Chained Value

AuthorMichele Ruta and Mika Saito
Positiona Senior Economist in the IMF’s Strategy, Policy, and Review Department and is a Senior Economist in the IMF’s African Department.

The 787 Dreamliner, the latest aircraft produced by Boeing, is a well-known American product, assembled in Washington state and sold worldwide—more than 80 percent of orders come from outside the United States.

Not only are Dreamliners bought by the world, they are made in the world. Many of their parts and components are manufactured outside the United States, among them the center fuselage by Alenia (Italy); the flight deck seats by Ipeco (United Kingdom); the tires by Bridgestone (Japan); the landing gear by Messier-Bugatti-Dowty (France); and the cargo doors by Saab (Sweden).

Airplanes are just one example of multicountry manufacturing. More and more final products—such as automobiles, cell phones, and medical devices—are produced in one country using inputs from many others, partly as a result of fewer trade barriers and technology-led declines in transportation and communication costs over the past 20 years. This development, what we call the growth of global value chains, is changing how world income and growth are generated. At the same time, the nature of competition has been affected. Are countries competing over the goods produced or over the labor and capital that go into production? Changes in the nature of competition are, in turn, changing the formulation of trade and other policies that are targeted to improve competitiveness. In this article we review how the growth of global value chains has affected income and growth, measures of competitiveness, and trade policies.

Remarkable growth

The growth of trade relative to total output in the past two decades has been remarkable—a reflection in large part of the number of times intermediate products cross borders. The world export-to-output ratio rose from 20 percent in 1995 to 25 percent during 1995–2009 (in 2008, the ratio was as high as 30 percent, before falling during the global financial crisis). The change is even more impressive for some countries—such as China, where the ratio rose from 23 to 39 percent, and the northern euro area countries, where it went from 30 to 40 percent.

The growth in gross exports relative to output to some extent reflects more intensive use of global value chains: more intermediate inputs move from one country to another as part of the manufacturing process. To produce just one more Dreamliner, for example, requires more imports—cargo doors from Sweden, tires from Japan, landing gear from France, and myriad other components from foreign suppliers. Assessing the growth and income effects of value chains, however, requires looking at more than just gross exports. The value of a country’s exports (for example, a Dreamliner sold by the United States) can be very different from the value the country adds to its exports. The so-called value-added exports in this case represent the labor and capital income generated in the United States to export the Dreamliner.

A critical question is whether the growth of global value chains is generating wealth in the countries that make up the chain. The short answer is yes, but at different speeds...

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