Measuring countries and sectors in GVCs

There is no doubt that the production of goods and services has become increasingly globalized since the 1970s, but this trend is one that is hard to measure. Ideally, the best way would be to use firm-level trade and census data across countries, but such data are very rare (Bems and Kikkawa, 2021).

In the absence of firm-level data that would allow for the full measurement of participation in global value chains  (GVCs), considerable work has focused on combining information from customs offices with national input-output tables. The most widely used are the World Input-Output Database (WIOD; Timmer et al., 2015), a collaborative project led by researchers at the University of Groenigen, and its augmented version developed by the Asian Development Bank (ADB Multiregional Input-Output); the Trade in Value Added (TiVA) database compiled by the Organization for Economic Cooperation and Development (OECD); and the EORA Global Supply Chain database (Lenzen et al., 2013), developed by a team of researchers at the University of Sydney.

Despite their limitations, such global input-output databases can be used to measure the extent to which production processes have globalized in recent years, and how countries and sectors participate in GVCs, together with several features of GVC linkages consistent with what Antràs (2020) calls “the broad view of GVC participation”.  A number of papers paved the way in this literature by contributing to conceptualize and quantify production sharing and trade in value added (Hummels, Iishi and Yi, 2001; Johnson and Noguera, 2012, Koopman, Wang and Wei, 2014).  In particular, Hummels, Iishi and Yi (2001) claim that a minimal condition for considering trade to be GVC-related is that it crosses at least two borders.

Building on this literature, Borin and Mancini (2015) showed how GVC-related trade can be computed using global input output tables. This can be seen as the sum of two natural measures of cross-border GVC linkages: forward GVC participation (i.e. producing and shipping inputs that are further re-exported) and backward GVC participation (i.e. using imported inputs to produce goods that are shipped abroad). During the COVID-19 crisis, these notions have been used extensively to detect a country’s exposure to demand and supply shocks and to discuss resilience. Such concepts are now widely accepted as standard in the literature (see Antras and Chor, 2021, Belotti, Borin and Mancini, 2021, Borin and Mancini, 2017 and 2019, Wang, Wei and Zhu 2017).

However, in our new paper (Borin, Mancini and Taglioni, 2021) we show that fully characterizing GVC participation by distinguishing between forward and backward linkages leads to overstating a country’s dependence on other countries’ inputs (i.e., backward integration). This assumption leads to a false empirical regularity too, whereby backward linkages appear systematically higher than forward linkages for all countries (Figure 1).

Figure 1. GVC Backward and Forward participation at the global level (as % of total trade)

_{Source: Borin, Mancini and Taglioni (2021)}

The concepts of forward and backward participation are important, since exposure to foreign economic forces depends on the absolute and relative importance of forward and backward linkages in GVCs. But this distinction neglects the fact that GVC participation encompasses many activities that are linked simultaneously both forward and backward to entities abroad. This is what is known as the I2E (import-to-export) in the terminology used by Baldwin and Lopez-Gonzales (2015).

In our paper we suggest that for a more accurate representation of the GVC phenomenon, we should allow for three distinct modes of participation: (i) pure forward participation for the activities at the beginning of the value chain; (ii) pure backward participation for the activities at the end of the chain; and (iii) two-sided or intermediate participation for activities that are neither at the beginning nor at the end of the chain. Once participation is computed in this way, pure forward and pure backward participation balance out at the global level.

The second improvement that we propose is to measure GVC output, in addition to GVC trade. Doing so eliminates another problem of standard approaches: the systematic underestimation of the involvement of less export-oriented industries, such as services, in GVC activity (Figure 2).

Figure 2. Exporter vs producer perspective in measuring GVC participation

GVC-trade (US$ trillion)	GVC-output (US$ trillion)
Source: Borin, Mancini, Taglioni (2021).

