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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