Trade patterns and global value chains in East Asia: - IDE-JETRO

Trade Patterns and Global Value Chains in East AsiaAcknowledgementsThis publication is the result of a cooperative effortbetween the WTO and IDE-JETRO. The writing of thebook and the preparation of the various statistical inputshas involved staff from both organizations.Many people provided assistance during its preparation.Special thanks are addressed to IDE-JETRO for havingprovided the Asian International Input-Output (AIO)Tables used for the compilation of many indicators shownin the publication. Acknowledgements are also due toAnthony Martin and Helen Swain of the WTO Informationand External Relations Division for their commentsand suggestions. We are also grateful to the WTODocuments Reproduction and Distribution Section.About the editors and contributorsThe publication was prepared and edited under thedirection of Hubert Escaith, WTO Chief Statistician,and Satoshi Inomata, Director of the International Input-Output Analysis Group, IDE-JETRO.Christophe Degain and Andreas Maurer were responsiblefor the technical supervision of the project. ChristopheDegain also managed the publication process, assistedby Antonella Liberatore and Myriam Nafir.Contributors to the initial manuscripts includeChristophe Degain (Chapters I, VIII, IX), Florian Eberth(III, VIII, IX), Hubert Escaith (I, IV, VI), Farah Farooq (III,V), Satoshi Inomata (VI, VII, X), Andreas Maurer (II, V),Adelina Mendoza (IV), Bo Meng (X) and Bekele Tamenu(II, III).Giacomo Frigerio was responsible for the graphic designand layout of the publication.DisclaimerThis publication and any opinions reflected therein are the sole responsibility of the WTO Secretariat and IDE-JETRO.They do not express the opinions or views of WTO members or of institutional stakeholders of IDE-JETRO.WTO members are frequently referred to as “countries”, although some members are not countries in the usualsense of the word but are officially “customs territories”. Geographical and other groupings in this report do notimply any expression of opinion by the authors concerning the status of any country or territory, the delimitation of itsfrontiers or the rights or obligations of any WTO member in respect of WTO agreements. The colours, boundaries,denominations, and classifications used in the maps which feature in this publication do not imply any judgement ofthe legal or other status of any territory, nor any endorsement or acceptance of any boundary.Throughout this report, the Hong Kong Special Administrative Region of China, the Republic of Korea and theSeparate Customs Territory of Taiwan, Penghu, Kinmen and Matsu are referred to as Hong Kong (China), Korea,Rep. of (in some figures), and Chinese Taipei, respectively.Note on geographical coverageEast Asia in this publication covers China, Hong Kong (China), Indonesia, Japan, the Republic of Korea, Macao (China),Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam. India is also included in the study. Dependingon data availability, the country coverage can vary across chapters. See Annex 1 for details on the composition ofgeographical and economic groupings used in the publication.Statistical noteTrade data sourced from statistical frameworks such as the balance of payments (BOP), customs or input-output tablesdo not necessarily match each other due to differences in concepts.2

ForewordThis book is the result of cooperation between IDE-JETRO and the WTO in analysing a fundamentalchange that has been taking place in the structure ofinternational trade. This change is referred to in variousways: vertical specialization, production sharing, trade intasks, or supply chain trade, to cite just a few. What theseall indicate is that much of trade these days comprisescomponents or intermediate goods and services thatpass from economy to economy before becoming part ofa final traded product.This change has many implications for the way weunderstand trade policy. The distinction between “them”and “us” that has traditionally defined our way of thinkingabout imports and exports is increasingly outmoded.Products are no longer “made in Japan”, or “made inFrance”; they are truly “made in the world”. This newreality has profound implications on several counts. Inparticular, it redefines the nature of trade relations that arenow characterized by a much closer inter-relationship.In order to understand fully the true nature of these newtrading interactions, and the actual contribution of tradeto national economies, we need to promote a conceptualand statistical shift in the way trade is most commonlyperceived in policy debates. The present research buildson complementary programmes developed separately atIDE-JETRO, with the construction of international inputoutputmatrices, and at WTO, with the measurement oftrade in value added. By combining the expertise anddata available in both organizations, this book illustrateshow the conjunction of technical, institutional and politicalchanges in East Asia in the past 30 years has led to theemergence of new production and trade networks.success story was the result of a close partnershipbetween private and public sectors, the latter facilitatingthe work of the former. Building these industrialrelationships also paved the way for the emergence ofdeeper regional integration.Besides analysing the new trading relations frominternational and regional perspectives, the book alsoprovides interesting findings on the impact of internationaltrade on domestic economies. The role of trade ingenerating employment opportunities is reviewed, andshows, using the emblematic case of China, how anexport-led development strategy, initially focused on afew industrial coastal zones, was able to progressivelyinclude the rest of the economy.East Asia has been at the heart of the new model governingglobal manufacturing and international trade. It providesa natural case study to explore the contours of this newterritory. But the relevance of the study transcends theregional dimension, and we hope that analysts and policymakers from other regions, especially in the developingworld, will read these results with interest and adaptthem to their own national and regional contexts.Pascal LamyWTO Director-GeneralTakashi ShiraishiIDE-JETRO PresidentThe report makes it clear that business opportunitiesin developing countries have not only been linked tochanges in the global manufacturing model, spurredby the United States and Japan, but have also beenstimulated by governments in developing countries.These governments have invested massively to providethe necessary transportation and telecommunicationinfrastructure, while facilitating trade through variousinstitutional and administrative improvements. The Asian3

