What is Trade in Value Added?
Trade in value-added describes a statistical approach used to estimate the source(s) of value (by country and industry) that is added in producing goods and services for export (and import). It recognises that growing global value chains mean that a country's exports increasingly rely on significant intermediate imports (and, so, value added by industries in upstream countries). For example, a motor vehicle exported by country A may require significant parts, such as engines, seats etc produced in other countries. In turn these countries will use intermediate inputs imported from other countries, such as steel, rubber etc to produce the parts exported to A. The Trade in value-added approach traces the value added by each industry and country in the production chain and allocates the value-added to these source industries and countries.
Why is this important?
Trade, growth and employment
While there are concerns that imports threaten domestic jobs, the reality is that jobs are increasingly created as part of global value chains. Trade flows in value added terms indicate where jobs are created and highlight the benefits of trade for all economies involved in the value chain. Understanding interdependencies within global value chains are key to explaining the competitiveness of countries and the productivity gains that can be made.
A country’s overall trade surplus or deficit with the rest of the world is the same whether measured with gross trade flows or using value added based measures. However, measures of bilateral trade flows based on gross concepts can present a misleading picture of who ultimately benefits from the trade and exaggerate the importance of producing countries at the end of value chains. Value added measures of bilateral trade better reflect who benefits, both in monetary terms but also, by extension, employment terms.
Conventional measures therefore may create a risk of protectionist responses that target those countries at the end of global value chains, on the basis of an inaccurate perception of the origin of trade imbalances. Indeed ‘beggar thy neighbour’ strategies can turn out to be ‘beggar thyself’ miscalculations - in other words, if a Country C exports goods worth $90 to another Country A, which in turn uses them to produce $100 of exports to Country B, which then uses them to produce $110 of final goods for export to C, then any policies initiated by C in response to a deficit with B, would have their greatest impact on the sector in C producing intermediate goods for A.
Managing macro-economic shocks
The 2008-2009 financial crisis was characterised by a synchronised trade collapse in all economies, as the effects of a drop in demand fed through to countries located upstream in the global value chain. A better understanding of value added trade flows would provide tools for policymakers to identify the transmission of macro-economic shocks and adopt the right policy responses.