Invisible magic

Ratio of value-added to total nominal trade

The hallmark of global economic integration is the smearing of origin.

Most of the interesting things we import comprise component parts or other inputs from a variety of different countries. The whole world is wealthier in large part because millions of unseen markets spread around the globe coordinate this complexity for us, invisibly, speedily and (rather) smoothly.

“Roughly two-thirds of international trade is in intermediate goods. As a result, measures of trade flows that tally the gross value of goods at each border crossing lead to a distorted view of world trade. Using a value-added measure, this column finds that the controversial US-China imbalance is in fact around 40% smaller than many people think.” Extract from Johnson and Noguera :: VoxEU

The gargantuan web of traded inputs and outputs creates most of anything we don’t grow or dig up for ourselves; from airplanes to zippers. But econometricians are only slowly coming up with ways to represent this invisible magic.

Johnson and Noguera have created a sort of global input-output matrix at the sector level (I haven’t been able to find their paper yet, so I’m not sure how detailed their model is). It shows that in aggregate many countries produce less than three quarters of the value-added in their own exports. Across all merchandise and services sectors and all export destinations, 27% of the “median” country’s exports comprised inputs of some kind from somewhere else.

The difference between the value of final goods and the original value-added is most extreme in manufactures, because that is the sector where international supply chains are most developed. The “not manufactured here” tag applied, in that “median” country (the sample is 94 different countries), to 56% of its value-added in manufactures exports. In other words, more than half the value of manufactures exports in a typical case comprise either non-manufactured components (services, mostly) or components made somewhere other than the nominal “country of origin”.

The invisible web means, too, that a lot of trade is “triangulated”. Exports arrive at their ultimate destination—ofen in a very different form—via a processing activity in some third country. There’s no better illustration of this phenomenon than Australia’s trade with the USA (click the thumbnail above). Johnson and Noguera show that about 15% of our imports from the USA comprise components or services from other countries. But the full value of Australia’s exports to the USA is about 130% of the nominal value because quite a lot of Australian “value added” (which does not mean “processed” in this case; probably mostly minerals, energy and services) arrives in the USA in the form of Asian manufactured goods.

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