Trade Patterns and Global Value Chains in East AsiaIntroductionThe geographical fragmentation of production hascreated a new trade reality. Often referred to asglobal value chains or vertical specialization, thisfragmentation deepens the interdependency of traderelations and has many implications for how weunderstand trade policy. This book sheds light on thenature of this interdependency, and the contributionof trade to national economies. It illustrates theconjunction of technical, institutional and politicalchanges that led to the emergence of production andtrade networks in East Asia, including their impact ontrade patterns.As shown in the diagram, the rise of global valuechains results from the conjunction of several factors.It started with a change in the consumption models ofindustrialized economies, which found a supply potentialin some developing countries. The book also showshow this development approach, initially centred on afew leading economies that had adopted an export-ledindustrialization strategy, enabled a larger number ofregional partners to embark on an industrialization paththat had deep implications for their domestic economies.This structural shift in the functioning of internationaltrade requires, in turn, that the tools used to analyse itsevolution, in particular trade statistics, be adapted.International demandDevelopment ofinfrastructureand trade policyIndustrial processing zonesOffshoring-outsourcingstrategies and FDIGlobal Value Chains (GVCs)and world tradeIncrease of trade inintermediate goodsNeed for new statisticalmeasures of internationaltradeDomestic/territorialimpact of GVCsThe first chapter recalls that globalization has gonethrough several phases; as a matter of fact, the historyof mankind is often closely related to the evolution oftrade. In former times, when transportation was difficult,international trade was limited to the most expensiveitems. With the industrial revolution in the 19th century,mass production and improved transportation madeinternational trade much easier, and most goods becametradable. More recently, a new phenomenon, “globalmanufacturing”, is again boosting the volume and diversityof products being exchanged. But it is also changing thevery nature of international trade. Global manufacturingis characterized by the geographical fragmentation ofproductive processes and the offshoring of industrialtasks.The increasing fragmentation of value chains has ledto an increase of trade flows in intermediate goods,especially in the manufacturing sector. In 2009, tradein intermediate goods was the most dynamic sectorof international trade, representing more than 50 percent of non-fuel world merchandise trade. This tradein parts, components and accessories encourages thespecialization of different economies, leading to a “tradein tasks” that adds value along the production chain.Specialization is no longer based on the overall balanceof comparative advantage of countries in producing afinal good, but on the comparative advantage of “tasks”that these countries complete at a specific step alongthe global value chain.4

