It is a cliche to say that globalisation has integrated the world economy, but there is scant evidence for such verity in national trade data. Economists noted that trade in intermediate goods formed an increasing part of commerce but it did not tell you how widgets and parts that cross borders many times over end up in finished export goods that figure in trade statistics. No more. Thanks to an initiative by the World Trade Organization (WTO) and the Organisation for Economic Co-operation and Development (OECD), we now have a complex new database that drills down into the complexity of massive trade flows and like an X-Ray image shows the hidden connections.
On 17 January, the WTO and OECD launched the new database, Trade in Value-Added (TIVA), which measures flows related to the value that is added (wage, transportation, other related services and imported components) by a country to produce goods and services for export. By decomposing the factors that go into creating goods and services for export and tracking their origins, the new database reveals the intricate global network feeding today’s export engines. By exposing the interconnectedness and interdependence of the world’s trade partners, TIVA helps explain many mysteries such as the synchronous collapse in trade in 2008-09 or lack of virulent protectionism as a consequence.
Economic or financial trouble in a major economy has always resulted in a fall in its import demands and a loss for exporting countries. But never before has the world witnessed a synchronous fall in global commerce as in the aftermath of the 2008 US financial crisis. Global trade in goods and services fell 15.8 per cent over the final two quarters of 2008 and the first quarter of 2009. The largest three quarter decline in the past 40 years has been dubbed the Great Trade Collapse. It is now clear that one of the main reasons for the dramatic fall was the intertwining of production chain and export. When shoppers in the US or Europe worried about the future and postponed purchase, the drop in demand rippled through the global supply chain to countries located upstream.
After the trade collapse, there was a worldwide fear that countries would revert to a beggar-thy-neighbour approach. But, fortunately, that mostly did not happen. Aware how raising tariff on imports could hurt their own exports, countries refrained from raising protectionist barriers. The extent of value adding by multiple countries, revealed by the new data base, shows the wisdom of countries in avoiding a trade war, and, it also makes a powerful argument for keeping trade free.
The director general of the WTO, Pascal Lamy, who initiated the TIVA database project in 2007, had long argued that one of the biggest challenges to the world trading system was that it had not figured out how to deal with the interdependent economy it has created. The nature of manufacturing and trade has changed dramatically, but trade is still measured as it was in the time of Adam Smith — between nations. This failure is even more serious as trade has grown exponentially and job creation has been directly linked to trade. A way to measure trade — which helps to show where and how values are added and jobs created in the process — would lead countries to accept open trade as path to prosperity.
One of Lamy’s favourite examples is the iPhone. “Instead of ‘Made in China’ on the back of an iPhone,” he says, “the label should read ‘Made in the World’, reflecting (the fact that the iPhone also features) Japanese microchips, US design, Korean flat-screens and Chinese assembly.” In fact, a 2010 study shows that while the wholesale price of an Apple iPhone 3G exported from China to the US is $179, the value of the work performed by the Chinese workers at Foxconn factories amounts to only $6.5. Yet, those phones alone created a $2-billion trade deficit between China and the US. The TIVA data shows that China’s whopping $179 billion trade deficit with the US (2009) in gross terms is reduced by 25 per cent in value-added terms as it is redistributed to Japan, Korea, Germany and other intermediate input suppliers to China.
In other words, when US lawmakers threaten to curb Chinese imports, they also threaten jobs in the countries that supply intermediate goods and services to China. With TIVA, globalisation now has numbers to prove its impact and warn against raising self-defeating barriers.