The Changing Nature of the

UK’s Involvement in Global Value Chainsprepared for the Business Statistics User Event:

The Changing Nature of Trade and Investment

in the UK24th September 2013

Dr. Michael GasiorekCARIS, University of Sussex

& InterAnalysism.gasiorek@sussex.ac.uk www.tradesift.com

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What are the issues....• The last 10-15 years have seen the increasing

integration of firms in value chains or supply chains.• Firms increasingly purchase and sell goods and

services as intermediate inputs internationally. • This process has become known as the fragmentation

of the supply chain. • Conventional wisdom suggests this has enabled a

finer degree of “within industry” specialisation, leading to increased productivity & competitiveness.

• Also resulted in greater inter-dependance between countries

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What are the issues....• Looking at gross exports may be misleading. Need to

be able to identify the value added in those exports. • To do so, need to identify the intermediates that are

used by each industry and where the intermediates come from: domestic v imported input-output tables.

• Two recent data-sets (TiVA & WIOD) have been released which provide this information and allow these issues to be explored:

• Important for policy and for understanding the changes that have taken place in the UK economy

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TiVA and WIOD - overview• TiVA (trade in value added)

• Produced by the OECD• Indicators for 18 sectors – manufacturing and services• 57 economies (OECD + others) • 1995, 2000, 2005, 2008, 2009

• WIOD (world Input Output Database)• Produced by • Provides detailed (input-output) tables for 36 sectors • covers 27 EU countries + 13 other countries • period 1995-2009. • Includes information on the employment by skill type (high

medium & low) embodied in trade and production

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Every picture tells a story….

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Domestic value added in gross exports• Chart shows that for the UK, the share of domestic VA

in exports has gone up (from 79% to 83%)• Interestingly for the others we see the reverse trend

• China: 88% 67%• India: 90% 78%• Germany: 81% 73%

• This would appear to suggest that the UK may be engaging less in international value chains, while competitors are engaging more.

• Important to understand this and to consider the extent to which this “matters”.

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Possible explanations1. Within industries the UK is producing more of the

value chain (MVC) - supplying more intermediates2. Within industries UK is now producing a higher

value part of the value chain eg. moving up the value chain (UVC)

3. No compositional changes but within industries the price of UK intermediates relative to the price of the final goods it exports has gone up

4. Changes in the structure of the UK economy – Decline of sectors with a low domestic value chain share – growth of sectors with a high domestic value chain share

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Possible explanations• (1) and (2) suggest that the UK is becoming more

competitive in the intermediates it supplies for use in the final goods that the UK then exports

• (3) suggests that the UK is becoming less competitive in the intermediates it supplies

• Assessing competitiveness in the intermediates is tricky – and cannot be done with TiVA data directly

• TiVA gives revealed comparative advantage for 9 manufacturing sectors

• This does not identify the intermediates used in those sectors, however if the UK was more competitive in the intermediates might also expect this to be the case for the final goods too.

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Ag, for fish

Food, Bev, & Tob

Wood, Paper, prntng

Chem Basic metals

Machry.

Elect & Opt.

TranspEquip

Manuf nes

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Possible explanations• Each of (1), (2) and (3)

Producing more of the value chain (MVC) Producing higher up the value chain (UVC) Increasing price of UK intermediates

...imply changes taking place within industries, so we would expect to see a higher share of domestic value added within industries

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Wood, Paper, prntng

Chem TranspEquip

Ag, for fish

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For Chemicals and Transport Equip: RCA , domestic VAsh For these competitiveness may be related to more international fragmentation as opposed to less

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Ag,For. & Fishg, and Wood, Paper & Printing: RCA, dom Vash Therefore may be consistent with explanations 1,2 or 3

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Overall

• There are 10 industries where the UK value added share has gone up,

– five are service industries accounting for 21% of the UK’s exports.

– five of these in manufacturing comprising 28% of the UK’s exports in 2009;

– No clear pattern between competitiveness and domestic value added share – but this is at a very aggregate level

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What do the graphs suggest?1. There are four sectors where the UK’s revealed

comparative advantage has gone up: – food, beverages and tobacco; – wood, paper, printing and publishing;– Chemicals and non-metallic mineral products– Transport equipment

2. In only two of the sectors which saw a rise in the UK’s domestic share of value added, is there evidence of the RCA rising.

3. Note also little difference at this aggregate level between the RCA using gross exports and value added exports. This is unsurprising.

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What about inter-sectoral compositional shifts?

CARIS(Note: Excluding industries with a 2009 share less than 2.5%)

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What about inter-sectoral compositional shifts?

CARIS(Note: Excluding industries with a 2009 share less than 2.5%)

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What about inter-sectoral compositional shifts?

CARIS(Note: Excluding industries with a 2009 share less than 2.5%)

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Some significant changes here• Indicative of substantial compositional shifts• Decline in the share of all manufacturing sectors.• growth in the importance of “financial

intermediation” (65-67) from 4.9% of value added exports to 18%

• Growth in “real estate, renting and business activities” (70-74) from 8.7% to 16.7%.

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So what is the story?• Post 1995 restructuring of the economy towards financial &

business services. These sectors have a higher value added share in exports, so this is driving the aggregate results

• Decline in manufacturing in the UK, though not necessarily by UK firms. Production and exports shifted to 3rd countries.

• In contrast (possibly) Germany shifted source of intermediates to third countries. China and India changes driven more by the opening up of their economies

• May have been exacerbated by overvalued exchange rate. On the one hand this makes imported intermediates cheaper (encouraging their use; on the other hand makes exports more expensive. Net effect unclear

• However, hard to see in detail what is happening to trade

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For that you need more detailed trade data...• Out of 4696 goods exported in 2011, the top 50 UK HS 6-

digit exports account for just under 50%.• Those 50 industries accounted for 36% of UK exports in 2001• Of those 50 industries, nearly 25% saw their revealed

comparative advantage over 2001-2011 decline. • These industries accounted for 18% of UK exports in 2001,

and 14.6% in 2011.• Out of the 50 industries the 10 which saw their RCA rise the

most, saw their share of exports over the period rise from just under 2% to 6.6%.

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Another picture, another story?

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