Trade Patterns and Global Value Chains in East Asiato de facto economic integration were first observed inJapan, and then gradually shifted towards China. Thechapter shows the growing role of China and the relativedecline of the United States and Japan as productionhubs. Other emerging East Asian economies have alsosignificantly increased their degree of integration into theregional production system, contributing to strengtheningeconomic interdependency in the Asia-US region.The diversity and complementarity of the regionalproduction system also fosters specialization when itcomes to trade in tasks. Reflecting their particular rolesin global value chains, some countries, like Japan or theRepublic of Korea, specialize in the export of productsinvolving high- or medium-skilled labour, while others,such as China or Viet Nam, focus on low-skilled, labourintensiveactivities. When considering the totality ofthe value chain, from conception to production andconsumption, developed economies like the UnitedStates tend to create employment at both ends of thequalification spectrum, from highly-skilled engineersand professionals to low-skilled retail workers; however,low-skilled manufacturing tasks are outsourced. Thenet balance of employment is also clearly influenced bythe overall macroeconomic situation of each economy;net job creation attributable to trade is much higher inexport-led surplus countries than in inward-orientedones, especially when the latter run structural tradedeficits.An examination of the historical evolution of productionnetworks in the region, which is the purpose of ChapterVII, shows how Asian economies have becomeinterconnected with each other and with the US market.In 1985, there were only four key players in the region:Indonesia, Japan, Malaysia and Singapore. In the 1990s,the Republic of Korea, Chinese Taipei and Thailand alsoemerged as important links in the production network.Japan was extending its supply chains, while outsourcingfrom the United States was also strongly entering thepicture. After 2000, the emergence of China altered theregional network, and by 2005, the network’s centre ofgravity had clearly shifted there. The intermediate goodsimported by China come through relatively long andcomplex supply chains, characterized by a high degreeof fragmentation and sophistication. The competitivenessof Chinese exports is not only attributable to its lowproduction costs, but also to the complex intermediategoods imported from other countries, be they from Asiaor the rest of the world.Chapter VIII is dedicated to the mapping of tradein intermediate goods, which constitutes the “bloodstream” that irrigates global and regional supply chains.Trade in intermediate goods now dominates worldtrade in non-fuel merchandise. While Europe is still thebiggest trader in intermediate goods, Asia has beenrapidly closing the gap, and is now a close second.While intermediate goods constitute more than 60 percent of Asia’s total imports, Asia tends to export morefinal goods composed of the imported intermediateones. This regional characteristic, inherent in the region’srole as “Factory Asia”, is not equally displayed by eachcountry. Some economies, like China, India and VietNam, have distinctly higher shares of intermediate goodsin their imports than in their exports, while the opposite istrue for the Republic of Korea, Japan and Chinese Taipei.Not only has trade in intermediate goods increased, butthese goods are also increasingly complex.Some trade analysts have argued that the change fromtrade in goods to trade in tasks implied by the operationof global value chains is comparable to a paradigm shift inthe analysis of international trade. Because new conceptsalso involve new measurements, Chapter IX exploressome of the changes required to complement existingstatistical indicators. The complexity of productive andcommercial relationships has blurred the relevance ofa series of macroeconomic indicators, such as bilateraltrade balances. The concept of “country of origin” isbecoming increasingly difficult to apply to manufacturedgoods, as the various operations that comprise them,from the design of a product to the making of itscomponents, their assembly and related marketing, arespread across the world. Nowadays, products are more“made in the world” than “made in” a specific country.One way of taking into account the fragmentation ofvalue chains and providing a decomposition of grossexports by domestic and foreign origin is by measuringthe value added imbedded in exports.Measuring trade in value added uses both trade statisticsand international input-output tables, such as thosedeveloped by IDE-JETRO, to separate the domestic contentof an export from the cost of the imported components.This methodology offers a new perspective for tradeanalysts, as it dramatically re-evaluates the importance ofsome economies as “countries of origin”. The result is thatthe absolute value of some bilateral trade imbalances isreduced, notably that of China and the United States, whileoverall global balances remain untouched.6

Vertical specialization, an indicator compiled throughinput-output tables, allows for an assessment of theforeign content included in exports and hence the tradeoccurring within international production chains. Thelevel and growth of vertical specialization do not onlyvary substantially among the Asian economies but alsowithin sectors.Finally, Chapter X demonstrates, using China as anexample, how an export-led development strategy cantrickle down to the rest of the domestic economy. In2010, China became the second-largest economy inthe world, surpassing Japan in terms of nominal grossdomestic product. This was the result of the rapideconomic growth which followed the launch of theReform and Open-door policy in 1978. The coastalregions of China enjoyed particularly strong growthas a result of preferential development policies heavilyorientated towards exports. However, their successhas led to significant regional disparities. A territorialrebalancing has been under way since the early 2000s,and the centre of gravity of development has shiftedto the western regions and the North East. The nextchallenge for China is to reduce the regional incomeinequalities and move from an export-dependenteconomy to a balanced system based more on domesticdemand.A glossary and a number of technical annexes at the endof the publication provide additional information on theterms and technical points developed in the differentchapters.7

Trade Patterns and Global Value Chains in East AsiaI. From mass demandto global supply chains• Production and trade evolve in parallel, from craftsmanship and localmarkets, to global value chains and international “trade in tasks”.• The emergence of “Factory Asia” reflects changing demand for moreproduct variety in the US market.• Over time, the respective economic roles within East Asia have changed,leading to a regional clustering of supply chains based on closeindustrial interconnections.8

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. From trade in goods to trade in tasks: The rise of global value chainsB. The emergence of “Factory Asia”: When supply meets demandC. Growing vertical specialization in Asia and regional clustering of tasks101416V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth9

