With the rise in global value chains (international supply chains) it seems more reliable to judge trade and competition based on value-added during each step of manufacturing process than total value of final products imported or exported from countries. Pascal Lamy argues that concluding on the scale of competition from existing volume of imports overstates the competition between trading countries’ factors of production. Focusing on total value of exports or imports gives a distorted picture of trade imbalances. We need to look at domestic value addition to gauge that. It would change the debate on macroeconomic imbalances and exchange rate changes.
[…] The question of “who produces what for whom”, and “where the value added is accruing” are perhaps as important as the traditional concept of country of origin, which guides not only custom statistics, but the application of the core WTO principle of Most Favoured Nation.
[…] with the fragmentation of production, the share of value added by factors of production of the origin country in traded products is considerably lower than in the past. This growth in the trade of parts and components means that import statistics will overstate the degree of competition that comes from one’s trade partners.
[…] by focusing on gross values of exports and imports, traditional trade statistics also gives us a distorted picture of trade imbalances between countries. The picture would be different if we took account of how much domestic valued added is embedded in these flows.
[…]correcting macroeconomic imbalances does not pass through correcting bilateral trade deficits, as the use of trade statistics in value added clearly reveals.
[…]When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its “value added content”. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects.
Here is a webpage related to analyzing trade in value added. Below is the trade balance in iphones for the US (US$ million). With traditional measure the trade balance concerns only with China. But, with value added measure, US trade deficit with China in iphone is very low and is spread across many countries (US trade deficit with Japan is the highest in iphone).
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