Trade Policy Implications of Global Value Chains: Preliminary Observations from the 2021 TiVA Databa

trade policy brief

Trade policy implications of global value chains: Preliminary observations from the 2021 TiVA database

December 2021

R eports of the demise of globalisation have been exaggerated: In most exporting economies, the foreign value added in trade increased between 2016 and 2018.

R egional value chains also show signs of resilience: Although there is no overall trend towards more regional value chains, preliminary evidence suggests that GVC links within regions are more stable than value added trade flows with extra-regional partners.

Manufacturing value chains are consolidating: Some industries are switching back to shorter value chains that rely on a smaller number of suppliers, while the traditionally shorter services value chains have seen supply chains lengthen.

S ervices remain more traded than goods in value-added terms: The new TiVA database confirms that the share of services value added in trade has increased in OECD economies and is on average above 50%.

Introduction

Reports of the demise of globalisation have been exaggerated

The 2021 edition of the OECD Trade in Value Added (TiVA) database and its underlying Inter-Country Input-Output (ICIO) tables were released on 17 November 2021 by the OECD Directorate for Science, Technology and Innovation (STI). The new TiVA database covers 66 countries and 45 industries (in the ISIC Rev. 4 classification) over the period 1995-2018 and follows the standards of the 2008 System of National Accounts. As compared to the previous edition (2018), the number of unique industries has increased from 36 to 45. A preliminary examination of the new data yields a number of observations from a trade policy perspective.

The previous 2018 TiVA database covered the period 2005 to 2015, with some indicators projected to 2016.

This suggested a slowdown in the fragmentation of production and a trend towards more domestic GVCs in some countries. The 2021 TiVA indicators reveal that this slowdown did not persist beyond 2016. In most exporting economies the foreign value added (VA) in trade increased between 2016 and 2018, indicating that the apparent ‘GVC trade shrinkage’ was temporary.

Figure 1. Foreign value added in gross exports, selected economies, 2011-2018

30.0%

China

Germany

EU27 (single economy)

Japan

2013

2015

OECD (average)

United States

25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

2011

2012

2014

Source: OECD TiVA Database, 2021 edition

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2016

2017

2018

Trade policy implications of global value chains: Preliminary observations from the 2021 TiVA database Going forward, as TiVA is further updated, the impact of COVID-19 will need to be taken into account when drawing conclusions regarding the era of “slowbalisation”. Some authors suggest that the GVC trade shrinkage observed after 2011 was mainly related to a decrease in the price of raw materials, starting with oil, and that there is no such slowdown when looking at data in constant prices.

Forthcoming OECD analsyis of TiVA ICIOs in previous year’s prices will seek to disentangle the role of prices from structural changes in GVCs.

Signs of resilience in regional value chains As value chains are becoming less fragmented, one question is whether they are becoming more regional. In all regions, the share of intra-regional VA has remained

relatively stable since 2011 while the change observed in the foreign VA in trade is almost fully explained by the extra-regional VA, with a decrease after 2011 and an increase in the more recent period (2016-2018). Although there is no overall trend towards more regional value chains, GVC links within regions seem more stable.

Changes in foreign sourcing seem to affect primarily suppliers located outside the region. This trend could also reflect the fact that adjustments are more on primary inputs than on first tier suppliers of processed inputs, which are generally located in the same region as final producers. Data controlling for changes in prices of raw inputs could reveal more about the drivers of this trend.

Figure 2. Intra-regional and extra-regional foreign value added in gross exports, by region

Share of extra-regional value added in gross exports East and South East Asia

Europe

North America

South and Central America

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Share of intra-regional value added in gross exports East and South East Asia

Europe

North America

South and Central America

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018

Source: OECD TiVA Database, 2021 edition

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Manufacturing value chains are consolidating Industries that have traditionally had the most fragmented production, such as coke and petroleum, basic metals or ICT and electronics have seen their international supply chain fragmentation ratio (i.e. ratio of imports of intermediate inputs along the whole value chain to output) decreased the most between 2011 and 2018. On the contrary, the traditionally shorter services value chains have seen supply chains lengthen. This evolution suggests a consolidation of supply chains

in manufacturing industries where firms have used outsourcing strategies extensively and may switch back to shorter value chains or value chains that rely on a smaller number of trusted suppliers. For services, the digital transformation and policy reforms may on the contrary offer new opportunities for outsourcing and offshoring. Starting from a lower level of fragmentation of production, there are still significant economic gains in expanding GVCs in these industries.

Figure 3. International fragmentation ratio by industry

60%

Supply chain fragmentation RATIO in 2018

50%

Coke and petroleum

40%

Basic metals Water transport ICT and electronics Other transport Motor vehicles Chemicals Electrical machinery Rubber and plastics

30%

Fabricated metals Machinery Textiles and apparel Air transport Other manufacturing Wood Paper and printing Pharmaceuticals Non-metal minerals Electricity Food products 20% Construction Warehousing Land transport Publishing, broadcasting Postal Agriculture Telecoms IT services Professional and technical Hotels and restaurants Admin support Finance 10% Wholesale and retail Other services Health Recreation Education Real estate 0%

0%

10%

20%

30%

40%

50%

60%

Supply chain fragmentation RATIO in 2011 Source: OECD TiVA Database, 2021 edition Note: Weighted average across countries using 2011 weights for both years

Services remain more traded than goods in value-added terms TiVA indicators highlight the ‘servicification’ of economies and the fact that in VA terms, services account for a higher share of trade than manufacturing activities. The new TiVA database confirms that the share of services in trade has increased in OECD economies and is on average

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above 50%. Direct exports of services VA (i.e. exports from services industries) have increased, but there is also a higher share of indirect services exports, in particular through services embodied in exports of goods. The new indicators also highlight the internationalisation of services exports with a higher share over time of foreign services VA in exports.

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Trade policy implications of global value chains: Preliminary observations from the 2021 TiVA database Figure 4. Services value added in gross exports, direct and indirect, OECD average, 1995-2018 Direct

60.0%

Indirect - domestic

Indirect - foreign

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: OECD TiVA Database, 2021 edition

Next steps Forthcoming TiVA country notes will provide more detailed results for each OECD economy and cover a broader set of indicators than those introduced in this brief. Moreover, the TiVA database allows some analysis of bilateral trade relationships and can help countries to assess the importance of specific partners (as suppliers of inputs or as customers) in GVCs. For this level of detail, data can be consulted online and extracted for specific countries and industries.

Further reading • Measuring interconnected economies: Launch of the 2021 OECD Inter-Country Input-Output (ICIO) and Trade in Value-Added (TiVA) databases. https://www.oecd.org/sti/ind/ measuring-interconnected-economies-2021.htm • Trade in Value Added (TiVA) database access (2021 edition). https://www.oecd.org/sti/ind/ measuring-trade-in-value-added.htm • Guide to OECD’s TiVA indicators (2021 edition) https://www.oecd.org/industry/ind/oecd-tradein-value-added-indicators-2021-guide.pdf

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