Trade Patterns and Global Value Chains in East AsiaA. From trade in goods to trade in tasks: The rise of global value chainsSince ancient times, international trade has allowedconsumers to purchase products that are not producedlocally. Production can be separated from consumption,often by great distances. The notion is summed up in thefamous example of English 18 th century economist DavidRicardo about Portuguese wine being traded for Englishcloth. Countries did not need to grow grapes to enjoywine, he noted. Thanks to trade, they could “transform”the cloth they produced into wine.Before the development of mechanized transport, suchas railways and steam ships, international trade wasreserved for the most expensive commodities, like spicesor silk. With mechanization, land and sea transportbecame easier and more reliable, allowing productionand consumption to be more geographically dissociated.The 19th century industrial revolution saw also the riseof large industries, with workers performing specializedtasks and progressively supplanting traditional craftsmen.While craftsmen worked close to their customers, usuallyin the same town, the industrial revolution created largeindustrial agglomerations able to serve national marketsthanks to a new network of railways and intercity roads(see Figure 1).The key to higher industrial productivity was toconcentrate the various tasks involved under a singleroof. By specializing in one or a small number of tasks,each worker could focus his/her energy and therebyperform more efficiently. But without proximity, it wouldhave been impossible to coordinate the efforts of thevarious workers, or to combine their inputs into a singleproduct. Thus, production remained largely enclosedwithin national borders and trade patterns reflected therespective productive specializations. As World TradeOrganization (WTO) Director-General Pascal Lamy hasnoted: “In the 19th century, when Ricardo developedwhat was to become the foundations of internationaltrade theory, countries exported what they produced. Infact, the industrial revolution took root in countries thathad coal mines and iron ore. A Portuguese entrepreneurimporting a steam engine from England would knowthat everything, from the steel of the wheels to the boilerpressure gauge, came from the United Kingdom.” 1Another industrial quantum leap took place in the1990s, thanks to the information technology (IT)revolution and the conjunction of a series of political andinstitutional breakthroughs. Together these facilitatedthe internationalization of industrial processes, openingthe way to what became global manufacturing. Cheaperand faster intercontinental communication allowed farflungbusinesses and production centres to coordinatemore easily, leading to the unbundling of the productionprocess and its international fragmentation. The USauthor Thomas Friedman has described these trendsas forces that have “flattened” the world. Among themare the birth of the Internet, the development of workflowsoftware, “in-forming” and advances in digital, mobile,personal and virtual communication technologies.On the institutional side, tariff cuts and multilateralagreements boosted trade. For example, trade inintermediary products, the backbone of geographicallyfragmented supply chains, was facilitated by internationalaccords, such as the WTO Information TechnologyAgreement (ITA) 2 on computers, semi-conductors and ahost of related goods. Asia also benefitted from regionaltrade pacts, including those established under theAssociation of Southeast Asian Nations (ASEAN) andthe Asia Pacific Economic Cooperation forum (APEC).The integrated factory floor, which had dominatedmanufacturing since the 19th century, has been replacedwith a network of individual suppliers specializing inspecific services or phases of production. In this secondgreat unbundling, as defined by Richard Baldwin of theGraduate Institute of International Studies in Geneva,production is “sliced and diced” into separate fragmentsthat can be spread around the globe. 3 PrincetonUniversity economists Gene Grossman and EstebanRossi-Hansberg 4 have called this new paradigm“trade in tasks”. Countries no longer export exclusivelyfinished products, but tend to specialize in specificstages of the production process. These various stepsto obtain finished products can be associated throughthe notion of a “value chain”, which refers to the entiresequence of productive (i.e. value-added) activities, 5from the conception of a product to its manufacturingand commercialization. The possibility of slicing upand optimizing value chain activities among multiplecompanies and various geographical locations haseven spawned a broader term - the “global value chain”(GVC). With specialization in specific tasks and theirclose integration into a highly coordinated businessmodel, these chains of related activities result in the10

