dji

Mj

Mii aaaaaaaaaaXDVAX ...1

with Xi the gross exports in industry i, aDji is the share of domestically

produced inputs in sector j used in sector i.

aMji is the share of imported inputs in sector j used in sector i.

Includes the value added contained “directly” and “indirectly” in domestic inputs.

Definitions

• Direct labour income content of exports is the sum of the “compensation of employees” generated by each manufacturing sector’s exports within its own sector Direct labour share of exports (CEX) • Direct and indirect labour income content of exports includes also the labour income contained in all the domestic inputs used for the production of exported goods, that is, the labour income generated by exports in the overall economy Domestic content of labour in exports (DCEX)

• Direct labour share of exports (CEX)

• Domestic content of labour in exports (DCEX)

aDji is the share of domestically produced inputs in sector j used in

sector i.

with cei the “compensation of employees” content for one unit of product in sector i.

[ ]∑ ⋅=i

ii ceXCEX

∑ ∑∑∑∑∑∑

++++=

i j

Dji

k s

Dkj

Dsks

j

Dji

k

Dkjk

j

Djijii aaaceaaceaceceXDCEX ...

Data • National accounts from Eurostat • Nace-sector export data • Input-output tables (Eurostat and Istat) providing the distinction between domestically produced inputs and imported inputs (2000 and 2007) – only for DVAX and DCEX • Imported inputs take into account all goods (including energy products) and market service products (46 NACE-sectors). • As a robustness check to avoid the bias due to the high volatility of energy price, the DVAX has been calculated even by excluding energy products inputs from the manufacturing non energy exports. Results confirmed.

A first evidence:

The “direct” value added and

labour income content

8010

012

014

016

080

100

120

140

160

8010

012

014

016

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

France

Germany

Italy

gross exports exported va

Note: for years 2009 and 2010 value-added exports are estimated onpre-crisis national accounts data.

• Focus on the period between 2000 and 2007.

• Direct value added of manufacturing exports increases less than gross exports.

• The performance of German exports was strong (about 60%), even in terms of direct value added (53%). Despite the “bazaar economy” view.

• For Italy, the growth of exports was lower (38%), and even less if considered in terms of direct value added content (26%).

•The increase in the exported direct value added for France was almost negligible, reflecting the moderate growth of gross exports.

100

120

140

160

100

120

140

160

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

France

Germany

Italy

gross exports exported ce

Note: for years 2009 and 2010 compensation of employees exports areestimated on pre-crisis national accounts.

• For Italy and France similar pattern of the direct labour income content and that of exports.

• For Germany they strongly diverge since year 2003. Expansion of exports (45% between 2003 and 2010), induced an lower increase of labour income in manufacturing (16 % -labour inputs decreased by 2.4%).

• Role of the Hartz Committee reform in German labour market

• Implications for redistribution

Main results:

The “domestic” value added and

labour income content

• To be clear, I remind you some definitions: • Direct value-added catches the value added created by each manufacturing sector’s exports in its own sector. • Direct import content measures the value of foreign inputs utilised directly in each manufacturing sector to produce.

• Domestic value added estimates the value added created by manufacturing exports in all the economy (private sectors including services) by taking into account the domestic inputs from all sectors used for the production of exported manufacturing goods. • Direct and indirect import content measures the value of foreign inputs utilised directly or indirectly (imported inputs embodied in domestic inputs) in each manufacturing sector to produce goods.

Italy France Germany

2000 2007 2000 2007 2000 2007

Direct value added (VAX) 28.0 25.6 25.1 23.6 32.9 31.4

of which: labour content (CEX) 15.7 15.2 15.9 15.7 25.0 20.1

Domestic value added (DVAX) 67.4 61.7 66.4 64.0 70.1 65.5

of which: Domestic labour content (DCEX) 31.2 30.2 38.6 38.7 46.7 38.2

Direct imported inputs 21.3 25.4 22.0 23.9 20.7 23.7

Direct and indirect imported inputs 32.6 38.3 33.6 36.0 29.9 34.5

• Higher aptitude of German exports to create value added (as measured by DVAX) than Italian exports; similar to the French ones. • When considering the extent to which exports create value added just in their own industries (VAX), Germany showed an apparent higher aptitude. • Similar pattern of fragmentation of production (in terms of DVAX) for German and Italian manufacturing industries. For France the process was less intense. • The same holds for the “labour income” component.

Shares of value added, labour and import content in manufacturing exports

Growth of gross manufacturing exports and their components (2000-2007)

Gross exports

Direct va of exports

of which: direct labour

content

Domestic value added

of which: domestic

labour content

Italy 38.0 26.3 33.7 30.7 33.8

Germany 60.8 53.5 29.5 54.8 31.5 France 13.3 6.4 12.0 10.6 13.5

• From a dynamic prospective:

• Only for Germany the growth of DVAX is about in line with the increase of the VAX. For France and Italy the increase of DVAX is higher than that of the VAX (stronger activation of domestic value chains)

• Even evaluated in “domestic” terms, the patterns of va and labour income content for German manufacturing strongly diverge.

