vertical specialisation

Vertical specialisationAn analysis with redirected

trade in value added

Paul VeenendaalArjan Lejour

Hugo Rojas-Romagosa

Outline• Background and purpose• Methodology• global input-output analysis• labelling trade in value added• definition of indicators

• Results• hubs in electronics and motor

vehicles• hubs in China, EU12 and EU15 • summary of major hubs and

major suppliers to the hubs• Some conclusions

CPB Netherlands Bureau for Economic Policy Analysis3 Vertical Specialisation

Background• Hype in attention for trade in value added (WTO, World Bank, OECD)• Inspiring articles:

J&N: Johnson, R. C. and Noguera, G. (2012), Accounting for Intermediates: Production Sharing and Trade in Value Added, Journal of International Economics, 86(2):224-236

KPWW: Koopman, R., Powers,W., Wang, Z. and Wei, S.-J. (2010), Give Credit where Credit is Due: Tracing Value Added in Global Production Chains, NBER Working Paper 16426

• My presentation is based on LRV: Lejour, A., Rojas-Romagosa, H. and Veenendaal, P. (2011),The Origins

of Value in Global Production Chains, study for DG TRADE• but I bring the analysis further than LRV by

using a more focused country classification adding 2007 data to the datasets for 2001 and 2004 used in LRV and shifting the focus to vertical specialisation

20 March 2012


Purpose• Can we retrieve meaningful information from global input-output

tables about vertical specialisation at the industry level? with vertical specialisation we mean ‘the use of imported inputs in

producing goods that are exported’› Some examples:

◦ electronics production in China, South-East Asia and East Asia ◦ motor vehicle assembly in EU12, Canada, Japan, etc.◦ airplane construction in USA and EU15

we aim to identify at the industry level› the ‘hubs’ that convert intermediate output imports into final

output exports› their most important suppliers› and the regions that do not supply

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Approach• Take the datasets from GTAP for 2001, 2004 and 2007

these datasets link national input-output tables with bilateral trade statistics

57 industries, 84 different countries/regions• Construct global input-output tables from the datasets

main proportionality assumption: all incoming imports at the industry level are allocated to intermediate and final use in proportion to the row of the import matrix of the importer› hence, for example, German electronics imports from China and

German electronics imports from the US are allocated to use categories in Germany in exactly the same proportions

• Derive suitable indicators that describe vertical specialisation at the industry level we base these on redirected trade in value added

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Structure of the global input output tables• For a three region world example with regions: e (EU), c (China), r (RoW) and w (World)

• S is an (industry by industry) matrix of intermediate output deliveries, f a vector of final output deliveries by industry, x a vector of gross outputs by industry and w’ a row vector of value added by industry

ee ec er ee ec er e

ce cc cr ce cc cr c

re rc rr re rc rr r

e c r

e c r

S S S f f f xS S S f f f xS S S f f f xw w wx x x

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Leontief arithmetic I (condensed notation)We summarize the global table with

and define input coefficients for intermediates and value added as

and

Then

in which B denotes the global Leontief inverse and is global final output use.

S F xwx

( , , , ) ( , , , ) / ( )A r i s j S r s i j x j ( , ) ( , ) / ( )v r j w r j x j

1( )w w wx Ax f I A f Bf

wf

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Leontief arithmetic II (condensed notation)Defining the use of final output in country r as and using the ^ symbol to denote a matrix with a vector on its main diagonal and zeroes elsewhere consider

This matrix gives all values added that are required for the use of final output in country r. The row totals represent the values added from different sources that are needed for final output use in r and the column totals are equal to this final output use.

rf

ˆˆr rvBf

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Labelling required values added (three region world)For China this matrix would become

which we label as

We label the entries to distinguish four different claims on value added because of the use of final output in China:• G: values added for direct final output imports• D: values added for Chinese final output that is used in China• R: values added diverted into China (via third country’s final good exports)• R*: values added reflected back to China

* *

c c ce e erc cce crc c cre r r

G D RR RR D G

Row sums

Column sums

ˆ ˆ ˆˆ ˆ ˆ ( )ˆ ˆ ˆˆ ˆ ˆ ( )ˆ ˆ ˆ ( )ˆ ˆ ˆ

e ee ec e ec cc e er rc e c

c c ce ec c cc cc c cr rc c c

r cr re ec r rc cc r rr rc

ec cc rc

v B f v B f v B f w fv B f v B f v B f w f

w fv B f v B f v B f

f f f

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Reducing dimensionality (matrices -> vectors)

• At the industry level we can either follow the destinations of value added of a specific industry or the uses of national value added in the foreign production activities of that industry

• We choose the second option because it is the relevant choice for analysing vertical specialisation

• Hence, we reduce all matrices to vectors by adding country-wise over sectoral origins of value added

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Bilateral value added exportsThus, bilateral value added exports from the EU to China can be represented as

where the jth entry of these vectors denotes EU value added that is used for final output production (d, r and r*) and final output use (g) in China.

*

Absorbed in China

Directly Diverted by RoW to China Reflected by China to EUc c c c ee e e er ece g d r r

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Bilateral value added intermediate imports

China’s bilateral imports from the EU into Chinese final output production

This equation is the basis for our vertical specialisation indicators.