Box 2. About the verticality of production and tradeBasically, vertical integration is a synonym for corporate ownership and control. One of the pioneers was Henry Ford, who soughtto minimize costs and industrial risks by acquiring various firms involved in the production process of his cars. This businessmodel was adopted by other large companies with the emergence of mass production in the early 20 th century. The aim was toincorporate into a single industrial structure the production of raw materials, the machines needed for their transformation, andtransportation to and from the factories. Vertical integration was at the core of Japan’s industrialization, with conglomerates knownas “Zaibatsu” containing holding companies controlling banks and industrial subsidiaries.Vertical integration is about corporate strategy and relates to the “make” or “buy” decision 7 companies invariably face. Whileoutsourcing is an example of the “buy” approach (act of purchasing from an external supplier), vertical integration involves an“insourcing” or “make” option (choice of producing an item or keeping a specific activity internally). Reduced operational costsand better coordination of the supply chain are the key benefits sought by vertically integrated enterprises.Vertical integration can be achieved not only through direct ownership, but also by means of contractual relationships (at “arm’slength”) with suppliers.In Figure 3 below, the orange zone highlights the different functions that have been gathered within the same company. Allcorresponding activities are controlled and managed internally. The assembly operation may be executed by a secondary companyowned by the main firm, or by one contractually dependent upon it; however, they both act as one unique entity within the supplychain.While vertical integration relates to structural linkages between industrial firms and key business processes, the concept ofvertical specialization, as developed by Hummels et al. (2001), outlines the degree of specialization of the different economiesinvolved in the international production chain. It is characterized and measured as the import content (in goods and services)embodied in exported goods (see Chapter IX for more details).Figure 3An example of vertical integrationI. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentMaterialsComponentssuppliersVI. IntegrateddiversityProcurementResearch andDevelopmentVII. An evolutionaryperspective onproduction networksin the Asia-US regionOperations:• Intermediate manufacturing• AssemblyMarketingInternalsupplychainVIII. Trade inintermediate goodsSalesIX. Vertical tradeand trade invalue addedMarket exchangeInternal processSource: WTO Secretariat.FinishedproductscustomersX. Cross-regionalspillover ofeconomic growth13

Trade Patterns and Global Value Chains in East AsiaC. Growing vertical specialization in Asia and regional clustering of tasksWhen investing in East Asia, international firms pursuetwo different types of objective. Some respond to thelogic of trade in tasks and geographical fragmentationby staging production along a global supply chain(vertical specialization). Others produce the same typeof goods that they do at home, with a view to entering theAsian market using the “build-where-you-sell” strategy(horizontal diversification of production). Consumerelectronics correspond more to the vertical specializationpattern, where lead firms, selling branded products in finalmarkets, place orders for key components with suppliersand have them assembled in a third, low-cost, country. 8The automobile industry is a typical example of horizontaldiversification; a Toyota car produced in Thailand maydiffer only slightly from the same model built in Japan. 9The division between the two types of investment is notclear-cut, and many foreign affiliates operating in EastAsia have progressively adopted the characteristicsof both vertical and horizontal multinationals. 10 Verticalspecialization started first. In the 1970s, according toSturgeon and Kawakami (2010), US semi-conductorfirms, whose production was very labour intensive,located assembly plants in East and South-East Asia, andJapanese companies located low-cost transistor radioproduction in Chinese Taipei and in Hong Kong (China).As household income in developing Asia rose, so didforeign direct investment for horizontal diversification. In2001, only 40 per cent of Japanese companies’ overseasproduction in Asia went to local consumers. Now theproportion is 62 per cent and growing as export-orientedindustries based in low-cost Asian countries build adomestic market and related consumption capacity.Both horizontal and vertical production patterns cancoexist, and the flexibility in sourcing components fromvarious countries, while exporting the resulting finalgoods, is closely linked to trade policies. As shown inFigure 6, Japanese automobile assemblers procure keyparts from four ASEAN countries, taking advantage ofthe ASEAN Free Trade Area (AFTA).Figure 6Complementary parts supply system of an automobile assembler in ASEANthailand• Press parts• Frame panels• Electronic parts• Interior parts• Engine partsAFTAphilippines• Engine fuel system• Emission dress parts• Engine electronic parts• Suspension parts• MT missionAFTA-CEPT AFTA-CEPT AFTA-CEPTmalaysia• Instrumental panelassembly• Bumper• Drive shaftAFTAindonesia• Cylinder head assembly• Cylinder block• Engine valve• Steering handle• AT missionNote: the ASEAN Free Trade Area - Common Effective Preferential Tariff (AFTA-CEPT) is a cooperative arrangement among ASEAN member states to reduce intraregionaltariffs and remove non-tariff barriers.Source: Hiratsuka (2010).16

EndnotesI. From massdemand to globalsupply chains1Inaugural speech to the conference on “Globalization of theIndustrial Production Chains and Measuring International Tradein Value Added” at the Senate in Paris on 15 October 2010.2The Ministerial Declaration on Trade in InformationTechnology Products (ITA) was concluded at the WTOSingapore Ministerial Conference in December 1996. The ITAeliminates duties on IT products covered by the Agreement.Developing country participants were granted additional timeto implement their commitments for some products.3See Baldwin (2006).4Grossman and Rossi-Hansberg (2006).5Sturgeon (2001).6Porter (1985).7The “make-or-buy” decision process was extensivelydeveloped by Williamson (1991).8The classical example is the iPod, designed and developedby a US firm and “made in China” out of US or Koreancomponents and licences which constitute most of the factorycost of the appliance.9“Leaving home: Japan’s big companies are shippingproduction abroad”, The Economist, 18 Nov 2010.10See Hiratsuka (2010).II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth17