 

Once these biases are corrected, three key stylized facts emerge:

• GVC output is important. Looking only at GVC trade understates the actual extent of GVCs by half, as GVC trade amounts to about US$10 trillion, while GVC output amounts to about US$20 trillion.
• For more than 60 percent of country-sector pairs, two-sided GVC output accounts for more than half of the total engagement in GVC activities and for as many as one-third of them the two-sided participation accounts for more than two-thirds of total GVC activities.
• At the country level, GVC trade and output are clearly correlated, but country rankings do not appear to be so closely related. For example, Germany ranks 22nd in terms of GVC output participation but only 53rd in terms of GVC trade participation, out of a total of 189 countries reported in the EORA dataset.

In conclusion, most countries and sectors’ participation in GVC activities is two-sided and twice as large as commonly believed. It is important to explicitly account for these facts for at least three reasons. First, when forward and backward participation are netted out of the intermediate steps, they do balance out at the global level, as theory would suggest. Second, GVC participation in services and some manufacturing sectors is severely underestimated when taking the viewpoint of the exporting sector. Lastly, such improvements in methodology matter from a macroeconomic perspective.

To facilitate policy assessments on GVCs, the World Bank’s World Integrated Trade Solution portal provides access to a new comprehensive database that measures GVC participation of countries and sectors using Inter-Country Input-Output (ICIO) linkages in both trade and output, as proposed in our paper. GVC participation is computed up to and including 2020, and hence covers the first phase of the COVID-19 shock.  

References

Antràs, P., 2020. ‘Conceptual Aspects of Global Value Chains. ’World Bank Economic Review, 34 (3): 551-574.

Antràs and Chor, 2021. ‘Global Value Chains’. Chapter prepared for the 5th edition of the Handbook of International Economics. NBER Working Paper No. 28549.

Baldwin, R. and J. Lopez-Gonzalez, 2015. ‘Supply-Chain Trade: A Portrait of Global Patterns and Several Testable Hypotheses.’, The World Economy, 38(11).

Belotti, F., A. Borin and M. Mancini, 2021. ‘icio : Economic Analysis with Inter-Country Input-Output Tables.’, Stata Journal, 21(3).

Bems, R. and A. K. Kikkawa, 2021.  ‘Measuring trade in value added with firm-level data.’, Journal of International Economics, 129.

Borin, A. and M. Mancini, 2015. ‘Follow the value added: bilateral gross export accounting’, Economic Working Papers no. 1026, Bank of Italy.

Borin, A. and M. Mancini, 2017. ‘Follow the value added: tracking bilateral relations in global value chains’, MPRA Working paper No. 82692.

Borin, A. and M. Mancini, 2019. ‘Measuring What Matters in Global Value Chains and Value-Added Trade’, Policy Research Working Paper;No. 8804. World Bank, Washington ,DC.

Borin, A., M. Mancini, and D. Taglioni (2021) ‘Countries and Sectors in GVCs’. Policy Research Working Paper; No. 9785. World Bank, Washington, DC.

Hummels, D., J. Ishii and K.M. Yi, 2001. ‘The Nature and Growth of Vertical Specialization in World Trade.’ Journal of International Economics, 54, pp. 75-96.

Johnson, R. C. and G. Noguera, 2012. ‘Accounting for Intermediates: Production Sharing and Trade in Value Added. Journal of International Economics, 86, Iss. 2, pp. 224-236.

Johnson, R. C. and G. Noguera, 2017. ‘A Portrait of Trade in Value-Added over Four Decades.’ Review of Economics and Statistics, 99, Iss. 5, pp. 896-911.

Koopman, R., Z. Wang and S. Wei, 2014. ‘Tracing Value-Added and Double Counting in Gross Exports.’ American Economic Review, 104(2): 459-94.

Lenzen, M., D. Moran, K. Kanemoto and A. Geschke, 2013. ‘Building EORA: a global multi-region input-output database at high country and sector resolution’, Economic Systems Research, 25:1, pp. 20-49

OECD,2018. Trade in Value Added database, oe.cd/tiva and https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

Timmer, M. P., E. Dietzenbacher, B. Los, R. Stehrer and G.J. de Vries, 2015. ‘An Illustrated User Guide to the World Input-Output Database: the Case of Global Automotive Production.’ Review of International Economics.

Wang, Z., S. Wei and K. Zhu, 2013. ‘Quantifying International Production Sharing at the Bilateral and Sector Levels. ’NBER Working Paper, No. 19677.