The latest chapter in the IRPP’s trade volume provides new evidence on the globalization of production and where Canada fits in.
In recent decades, lower trade costs and technological innovations have allowed companies to split their production processes into different stages and perform them in
The latest chapter in the IRPP’s trade volume provides new evidence on the globalization of production and where Canada fits in.
In recent decades, lower trade costs and technological innovations have allowed companies to split their production processes into different stages and perform them in different countries. As a result, world trade and production have become increasingly structured around “global value chains” (GVCs), which are especially prevalent in high-tech industries such as electronics, motor vehicles and other manufacturing as well as apparel.
Until recently, GVC analysis was often limited to specific case studies (e.g., production of the iPhone) or business surveys. But with new value-added trade data (based on global input-output tables) the extent to which production is fragmented across countries can now be assessed for individual countries and major trading regions. This approach is providing a more accurate picture of who trades what, and with whom. Here are some highlights from our new chapter, written by OECD researchers Koen De Backer and Sébastien Miroudot, that explains these broader global trends, with a focus on Canada.
The globalization of production
The value of gross exports of goods and services from 1995 to 2011 (the period covered in the newly-updated OECD-WTO Trade in Value-Added, TiVA database) can be decomposed into three parts:
- direct domestic value added, which comes from the exporting industry itself (e.g., the value added by car manufacturers in the exports of cars, including wages paid in production);
- indirect domestic value added, which comes from domestic inputs purchased by the exporter (including from the same industry — such as car parts bought by the car manufacturer — as well as from other industries, such as business services or chemicals purchased by the car exporter);
- foreign value added, which comes from outside the exporting country (e.g., foreign car parts).
International sourcing, through independent suppliers and own affiliates, has increased in recent decades, with the share of foreign inputs rising from 18 percent in 1995 to 24 percent in 2011 (figure 1).
Figure 1: World gross exports by share of domestic and foreign value added, 1995-2011
Example of value chains
In practice, production processes can involve a mix of value chain dynamics, including:
- producer-driven chains: where large high-tech firms control product design and assembly, and produce in-house (or in affiliates) to prevent competitors from using new technologies and know-how.
- Examples: electronics, autos and pharmaceuticals.
- buyer-driven value chains: where large retailers and successful brand merchandisers act as “lead firms” that focus on sales and marketing, while outsourcing production.
- Example: apparel industry
- snake chains: follow the classical assembly line process, where each stage in the sequence further transforms the product.
- Examples: basic metals, textiles, wood and electrical machinery.
- spider chains: involve the simultaneous assembly of several separately produced intermediates into one final good or service.
- Example: banking, where financial hubs are located in different countries, but the end service is delivered in a single stage in the consumer’s country.
GVCs can be considered regional in nature, structured around “Factory Asia”, “Factory North America” and “Factory Europe”. But with changing regional dynamics, they’re increasingly becoming global in scope. The share of value-added in gross exports coming from outside these regions has increased and the share from inside the region has fallen (figure 2).
Figure 2: Sources of the shares of foreign value added in gross exports, 1995 and 2011
- NAFTA countries collectively source less than one-third of their foreign inputs in value-added terms from among them. (If that number seems too low, it primarily reflects by the dominance of US trade patterns in continental trade).
- In Asia, only 40 percent of the intermediates embodied in exports are sourced from within the region. (Here, a significant share of parts and components produced by developed economies such as Japan and South Korea are exported to emerging economies — particularly China and, increasingly, Vietnam and Cambodia — where the inputs are assembled into finished products.)
- Perhaps not surprisingly, Europe has the most sourcing from within its region due to its more highly-integrated and geographically-concentrated market.
New technologies, such as 3D printing, are expected to continue to reshape GVCs in the future and reduce the importance of distance as a factor explaining the location of suppliers.
Country level differences
The authors use a rich dataset covering 39 advanced and key emerging market countries. The results show that countries differ greatly in the share of foreign value added in their gross exports, related to such factors as the size of their economy, natural resource endowments, patterns of specialization and geography (figure 3).
Figure 3. Share o