Trade Patterns and Global Value Chains in East AsiaA. Outsourcing and offshoring: Firms go beyond national boundariesAs production becomes increasingly complex andfragmented, specialization on core activities andoutsourcing have become inevitable. As part of theiroverall business strategy, enterprises may outsource oneor more of their productive activities, either within thecountry or abroad (offshoring). A reliable and conduciveinternational trading environment ensures the unhinderedand efficient flow of investment, goods and servicesamong nations. Through successive negotiations underGATT/WTO, trade barriers have been significantlyreduced or eliminated (see Chapter IV on tariff policies)and a stable, rules-based trading system has guaranteedand encouraged firms to engage internationally withconfidence. The availability of efficient and affordablelogistics, transport and communication services supportsthis global production system.Offshore sourcing or cross-border productionarrangements may take place between enterprises thatare either related (multinationals enterprises (MNEs)and their affiliates) or that have no formal relationship inownership (see Figure 1). In the latter case, enterprisesmay enter into contractual agreements or establish jointventures. The fragmentation of the production processhas also created business opportunities for small andmedium-sized enterprises (SMEs).Intra-firm trade is important for global manufacturingactivities involving either partly or wholly-owned affiliates.Data on intra-firm trade are not systematically collectedand only a handful of countries report informationgathered from firm surveys. The available informationindicates, however, that this trade is quite substantial. In2008, for example, merchandise exports of US MNEsto their foreign affiliates represented 18 per cent ofthe country’s total exports. Imports of MNEs from theirforeign affiliates accounted for 13 per cent of the totalUS merchandise imports. 1Figure 1Typology of outsourcing and offshoring strategiesDomesticForeignOutsourcingOffshoringOther FirmsOutsourcingOffshore-OutsourcingSame CompanyIn-houseProductionForeign DirectInvestmentSource: WTO Secretariat.20

B. Processing zones in developing countries: Where global manufacturingtakes placeI. From massdemand to globalsupply chainsEnterprises that outsource are usually located inadvanced economies, while their correspondingcounterparts are often in developing economies. Inmany countries, most of the processing and assemblingactivities take place in earmarked areas with specialadministrative and regulatory status to promote tradeand investment. Although these areas can have differentnames in different countries, the most widely usedterm is “export processing zone” (EPZ). As defined bythe International Labour Organization (ILO), EPZs are“industrial zones with special incentives set up to attractforeign investors, in which imported materials undergosome degree of processing before being re-exported”. 2They have become all-embracing. Again according toILO, EPZs “have evolved from initial assembly and simpleprocessing activities to include high tech and scienceparks, finance zones, logistics centres and even touristresorts”. 3 Many developing economies consider EPZs tobe an integral part of their export-led growth strategies.In 2006, the latest year for which estimates are available,3,500 EPZs were operating in 130 countries, providingwork for 66 million people (see Table 1).II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsTable 1Estimates of the development of export processing zonesIV. The evolutionof tariff policies1975 1986 1997 2002 2006Number of countries with EPZs 25 47 93 116 130Number of EPZs or similar type of Zones 79 176 845 3000 3500Employment (millions of workers)of which:......22.54366V. Foreign directinvestmentChinaOther countries with data availableSource: Boyenge (2007)....0.8...1.9184.530134026VI. IntegrateddiversityThe earliest EPZ was European, the Shannon Free Zoneof Ireland, which was established in 1959. The first AsianEPZ, the Kandla EPZ, was set up in India in 1965. In the1960s, Chinese Taipei attracted foreign firms to investin the assembly of semi-conductors, and in 1970, theRepublic of Korea included EPZs in its export-led growthstrategy. In subsequent years EPZs and similar zonesmushroomed in the Philippines, Malaysia, Sri Lanka,Thailand, Bangladesh and Pakistan, to name but a few.In the early 1980s, following its decision to vigorouslypursue an export-oriented policy and attract foreigninvestment, China established five special economiczones (SEZs), which effectively saw it join the globaleconomic community.Outside Asia, EPZs have also become very important forSouth and Central America and the Caribbean region. InAfrica, a number of countries have embarked on policiesof opening up their economies to foreign investorsthrough EPZs (see Figure 2).Based on balance of payments (BOP) statistics, it isestimated that about one-fifth of developing economies’exports come from EPZs, while the share on the importside is some 13 per cent (see Figure 3). Over the 2000-2008 period, China accounted for about 67 per centof all reported exports from inward processing – goodsimported duty-free for subsequent processing and reexport– while Mexico represented another 18 per cent.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth21

