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World Economics - Measuring Global Economic Activity

Revolutionary Trade Database Launched by OECD and WTO

Brian Sturgess, Toni Oki - January 2013

The OECD and the WTO have released an extremely important set of new international trade data which in the long-run may revolutionise the way current trade imbalances are discussed in public narratives. Trade in Value-Added (TiVA) data is a new way of presenting economic reality as it seeks to take into account the increasing dispersion of production chains across the world. Current trade statistics record the gross flow of goods and services each and every time they cross borders; the inaccuracy of this method of measurement is exemplified by the Apple ‘Made in China’ question, where the iPhone is considered to be a Chinese export to the US despite the product being entirely designed and owned by a US company, and being composed largely of parts produced in several Asian and European countries. The TiVA database is an attempt to redress this flaw by measuring only the value added to a product by each country. It thus also better reflects the importance of services in creating goods. Whilst there are, at present, limitations to the widespread calculation of trade in value-added data, this OECD-WTO initiative is to be applauded for providing a more revealing look into global trade and integration, and for paving the way for further development in this area.

The OECD and the WTO have released an extremely important set of new international trade data which in the long-run may revolutionise the way current trade imbalances are discussed in public narratives. The database is a joint initiative between the two organisations to produce statistics on trade in value-added (TiVA) as a supplement to traditional measures of trade that record the gross flow of goods and services each and every time they cross borders.

An analysis of the TiVA dataset challenges much of the conventional wisdom underlying current trade policies, public debate and movements in currency markets. For example, data on the size of the imbalance of trade between China and the US has produced fierce cross-party debates in Congress and in the country at large, leading to accusations of currency manipulation. However, the OECD-WTO data shows that in 2009, China’s bilateral trade surplus with the US was about US$40 billion, or 25% lower, when measured in value-added terms than when measured by traditional statistics. In contrast, Japan’s trade surplus with the US is 60% larger when measured in value-added terms while its trade surplus with China and Korea largely disappears since intermediate exports to Asia end up in goods consumed in the US. Perhaps more significantly, the revision of the size and direction of imbalances has important policy and currency market implications since traditional measures of trade ‘may lead to misguided decisions being taken,’ according to the OECD-WTO statement launching the initiative.


 

TiVA data is a new way of presenting economic reality since it takes into account the process of international fragmentation that has occurred as a result of the growth in the number, length and complexity of global value chains. The increasing dispersion of production chains across the world means that conventional measurements of countries’ exports and imports no longer provide a fully accurate picture of international trade. This problem has been popularised by the Apple ‘Made in China’ question. Conventional trade statistics consider the iPhone a Chinese export to the US, but the product is entirely designed and owned by a US company, and is composed largely of parts produced in several Asian and European countries. China's contribution is the last step – assembling and shipping the phones, and while the entire US$178.96 estimated wholesale cost of the shipped phone is credited to China, the value of the work performed in China has been recently estimated by the Asian Development Bank at just US$6.50, 3.6% of the total. 

 

The initial data and policy implications were the subject of a round table discussion today at the OECD in Paris featuring: OECD Secretary-General Angel Gurría, WTO Director-General Pascal Lamy, EU Trade Commissioner Karel de Gucht, New Zealand Trade Minister Tim Groser (http://www.oecd.org/newsroom/mediaalerttradeeventsattheoecdon16-17january2013.htm). The need for value-added trade data and whether or not current official statistics passed the fitness for purpose test (See Sturgess, 2012) were also the subject of a recent special issue of World Economics, Volume 13 (4) published in December 2012 (http://www.world-economics-journal.com/). The Journal contained an article by Alejandro Jara and Hubert Escaith, respectively Deputy Director General and Chief Statistician of the World Trade Organisation (WTO), who noted that while for many years the study of merchandise trade statistics was considered a ‘mature’ subject, there has now been almost a ‘paradigm shift’ caused by the globalization of production networks (http://www.world-economics-journal.com/Contents/ArticleOverview.aspx?ID=534). This has served to blur both official country borders and the traditional distinction between industrialised and developing economies. In effect the contribution value-added of countries participating earlier in supply chains will be counted in trade flows multiple times so a new measurement of international trade focusing on the value added content – or domestic content – of trade flows is required.

 

The TiVA database is an attempt to redress this measurement gap. The foundations of the database are derived from global input-output tables developed by the OECD describing the interrelationships between industries and consumers for 58 economies reflecting 95% of global output. The data also makes an attempt to better reflect the importance of services in creating goods. For example, in the automobile industry significant intermediate inputs may be provided by the domestic service providers in finance-insurance, R&D, accounting and other business services of one country and significantly contribute to the total value-added of vehicles sold, despite manufacturing taking place in another country. Estimates of the total trade in services using traditional gross trade data puts their contribution at less than one quarter of total trade, but accounting for the value-added by services in the production of goods shows that the services sector contributed over 50% of total exports in developed countries such as the US, the UK, France, Germany and Italy. Even in China value-added data estimated that the contribution of services was nearly one-third across all manufacturing goods.

 

There are a number of concurrent research initiatives working on improving global trade statistics. Concretely, William Powers, International Economist at the US International Trade Commission, reports in a paper in the World Economics special issue (http://www.world-economics-journal.com/Contents/ArticleOverview.aspx?ID=535) on the construction and use of value-added measures based on inter-country input-output (ICIO) tables which show the international sources of inputs in goods produced throughout the world. Testing against official trade data, Powers finds that value-added measures provide a more revealing look into global integration. However, there are also a number of serious data deficiencies with this approach that have to be overcome before they can fully complement official trade data. First, not every country produces input-output tables, and those that do often report these tables with a long lag whereas official bilateral trade data is readily available for nearly all countries and sectors. Second, much of the richness of the scope of international trade is lost since the tables produce estimates for only a few dozen aggregated industries rather than the 5,000-plus products available in official gross trade statistics. This all means that for the foreseeable future the production of a globally consistent trade and production database underpinning value-added calculations will be produced with longer lags and greater approximations than official statistics. In this context, the TiVA database is a welcome contribution to this long-term process. 

 

The TiVA database is also to be applauded in that it will provide a rich data mine for economists to work on analysing international trade issues, comparing the implications of the differences between TiVA figures and official data. Unfortunately, at present, the OECD-WTO initiative is limited in so far as it has only released data for three years, 2005, 2008 and 2009 for a limited sample of 18 industries across 40 countries. The nations chosen reflect OECD membership and the importance of a country in world trade (China, Russia, Brazil, India, Indonesia and South Africa) but there are plans to expand country coverage, to disaggregate the industries and to produce a time series dating as far back as 1995.

 


1 See ‘Not Really Made in China’, the Wall Street Journal, 15 December, 2010. http://online.wsj.com/ article/SB10001424052748704828104576021142902413796.html


 
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