U.S. Participation in Global V alue C hains William Powers Prepared for:

1. U.S. Participation in Global Value Chains William Powers Prepared for: What Does it Mean to Make it in America? A Look at Factoryless Goods Production and Global Value Chains Washington International Trade Association June 10, 2014 The views expressed here are solely those of the presenter. This presentation is not meant to represent the views of the USITC or any of its Commissioners.

2. Logistics Production R&D Marketing Design Sales Global value chains • The value chain includes all activities by firms and workers to bring a product from its conception to its end use and beyond • Global value chains (GVCs) have become much more prevalent and complex in the past 20 years • Traditional trade statistics (aka “official trade” or “gross trade”) don’t capture key elements of international integration • Led to development of trade in value-added trade (TiVA) which traces value added from its source to destination • Led to focus on factoryless goods producers After-market services

3. Uses of TiVA statistics • Identifying country’s participation in domestic and global value chains • Identifying indirect sources of strength • Services sectors and SMEs are indirect engines of manufacturing competitiveness • SMEs are also sources of key inputs to U.S. exports • Implications of trade for U.S. incomes • TiVA data can provide more accurate measures of the effect of trade on U.S. income than gross trade statistics

4. Official trade statistics often do not reflect increasing global integration • As global production has become more integrated, industries use increasingly more foreign value • This increasing integration is often not reflected in official trade statistics Share of intermediate inputs in U.S. imports Source: Powers (2012)

5. TiVA statistics show growing foreign value in U.S. production and exports Foreign value-added in U.S. exports, percent • Overall, foreign value makes up only about 12% of U.S. export value • Most globally integrated (e.g., China, Mexico) have 30–40% foreign value • Large economies rely more on domestic supply chains • Foreign value is increasing in most U.S. sectors • Chemicals, transport equipment, apparel most globally integrated U.S. sectors Source: OECD, 2013, “Measuring trade in value added, U.S. country note

6. TiVA analysis highlights indirect sources of manufacturing competitiveness Services’ contribution to manufacturing output, percent • Services contribute one-third of value-added in U.S. manufacturing • Business services are particularly important

7. GVCs and employment • According to the OECD: • GVC participation has little effect on overall employment • GVCs have greater effect on medium-skill workers with tasks that can be automated or codified (e.g., book-keeping, monitoring)

8. Payments to U.S. labor and capital for production of All manufactured goods Electrical machinery • Gradual increase in compensation of high skill workers (college graduates), and decrease to medium (some college) and low skill • Note: Total compensation, not compensation per worker High skill labor Medium skill labor Low skill labor Low skill labor Capital (profits) Capital (profits) Source: Estimates based on WIOD data

9. Policy implications and caveats • Trade costs multiply along GVCs • Multiple borders generate multiple costs • Nontariff barriers 6x greater effect than tariffs (WEF, 2013) • Domestic barriers to imports of intermediate inputs have greater impact on firms than in past • Trade barriers in upstream suppliers or downstream consumers affect trade even if you don’t directly trade with those countries • Caveats • Not available for many countries (much of Africa, Latin America) • Production of TiVA data faces long lags (2011 most recent) • Relies on many assumptions; not always consistent with to national statistics