Value-add data adds value to our understanding of Asia

Author: Christopher Findlay, University of Adelaide

The future of manufacturing in developed economies, and the scope for digital technology to provide new life for that sector, has received increasing attention as production moves to low-wage countries and as the manufacturing process becomes more fragmented.

A new data set on the nature of world trade in goods and services released by the OECD and the WTO this month suggests the real complexity of this story and the importance for policy makers of understanding global value chains. This new data set will have particular relevance across Asia, and especially East Asia, where manufacturing is already heavily organised around value chains.

For example, while the iPod comes from a production line in China and is exported from there, only about 10 per cent of the product’s value is added in China. The rest comes from other countries, through material inputs or services that facilitate its assembly.

Case studies in the present organisation of manufacturing prompted the construction of the data set, an initiative endorsed at the 2012 G20 trade ministers meeting in Mexico. The new data set is constructed to find out where the value in a product is created, from foreign sources or domestic.

Australian exports, for example, contain a low share of foreign value added. This makes sense because most Australian exports, like minerals, are at the top of the supply chain. Overall, the domestic share of the value of exports is about 88 per cent for Australia, but for China that number is just over 70 per cent.

There are three important messages in the new OECD–WTO data set.

First, trade balances are not what they seem. Australia appears to have a large deficit with the United States and a big surplus with China. But Australian exports to Asia are re-processed and re-exported to the United States. At the same time, Australia imports even more from the United States than it appears, because of the US value added which is incorporated in other countries’ exports to Australia. The net effect, however, is a lower deficit with the United States. Likewise, the Australian surplus with China is reduced because much of what Australia sells to China is re-exported.

The United States also appears to have a large trade deficit with China. This is a sensitive matter in US domestic politics and the origin of complaints about the behaviour of China. But the deficit is actually 25 per cent lower in value-added terms than in gross terms. What is apparently imported by the United States from China is actually sourced from Japan, South Korea, Germany and other intermediate input suppliers to China.

Second, the data also demonstrate that exporters are importers. China has to import components to export the iPod, for instance. And in those areas where Australia is a strong exporter, there is a relatively high share of intermediate imported items, which are then exported. The implication here is that having access to world-class inputs is critical to the competitiveness of export sectors, and this means continuing to reduce barriers to imports.

Note, too, that when China exports the iPod it does not import components from just one country, but from many. Making the trading system work better therefore demands a network view. Taking a country-to-country view or a small group approach, as in some bilateral or regional trade agreements, is too restrictive. This means there should be greater attention, not less, to the WTO and to its wide and multilateral approach to trade liberalisation.

Finally, the data show the importance of services to exports. Australia exports a lot of services, and the domestic content of those exports is relatively high compared to goods exports. Overall, services value added accounts for about 40 per cent of the gross value of exports, more than twice the share when measured in gross terms. But manufactured exports in gross terms also contain a lot of services: over 40 per cent for transport equipment, 37 per cent for machinery and 28 per cent for electrical equipment. The competitiveness of the services incorporated into these products or provided alongside them is therefore critical to the success of these exports.

Returning to the question of the revival of manufacturing, the data say that it will depend on a well-functioning world trading system, efficient global sourcing, the use of imports and a country’s ability to find the right place in the supply chain. It will also depend on a world-class services sector, whose outputs are both embodied in and facilitate trade.

Christopher Findlay is Executive Dean at the Faculty of the Professions, University of Adelaide.