Trade Patterns and Global Value Chains in East AsiaFigure 2Economies with export processing zones and shares of goods for processing in exports, 2006 or most recent year (percentage)FYR Macedonia60%Honduras55%Mexico45%Nicaragua40%Costa RicaDominican Republic65%Cape Verde14%Morocco25%54%Aruba Cote d’Ivoire95% 1%Albania60%Lebanon20%Egypt23%U.A.E.11%Bangladesh1%China47%Republic of Korea8%Philippines27%Indonesia5%Bolivia4%Chile3%Madagascar56%Swaziland7%Economies with EPZsSources: ILO and WTO Secretariat.Fiji5%22

China’s customs trade figures show that in 2009 nearlyhalf of its exports originated from processing zoneswhile one-third of its imports were bound to such zones.Around two-thirds of China’s processing trade wasundertaken by foreign owned enterprises.As a result of such strong export-oriented activities inits EPZs, China became the world’s leading exporter ofmanufactured products in 2008, and the leader in totalmerchandise exports in 2009.Currently, a considerable part of the exports of manydeveloping economies originate in EPZs (see Figure 2).The overall impact on their economies is substantial, withthe resulting value added (approximately the differencebetween the value of the exports of processed productsand the cost of the imports of intermediate inputs)equalling some 30 to 35 per cent of the exportedproducts.Figure 3Goods for inward processing in developing economies’ total exports and imports, 2000-2008(in billions of US$)I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chains60005000ExportsIV. The evolutionof tariff policies400030002000V. Foreign directinvestment100002000 2001 2002 2003 2004 2005 2006 2007 2008VI. Integrateddiversity60005000Goods resulting from inward processingOther goodsImportsVII. An evolutionaryperspective onproduction networksin the Asia-US region400030002000VIII. Trade inintermediate goods100002000 2001 2002 2003 2004 2005 2006 2007 2008IX. Vertical tradeand trade invalue addedGoods for inward processingOther goodsSources: IMF balance of payments statistics and WTO estimates.X. Cross-regionalspillover ofeconomic growth23

Trade Patterns and Global Value Chains in East AsiaC. Business process outsourcing and computer servicesOffshore outsourcing is not confined to the manufacturingsector. Outsourced service activities range from simpleback and front office routines to more complex researchand development (R&D) work. Data processing,call centres, virtual assistance, legal support (legaltranscription, drafting contracts, legal representation,etc), medical support (medical transcription, interpretingx-rays, etc), finance and accounting, software andapplications development and R&D are all activities thatenterprises can assign to foreign firms. All these activitiesare designated as business process outsourcing (BPO)or information technology-enabled services (ITES).Of the Asian developing economies, it is India andthe Philippines that are benefiting increasingly fromoffshored computer and IT-enabled business services.It is estimated that India earned US$ 36.4 billionduring the 2008-09 financial year from computer andITES/BPO services. 4 This is equivalent to 34 per centof the total commercial services India exported in thisperiod. Computer services alone generated US$ 26.6billion, while BPO services brought in US$ 8.4 billion.In the Philippines, the ITES/BPO industry, whichis predominantly composed of call centre services(accounting for nearly 70 per cent of related exports),is estimated to have grown by 46 per cent annuallybetween 2004 and 2008. 5 According to the BusinessProcess Association of the Philippines (BPAP), theBPO industry is estimated to have earned US$ 7.3billion in revenue and provided 442,164 jobs.D. Logistics services and distribution: The unique role of Hong Kong (China)and SingaporeFollowing changes in the organization of production(i.e. outsourcing/offshoring), enterprises have becomeincreasingly dependent on logistics services. Logisticsservices include core elements such as cargo handling,storage and warehousing, transport agency servicesand related freight logistics services as well as noncoreservices such as packaging and supply-chainconsulting.Due to their excellent infrastructure and connectivity,Hong Kong (China) and Singapore play core roles in theglobal supply chain by offering logistics and entrepôtservices. This is in addition to their productive capacity.Trading companies in Hong Kong (China) and Singaporematch buyers and sellers in different markets. Besidesthis intermediation activity, companies in Singapore andHong Kong (China) also perform specialized services(such as quality control or simple manufacturing orprocessing, like sorting or packaging). This activity hasenabled Hong Kong (China) to become the world’sleading re-export specialist. In 2009, re-exportsrepresented 95 per cent of Hong Kong’s (China) totalexports, or US$ 313 billion. In Singapore as well, reexportsare fast gaining in importance. The share of reexportsin total exports rose from 34 per cent in 1990to 49 per cent in 2009. The combined re-exports ofHong Kong (China) and Singapore represented 11 percent of Asia’s total merchandise trade in 2009.Numerous foreign affiliates in Hong Kong (China) andSingapore serve as regional headquarters in the EastAsian region, providing a wide range of business services(business coordination, sourcing of raw and semi-finishedcomponents, technical support, financing, marketing, etc.)to their subsidiaries throughout the region.The share of intermediate goods in the total re-exportsof Hong Kong (China) has risen significantly in recentyears, from 48 per cent in 2000 to 58 per cent in 2008.This increase reflects the importance of commercialexchanges between regional production networks.While the origin of imports is relatively diversified, reexportsfrom Hong Kong (China) are mainly bound forChina (43 per cent of re-exports in raw materials andmanufactures) (see Figure 4). Taking advantage of itsproximity to the coastal provinces, Hong Kong (China)has also shifted its manufacturing tasks to the mainlandby re-exporting an increasing share of intermediateinputs for outward processing. Chinese Taipei, with ashare of 16 per cent, is also a major market for re-exportsof intermediate goods from Hong Kong (China).24