Decomposition of export content

66.4

38.633.6

64.0

38.736.0

70.1

46.7

29.9

65.5

38.234.5

67.4

31.232.6

61.7

30.2

38.3

010

2030

4050

6070

France Germany Italy2000 2007 2000 2007 2000 2007

Source: Eurostat and Istat. Calculations on I-O tables, National Accounts and foreign tradedata in manufacturing sectors.

domestic value-added of which: domestic labourdirect and indirect imports content

Results:

Some insights from sectors

• In general, the ranking of sectors in DVAX terms does not correspond to the ranking in VAX.

• Major manufacturing sectors: “machinery and equipment”, “electrical machinery”, “motor vehicles”, show similar ranking among the three economies in terms of DVAX.

• In “chemicals” relatively high content of DVAX in France and Germany but not in Italy.

• Traditional sectors generate a relatively high level of DVAX especially in Italy and France.

Value-added of exports in Germany (2007)

VAX DVAX Share of total exports

medical, precision and optical instruments 47,9 77,0 4,6

food products and beverages 24,1 74,7 4,1

electrical machinery and apparatus n.e.c. 36,1 74,1 5,5

machinery and equipment n.e.c. 36,7 72,8 16,0

fabricated metal products, except machinery 38,8 71,8 3,8

furniture; manufacturing n.e.c. 35,1 69,1 2,0

rubber and plastic products 35,3 66,2 3,7

chemicals and chemical products 33,6 65,5 12,5

pulp, paper and paper products 29,4 64,4 2,1

motor vehicles, trailers and semi-trailers 24,9 63,3 20,1

other transport equipment 28,8 61,9 3,5

radio, television and communication eq. 31,2 59,5 4,4

office machinery and computers 29,0 53,3 2,7

basic metals 24,1 50,5 7,0

coke, refined petroleum products and n.f. 7,2 17,3 1,9

Value-added of exports in Italy (2007)

VAX DVAX Share of total exports

other non-metallic mineral products 32,0 75,6 2,9 food products and beverages 21,1 74,8 5,5 machinery and equipment n.e.c. 29,2 69,8 21,6 fabricated metal products, except machinery and eq. 34,1 68,9 4,8 wearing apparel; dressing; dyeing of fur 29,3 67,9 4,0 electrical machinery and apparatus n.e.c. 30,5 67,2 4,1 leather and leather products 25,3 66,6 4,2 furniture; manufacturing n.e.c. 26,6 66,1 5,0 medical, precision and optical instruments 35,6 63,3 2,5 textiles 28,9 62,9 4,1 other transport equipment 21,6 61,0 3,2 motor vehicles, trailers and semi-trailers 18,4 59,5 8,5 rubber and plastic products 26,1 58,7 3,8 basic metals 17,8 48,4 7,7 chemicals, chemical products 22,3 47,0 9,4 coke refined petroleum products and nuclear fuel 11 6 22 4 3 8

Value-added of exports in France (2007)

VAX DVAX Share of total exports

food products and beverages 23,1 78,8 9,0 medical, precision and optical instruments 38,4 74,3 3,7 furniture; manufacturing n.e.c. 30,5 73,0 1,9 fabricated metal products, except machinery and eq. 36,5 71,5 2,6 machinery and equipment n.e.c. 31,4 71,1 9,6 wearing apparel; dressing; dyeing of fur 31,3 68,5 1,9 radio, television and communication eq. 23,3 66,2 3,6 pulp, paper and paper products 23,7 65,8 1,8 electrical machinery and apparatus n.e.c. 28,0 64,8 4,8 chemicals, chemical products 21,3 63,3 16,6 rubber and plastic products 29,5 62,0 3,3 basic metals 21,8 58,5 7,2 other transport equipment 17,2 57,0 9,8 motor vehicles, trailers and semi-trailers 13,4 55,8 13,7 coke, refined petroleum products and n.f. 9,6 26,8 3,4

Conclusions

• Between 2000 and 2007, similar pattern of fragmentation of production for German and Italian manufacturing industries through an increased use of imported inputs to reduce costs. • For France the decrease in domestic value added (and the corresponding increase of IC) was less intense. Probably this was due to a different strategy of delocalisation for French manufacturing firms: in 2000 the level of FDI abroad in manufacturing was higher. This probably contributes to explain the weaker performance of French manufacturing exports. • Although the similar strategies of use imported inputs, German manufacturing exports maintained the ability to create more value added than Italy (A different role in the global value chain?) • In 2007 the domestic labour income content for Italy was markedly below the level of France and Germany. The difference remained despite the dramatic reduction of labour costs in Germany.

Rita Cappariello

Economic Research and International Relations Area

Balance of Payments Division

Banca d’Italia

rita.cappariello@bancaditalia.it