“Made in the world”

How trade in value-added affects policy

©UK Government Service

The new OECD/WTO database on trade in value-added is not just about changing the numbers, but policymakers’ approaches too. It gives trade fresh importance, and a place high on the agenda of the UK’s G8 presidency. 

The Opening Ceremony at the London Olympics in July 2012 memorably depicted the coming of the Industrial Revolution, with chimneys rising from the stadium floor and proud engineers surveying their work. The UK, as the birthplace of the modern factory and the steam engine, led the way in this fundamental transformation in manufacturing. And for many years, Britain’s ability to produce goods cheaply and in large quantities gave it a unique position in the world.

The last few years have seen a new revolution in how we manufacture. Today's goods, ranging from large planes to small electronic devices, such as iPods, are made up of intermediate products, both tangibles (such as cases, wings or wheels) and intangibles (such as design or computer programming). Each can be sourced from a different country, and come together into a final product through a global value chain. In effect, we are increasingly observing “Made in the World” replacing “Made in Britain” or “Made in China”.

The new OECD/World Trade Organisation (WTO) Trade in Value Added (TiVA) database clearly shows that what counts for success in this new world is not so much the production and sale of final goods, but using national comparative advantages to add most value along the production chain. By providing this new perspective, it forces politicians, including myself, to think again about how world trade and production works.

First, it puts into question the logic of restricting imports, either through tariffs, quotas, trade defence measures, or unnecessarily restrictive regulation. Consumers are increasingly aware that inputs to production can affect the prices they pay. For example, rising energy costs mean paying more for food, because energy represents a significant part of the cost of production for farmers. But the same applies for products across the economy. Every pound, euro or dollar added to the cost of imported inputs because of barriers to trade is a pound, euro or dollar added to both the price of exports and prices paid by consumers. Hardly a recipe for competitiveness!

In response we need to make it easier and cheaper to import and export. A major opportunity is coming up at the end of the year at the ministerial meeting of the WTO in Bali. A deal on trade facilitation could provide a US$70 billion boost to the world economy.

Because of the importance of trade to the world economy we have made trade one of our three key priorities for theUK’s G8 presidency in 2013. We will use this opportunity to promote the contribution of open markets to growth, both through the multilateral system and major bilateral deals such as that between the EU and US.

Secondly, the TiVA data from the OECD/WTO underlines the importance of services. Traditionally, we tend to think of trade and production in terms of manufacturing–perhaps the primary symbol of globalisation is the container ship. But just as important now are the satellite and fibre-optic cables which facilitate the delivery of services across borders.

The importance of services is something theUKhas known about for a long time, given our role as a financial centre. But the TiVA data underlines just how important services are for all exports: for half of the countries covered by the data, over half of the value added of exports comes from services. Even in manufactured goods, this proportion is typically 30%.

This means that to be competitive abroad, our economies need efficient and productive service sectors. In the UK, we are reviewing the stock of our regulation over a two year period, looking at whether regulation continues to be necessary and whether its burden can be reduced. Within the EU, theUKis strongly in favour of the full implementation of the Services Directive. And we are active supporters of a plurilateral agreement on services internationally.

The OECD’s new Services Trade Restrictiveness Index, which we hope to see completed for all major sectors by 2014, will provide further useful information for where we should focus our efforts.

Finally, TiVA forces us to think harder about where the final markets for our exports actually are. I spend a lot of my time travelling, promoting trade and investment with theUK. Our ability to reap the benefits of trade depends on exploiting every link in the global production chain, not just our relationships with our immediate trading partners. It underlines the value of efforts to promote growth and structural reform globally.

But increased economic interconnectedness and global value chains mean that our trade performance can be affected by factors, which the new data reveals as being important. For example, slow growth or recession in one country won’t just hurt the trading partners from which it imports, it will also hurt anyone who provides components or contributions to these imports. TheFukushimaearthquake demonstrated that global value chains can act likeNewton’s cradle, with the trade shockwaves felt in countries with little or no direct trading relationship withJapan.

Of course, viewing trade from a value-added perspective does not change everything. It reinforces the case for active participation in the global economy and the benefits from tapping into global value chains. Airbus is a great example. TheUKhas expertise in producing wings and engines. But it’s by being able to sell these on easily toFrance, where they are assembled into the final plane, that we indirectly gain access to markets in third countries.

TiVA also reinforces the argument for an effective multilateral trading regime. With goods and services crossing multiple borders before final consumption, a lot of little barriers can have a significant cumulative effect. Multilateral liberalisation remains the most effective way of avoiding this “death by a thousand cuts”.

As I set out in my initial reaction on 16 January, TiVA represents an important step in broadening our understanding of how trade really adds value to theUKand world economy, and will better inform trade policymaking. As the database is expanded and improved, I look forward to continuing to work with the OECD and WTO to develop and apply the lessons it offers.


References

“Lord Green response to OECD and WTO report on trade”, 16 January 2013, see Lord-Green-response-to-OECD-and-WTO-report-on-trade

Visit the UK’s G8 website: www.gov.uk/government/topical-events/g8-2013

For more on trade in value added, visit www.oecd.org/trade/valueadded

©OECD Observer No 296 Q1 2013




Economic data

GDP : +0.5%, Q4 2014
Employment rate: 65.9%, Q4 2014
Annual inflation : 0.57% Feb 2015
Trade : -3.0% exp, -3.7 imp, Q4 2014
Unemployment : 7.022% Feb 2015
More moderate expansion ahead? Composite leading indicators
Updated: 23 Apr 2015

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