Shim and Uri write: “The imported intermediate input content accounts for about one-quarter of OECD economies’ exports, and the European Central Bank (ECB) estimates that such imports accounted for about 44 percent of EU exports (or 20 percent for imports from outside of the EU) in 2000, ranging from about 35 percent in Italy to about 59 percent in the Netherlands. In the United States, imported intermediate input content in exports reached about 10 percent in 2005. Among emerging economies, imported content’s share in exports is particularly high in China―about 30 percent, or twice that for India and Brazil.”
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With this sheer volume of trade in intermediate goods, they argue that (i) The importance of bilateral trade balances is exaggerated. Focusing just on bilateral trade imbalances would not address the underlying causes of imbalances as doing so would just redistribute trading costs across different partners; (ii) The importance of export-led demand is overestimated and that of trade as a source of efficiency (specialization) is underestimated. Policymakers fail to recognize that imported inputs feed into exports; (iii) Trade has become more volatile and a larger source of shocks as countries source intermediates from different destinations and are interlinked, magnifying the final impact of a shock. Fluctuations in trade is more volatile than that in GDP; and (iv) The cost of protection is higher. Trade in intermediates means the cost of protectionism is higher than is generally understood, and rising.
