Globalization of trade flows -- what you see is not what you get --

1. Globalization of trade flows -- what you see is not what you get -- andreas.maurer@wto.org 2nd WPTGS meeting, OECD Paris, 16.-18.11.2009

2. Provisional Outline • Global economic crisis - decomposition of trade flows (wysinwyg) • Trade and Production: Import content of exports -- statistical measurement • Economic importance • Statistical measurement • Case studies --Trade & Business Links • Direct measurement • Indirect measurement • Trade: • Goods for processing • Economic importance • Statistical measurement in BPM6/IMTS2010 • Intra-firm trade • Economic importance • Statistical measurement in SNA 2008/BPM6/IMTS2010

3. Global economic crisis • Growth rates of merchandise trade by region, Q1 2009 ... but second quarter world exports increased 8% (q/q)

5. Import content of exports – trade in value added • Three ways of measuring the fragmentation of the value chain • Using firm surveys • Foreign trade statistics • The increase in the share of parts and components in trade flows indicates more production-sharing between countries. • Using international input-output tables to depict inter-industry relations. • I-O shows how the output of one industry is an input to each other industry. Input is enumerated in the column of an industry and its outputs are enumerated in its corresponding row. • International I-O extends the inter-sectoral relations to several countries. It shows how dependent each national industry is on all other sectors from the domestic economy and from other partner countries, both as customer of their outputs and as supplier of their inputs. •  International I-O is conceptually very simple, but requires high-quality data. It is a powerful modeling tool for: • Measuring size/magnitude of production linkages and the “length” of the chains • Computing Vertical Specialization Index • Tracking the international transmission of demand/supply shocks

6. The “American car”* only 37 per cent of the production value is generated in the US • 30 per cent go to Korea for assembly • 17.5 per cent to Japan for components and advanced technology • 7.5 per cent to Germany for design • 4 per cent to Chinese Taipei and Singapore for minor parts • 2.5 per cent to the UK for advertising... • 1.5 per cent to Ireland and Barbados for data processing... • ... and that was in 1998 * Grossmann, G. Rossi-Hansberg, E. The Rise of Offshoring, It’s not wine for cloths anymore Firm surveys Trade and business links ?

7. Trade in intermediate goods, 2008

8. Trade in services – offshoring/tasks • Estimating the size of offshore outsourcing is subject to definitional and statistical challenges • Classifications do not distinguish services to end-use clients or intermediate, or business-to-business services. • Consequently, estimates vary • - 2005: OECD's and UNCTAD include all IT-enabled services, estimate at US$836 billion.[1] • 2007/8 UNCTAD estimated the value of trade in "IT-enabled" services at US$1.1 trillion in 2005, ...[2] • London School of Economics[3] estimates global market of offshore outsourcing of IT (ITO) and business process services (BPO) to exceed US$55 billion in 2008, 20 per cent increasing annually over next five years. • Leading recipients of IT and business process off-shored trade have been Brazil, Russia, India, and China. India’s exports US$40 billion, China, Russia, and Brazil US$5 billion, US$3.65 billion, and US$800 million respectively in 2008. • -------------------------------------------------------------[1]OECD, "Expanding International Supply Chains: The Role of Emerging Economies In Providing IT • and Business Process Services", Working Paper No. 52, May 2007. • [2] UNCTAD, Information Economy Report 2007-2008. UNCTAD. • [3] Willcocks, Griffiths, and Kotlarsky, Beyond BRIC: Offshoring in non-BRIC countries: Egypt – a new growth market, LSE Outsourcing Unit, January 2009.

9. Using Input-Output tables to measure vertical trade Asian Input-Output tables (IDE-Jetro) Leontief inverse = (I-A)-1 Vertical trade (import content of exports) = M * (I-A)-1 * X A: technical coefficients matrixI: identity matrixX: export vectorM: vector of shares of import per sector in sector output

10. An alternative measure of bilateral US trade deficit with China

11. Exports, BOP basis Imports, BOP basis 6000 6000 5000 5000 4000 4000 3000 3000 2000 2000 1000 1000 0 0 2000 01 02 03 04 05 06 07 2008 2000 01 02 03 04 05 06 07 2008 Goods for inward processing Other goods Goods resulting from inward processing Other goods Goods for Processing The importance of goods for inward processing in developing economies total exports and imports (minimum approximation), 2000-2008 (Balance of payments data, in billion dollars) Source: IMF Balance of Payment statistics partially completed with WTO estimates for missing data.

12. Goods for Processing

13. Goods for Processing A fictive example, China 2007

14. 1 10 (for acquiring raw oil from B) 3 Raw oil (acquired by A previously) Owner: A 15 (for refining oil by C) 2 Refined oil, delivered by C on behalf of A),owner: A 4 5 30 (for refined oil by C on behalf of A) Goods & Services Account: Economy A Goods Account: Economy B • General merchandise (with B): 10 DR • General merchandise (with D): 30 CR • Manufacturing services on physical inputs owned by others (with C): 15 DR Services Account: Economy C • Goods exports to A (10 CR) • Manufacturing services (15 CR) Money flow Goods flow ExampleManufacturing services that change the condition of the goods Resident Economy A Resident Economy B Resident Economy C Resident Economy D

15. Goods for Processing • The application of the new BPM6 recommendations can lead to significant divergences in trade aggregates • Fear: the BOP treatment may lead to a loss of data in merchandise as principal data source • Alter statistical description of an economy’s economic structure: shift between goods and services, structure of industries/output ratios/ productivity measures • Data collection: revision of questionnaires, register links, need for sound compilation guideline • Warn users against break in series, consistency of time series (ratios, shares and rankings change) • for users: will link between int’l. trade and production be less ambiguous? Where is the limit between goods for processing and manufacturing?

16. Intra-firm trade • Anecdotal evidence: • One-third of all [merchandise] trade is within companies • for the US in 2006, 37 to 38 per cent of its trade in merchandise is intra-firm (Akram/Khan/Holady study) • and 28 per cent of its trade in services is intra-firm (2007)

17. Intra-firm trade • 2008 SNA • In principle, items transferring across borders should be valued at “arm’s length” prices • BPM6 • (10.150) Services for the general management of a branch/subsidiary/associate...included in other business services • IMTS 2010 (draft): • ...transactions between related parties (whatever the definition of “related") should be included in international merchandise trade statistics the same way as if these transactions would take place between unrelated parties...

18. Conclusions • IMTS 2010 – mode of transport, country of consignment, imports (fob), goods for processing, intra-firm trade • MSITS 2010 – other business services, mfr services on inputs owned by others • More research needed into trade in value added • Intermediate goods • I/O approach • New data sources: trade and business links