The importance of global value chains

Economic theory suggests that countries more open to international trade should grow faster and have higher income levels than less open ones. International trade enables firms to specialise in goods and services that can be most efficiently produced in the home country; to sell to larger markets, hence exploiting economies of scale; and to benefit from higher quality and variety of inputs as well as technological spillovers and knowledge exchange. Trade also puts pressure on prices for final goods and intermediate inputs and facilitates international fragmentation of production processes, further reducing costs. Firms exposed to international competition ought to innovate continuously in order to succeed.

Key findings

The empirical evidence confirms the strong link between trade and growth. Countries more open to international trade, where openness is measured by imports plus exports as a percentage of GDP, typically have a higher level of GDP per capita. Moreover, with the exception of Greece, countries that have been able to increase their exports-to-GDP ratio over time have also improved labour productivity over the same period. This is especially true for catch-up economies such as Central and Eastern European countries, which suggests that participation in global value chains (GVCs) has contributed to the catch-up process.

Measures of exports based on gross terms can, however, overstate the importance that a given growth in exports makes to overall GDP growth; this reflects the fact that exports increasingly embody imports. Indeed, the foreign value added share of gross exports has augmented in nearly all countries over the past fifteen years, reflecting growing participation in GVCs. This has amplified the opportunities for specialisation, and so increased export driven growth, reflected in the higher ratios of direct domestic value content of gross exports to GDP, possibly contributing to productivity gains.

Definition

Typically, trade openness is measured as the ratio of total trade, i.e. gross exports plus gross imports, to gross domestic product (GDP). Exports on a gross basis include the value of imports embodied in goods and services as well as some value added created in other domestic sectors that returns embodied in imports. This “double-counting” particularly affects those countries where firms are closely integrated into global value chains.

Measuring international trade in value added terms attempts to correct for the double-counting. Value added embodied in foreign final demand – as represented in the bottom right panel of Figure 5.6 – can most readily be interpreted as “exports of value added”. It shows how industries export value added that is produced in the home country to foreign final consumers, both through direct final exports and via indirect exports of intermediate inputs.

Comparability

The indicators in the joint OECD/WTO Statistics on Trade in Value Added (TiVA) (database) are derived from OECD Input Output Tables linked together using bilateral trade flows in goods and services. Some assumptions are necessary to create the TiVA indicators, implying that some care is needed in interpreting the results. Key in this context is the underlying “production assumption” that assumes that for a given industry, all firms allocated to that industry use the same goods and services, and so imports, to produce the same outputs. Firms engaged in global value chains, particularly foreign owned affiliates, are likely to have higher import content than firms in the same sector producing goods or services for domestic markets. This means that TiVA estimates will, more likely than not, underestimate the import content of exports.

References

OECD National Accounts Statistics (database), http://dx.doi.org/10.1787/na-data-en.

OECD-WTO: Statistics on Trade in Value Added (database), http://dx.doi.org/10.1787/data-00648-en.

OECD-WTO (2012), “Trade in Value Added: Concepts, methodologies and challenges” (OECD-WTO, online document), www.oecd.org/sti/ind/49894138.pdf.

Figure 5.5. Trade openness and GDP per capita, 2017
Total economy, percentage of GDP (X-axis) ; current prices and current PPPs (Y-axis)
Figure 5.5. Trade openness and GDP per capita, 2017

 StatLink http://dx.doi.org/10.1787/888933969105

Figure 5.6. Change in exports to GDP ratio and growth in labour productivity
Total economy, exports in gross terms (left panel) and in value added terms (right panel)
Figure 5.6. Change in exports to GDP ratio and growth in labour productivity

 StatLink http://dx.doi.org/10.1787/888933969124

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