The traditional view of international trade is that each country produces goods and offers services that are exported as final products to consumers abroad. However, in today’s global economy, this type of trade only represents around 30% of all trade in goods and services.
In reality, about 70% of international trade today involves global value chains (GVCs), as services, raw materials, parts, and components cross borders – often numerous times. Once incorporated into final products they are shipped to consumers all over the world.
Exports from one country to another often involve complex interactions among a variety of domestic and foreign suppliers. Even more than before, trade is determined by strategic decisions of firms to outsource, invest, and carry out activities wherever the necessary skills and materials are available at competitive cost and quality.
For example, a smart phone assembled in China might include graphic design elements from the United States, computer code from France, silicone chips from Singapore, and precious metals from Bolivia. Throughout this process, all countries involved retain some value and benefit from the export of the final product. But much of this value added throughout the international supply chain is invisible in traditional trade statistics, which attribute the full value of a good or service to the last country in the chain that finalised production.
Better measurement leads to better policies
To begin providing the evidence needed to respond to policy questions raised by the growing importance of GVCs for trade and investment, the OECD launched an initiative to measure trade in value added (TiVA) terms to provide a more accurate view of the underlying economic importance of trade.
With TiVA, we are able to better identify where value is added along the supply chain, to estimate where income and jobs are created, and to provide a new perspective on bilateral trade imbalances. This is a critical undertaking to establish a better understanding of the links between trade and jobs.
In a world of GVCs, trade policy cannot solely focus on impediments to trade with direct trade partners. The whole value chain and bottlenecks upstream and downstream among third countries have to be considered in order to boost exports and improve economic performance.
Critically, as the competitiveness of a country’s exports can depend on imported inputs (inputs which can also include their own previous exports), countries also need to address their own barriers to trade if they are to reap the benefits of participating in GVC trade.
Countries at all levels of development can benefit from engaging in global value chains
For developing countries seeking to enter or engage in GVCs, there can be pressure to move up the value chain into higher value-adding activities. But the gains from participating in GVCs can come from any stage of the value chain: what matters is doing more of what you’re good at. That is, countries that become efficient at the assembly or production stage can generate greater total value from becoming a globally competitive supplier of these activities, than they can by carrying out higher value-adding activities in which they are less competitive. Ultimately, what actually matters is the total value that the economic activities within the value chain can generate.
From a policy perspective then, the focus should be on the total value that firms are generating and not the share value-added that is being performed domestically. In Viet Nam, for example, the share of domestic value added in exports fell from 64% to 53% between 2005 and 2016, but at the same time, the total domestic value-added exported was multiplied by 4. So Viet Nam gained more and exported more overall.
Trade-related policy insights from TiVA in a global value chain world
The emergence and persistence of GVCs challenges the conventional wisdom of how we develop trade policy. Success in international markets today depends as much on the capacity to import world class inputs as it does on the capacity to export. TiVA data reveals the way that GVCs magnify the costs of tariff protection, since tariffs are cumulative when intermediate inputs are traded across borders multiple times.
The evidence also points therefore to the need to pursue trade-facilitating measures, such as the convergence or interoperability of standards and certification requirements, as a way to reduce border bottlenecks and facilitate supply chains.
You can learn more about the OECD’s work on global value chains and Trade in Value-Added by reading our books, papers, and policy briefs, or by digging into the raw TiVA data.