It specifies the claims on EU value added for China’s final output production and splits these in those for Chinese final output exports (r and r*) and China’s domestic final output use (d)

*

Redirected by China

Diverted to RoW by ChinaAbsorbed in China Reflected to EUc c r ee e ec ecd r r

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Vertical specialisation indicators for j-outputWe propose two indicator pairs at the industry level: • China as a redirector:

China’s share in redirecting foreign intermediate value added as a percentage of its foreign intermediate value added imports (redirection as % China’s imports)

redirection as % of globally redirected value added trade for industry j

• China as a supplier to foreign redirectors: China’s share of domestic intermediate value added that is

redirected by other countries as a percentage of China’s domestic intermediate value added exports (% of exports that is redirected)

redirected Chinese exports as a % of globally redirected value added for industry j

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Country classification in results

EU15: Old member statesEU12: New member statesOWE: Other western EuropeOEE: Russia and other eastern EuropeIND: IndiaCHH: China and Hong KongEAS: East AsiaSEA: South-East Asia JPN: JapanUSA: United States of AmericaONA: Other NaftaROW: Rest of World

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Industry classification in resultsAGO: AgricultureENG: EnergyLTM: Low-tech manufacturingMLM: Medium-low tech manufacturingCRP: Chemical, rubber and plastic products MVH: Motor vehicles and parts OTN: Transport equipment nec OME: Machinery and equipment nec ELE: Electronic equipment TRA: TransportOBS: Business services OCS: Other commercial servicesOSR: Other services

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Aggregation and the share of redirected value added trade• Aggregation over industries does not affect the composition of value

added trade

• Aggregation over countries reduces the share of redirected value added trade and increases the shares of D and G Example: aggregation over EU member states

› all internal EU trade will be classified as D: domestic value added needed for EU final output used in the EU

› all EU imports that were diverted by EU-countries to other EU countries will be classified as G

› all EU exports that were diverted by EU-countries before leaving the EU will be classified as G as well

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Intermediate value added trade as % of global value added trade for j-output, 2007

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0102030405060708090

100

ele ome otn mvh crp mlm ltm ago tra eng obs ocs osr

%

D R R*


Redirection of foreign value added in electronics, 2007

0

5

10

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20

25

30

35

40

0 10 20 30 40 50 60 70 80 90

% of globally redirected value

added

% of intermediate value added imports

41 78 24 10 73 7 61 79 19 20 73 11EU15 EU12 OWE OEE China India EAS SEA Japan USA ONA RoW

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CPB Netherlands Bureau for Economic Policy AnalysisVertical Specialisation

Final destinations of redirected value added in electronics, 2007

20 20 March 2012

0

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40

60

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eu15 eu12 owe oee chh ind eas sea jpn usa ona row wld


added

Redirectoreu15 eu12 owe oee chh ind eas sea jpn usa ona rowFinal destination:


Redirection of domestic value added in electronics, 2007

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0 10 20 30 40 50 60 70


added

% of intermediate value added exports


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Origins of redirected value added in electronics, 2007

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added

Redirectoreu15 eu12 owe oee chh ind eas sea jpn usa ona rowValue added from:


Redirection of foreign value added in motor vehicles, 2007

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added




Final destinations of redirected value added in motor vehicles, 2007

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added

Redirectoreu15 eu12 owe oee chh ind eas sea jpn usa ona rowFinal destination:


Redirection of domestic value added in motor vehicles, 2007

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0

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0 10 20 30 40 50 60


added

% of intermediate value added exports



Origins of redirected value added in motor vehicles, 2007

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added

Redirectoreu15 eu12 owe oee chh ind eas sea jpn usa ona rowValue added from:


China as a redirector, 2001-2007

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2001

2004

ago

ltm

mlm

crp

mvh

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ele,2007

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EU12 as a redirector, 2001-2007

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2001

2004agoltm

mlm

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ome ele, 2007

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EU15 as a redirector, 2001-2007

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Summary table of important redirectors, 2007

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eu15 eu12 owe oee ind chh eas sea jpn usa ona row agoengltmmlmcrpmvhotnomeeletraobsocsosr

Criteria used:• share of redirected value added > 20% of intermediate value added imports• share of redirected value added > 8% of globally redirected value added


Summary table of important suppliers, 2007

20 March 2012

Criteria used:• share of redirected value added > 20% of intermediate value added exports• share of redirected value added > 8% of globally redirected value added

eu15 eu12 owe oee ind chh eas sea jpn usa ona row agoengltmmlmcrpmvhotnomeeletraobsocsosr


Some conclusions• Our analysis yields meaningful results on vertical specialisation at the industry

level that are robust over time and are easily recognized as making sense

• We contribute to the literature with the direct labelling of bilateral trade in value added; this is new and our indicators are new too

• Yet, the approach has some weaknesses one needs proportionality assumptions in constructing global input-output

tables we do not distinguish yet whether the ‘hubs’ identified are production hubs

or trading hubs (re-exporters of ‘almost final’ output)

• Future research might focus on the benefits of ‘being connected’ for this we might explore whether our indicators at the most detailed level of

84 countries contribute to the explanation of growth differentials

20 March 2012

vertical specialisation

Documents

intermediate output

global input output

row vector of value

national inputoutput

tracing value

origins of value

final output exportstheir

cpb netherlands bureau