Jan 18, 2013

TiVA - Database on "Trade in Value Added" by OECD-WTO

International Production Networks (IPNs), or the Global Value Chains (GVCs), are increasingly playing a major role in international trade. GVCs includes those services too, which move with the production value chains, in terms of support activities, such as logistics and business processes, that are linked to manufacturing activities. This blog has been vocal about the importance of IPNs and value chains in global trade. The current post is a continuation of that line of thought. 

The way we look at the trade statistics is undergoing a radical change in recent days due to GVCs. Traditional way of looking at gross values of cross-border trade is fast getting obsolete. To use gross trade statistics to develop trade policies, is considered misguided (if not downright stupid!). This fact was recently acknowledged eloquently by WTO DG, Pascal Lamy, in a part of this speech, on 16th Jan 2013: 

Traditional statistics failed to give a clear picture of today’s way of trading in manufactured products. They also failed in fully capturing the huge role played by services in manufacturing. But most importantly, they were not good enough in ensuring that trade policy is properly informed by what matters to people: jobs. It is a fact that over the last two decades, global value chains have changed the old ways of organizing international specialization and understanding comparative advantages.

In this regard, WTO and OECD came together to explore new ways of gathering trade data in terms of value add. This resulted in development of the database called TiVA: Trade in Value Add. This initiative would help in understanding trade, and help in trade policy making, by changing the way we look at trade statistics. From the same speech by WTO DG, the key points through which TiVA would benefit are:

1. By understanding the role of services to value added trade (a key point that's missed in current statistics).
2. By understanding the importance of trade in intermediate goods.
3. By redefining bilateral trade balances (from Gross value to measuring true national content)

In addition, it would also reveal the true nature of economic inter-dependencies and would help in understanding as to how shocks might impact downstream and upstream production. 

A simple example of how Gross values of trade is misguiding can be seen below (example taken from here)
Fig: Value added concept
"The Trade in Value-Added Initiative addresses the double counting implicit in current gross flows of trade,  and instead measures flows related to the  value that is added (labour compensation, taxes and profits) by a country in the production of any good or service that is exported.The simple example above illustrates this. Country A exports $100 of goods, produced entirely within A, to country B that further processes them before exporting them to C where they are consumed. B adds value of $10 to the goods and so exports $110 to C.  Conventional measures of trade show total global exports and imports of $210 but only $110 of value-added has been generated in their production. Conventional measures also show that C has a trade deficit of $110 with B, and no trade at all with A, despite the fact that A is the chief beneficiary of C’s consumption. If instead we track flows in value-added, C’s trade deficit with B reduces to $10 and it now runs a deficit of $100 with A."

The database, with preliminary results in the form of global input-output table, is now live. You can access it here. India is covered at aggregate level (not at sector level), and services value-add part is missing for India. It covers 95% of world trade and the data is impressively detailed for developed countries. Also, the database is interactive. 

For me, the eye opener was that the value of services in the production of goods was much higher than what traditional statistics told, contributing over 50% of total exports, when we account for it in the production of goods, for countries such as UK, Germany and US. For China, it's around one third. I guess the value is around the same, or little higher, for India. (This data is not available for India)

Also, the preliminary data table indicates that trade balances change significantly when we look at the data from value add point of view. For example, China's trade surplus to US comes down by around 25%. This means that a significant part of China's exports reflect foreign content originating in US. It was known, but analyzing the exact magnitude through statistics, is interesting. In fact, TiVA estimates, presented this way, will be better at resolving inconsistencies in international trade data arising from the way re-exports are treated differently by different reporting nations. 

Coming back, we need to re-look at our method of collection of trade statistics. It's time DGCI&S looks at the way things are done here. It's a sorry state of affairs, when it comes to trade statistics if we include services. I have blogged about the data issues herehere, and here. A revolution is going on at the international level in this field. I hope we catch up and work on it. Otherwise, we will exist as a missing data-point, in the matrix of excellent data on trading nations. It is also important, to have data in a usable format, for intelligent decision making at policy level. That's the point.