Figure 4Hong Kong’s (China) imports and re-exports of intermediate goods, by origin and destination (percentage)I. From massdemand to globalsupply chains1009080OriginsII. Organizationof the globalproduction process7060504030201001995 2009Republic of KoreaPhilippinesChinese TaipeiMalaysiaJapanIndonesiaIndiaChinaOthersIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesHONG KONG(CHINA)V. Foreign directinvestmentVI. Integrateddiversity100908070DestinationsVII. An evolutionaryperspective onproduction networksin the Asia-US region60504030VIII. Trade inintermediate goods201001995 2009ChinaOthersIX. Vertical tradeand trade invalue addedSource: Based on UN Comtrade Database.X. Cross-regionalspillover ofeconomic growth25

Trade Patterns and Global Value Chains in East AsiaHong Kong (China) also plays a prominent part inthe Chinese supply chain system by facilitating thetranshipment of Chinese intermediate goods from oneChinese location to another, principally from one EPZ toanother.This is done through a round trip flow known as reimports,“goods imported in the same state as previouslyexported”. 6 Many Chinese EPZs find that it costs lessand saves time to transport products through HongKong (China) because of its advanced logistics andinfrastructure capacity. The EPZs can also benefit fromtax rebates when goods are exported after processingand from preferential tax regimes when intermediategoods are imported for processing. China is by far theworld’s major re-importer. Its re-imports have risen morethan 12 times since 2000 and are becoming a significantcomponent of its trade (see Figure 5). They representedalmost 9 per cent of its total merchandise imports in2009.Figure 5Re-imports of China10100990880Share (percentage)765437060504030Value (billions of US$)22011002000 2001 2002 2003 2004 2005 2006 2007 2008 20090Share of re-imports in Chinatotal importsChina re-imports from ChinaSource: Based on UN Comtrade Database.26

EndnotesI. From massdemand to globalsupply chains1See Barefoot and Mataloni, (2010).2See http://www.ilo.org/public/english/dialogue/sector/themes/epz/epzs.htm/.3Ibid.4See Reserve Bank of India (2008-2009)5See Business Process Association of the Philippines (2010).6See International Merchandise Trade Statistics: Conceptsand Definitions 2010 (2010).II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth27

Trade Patterns and Global Value Chains in East AsiaIII. Infrastructure servicesin global value chains• Innovation and development in infrastructure services facilitate thesmooth functioning of the global value chain system.• Container port traffic in Asia has escalated, with China leading, followedby Singapore, Hong Kong (China) and Japan.• India, the Philippines and Indonesia showed the highest increases ininformation and communication technology (ICT) expenditure.• The trading environment that exporters and importers face within theirown countries impacts on the cost and timeliness of international trade.Asian economies are more competitive.28

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. Infrastructure services: A condition for global value chainsB. Merchant fleet and containerization: Key determinants of world tradeC. Air transport: The solution for time-sensitive international trade and productionD. Information and communication technology (ICT)E. Cost and time to trade at the border3030313233V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth29

Trade Patterns and Global Value Chains in East AsiaA. Infrastructure services: A condition for global value chainsAdequate infrastructure services at a reasonable costare a precondition for the development of global valuechains. Infrastructure services include transportation,telecommunications, finance and insurance. 1Transportation services cover sea, land and air, as wellas supporting and auxiliary services. Telecommunicationsservices encompass the electronic transmission ofinformation, including business network services andInternet access. Financial services deal with financialintermediation, with auxiliary services provided by banksand stock exchanges, and with services provided byfactoring, credit card and other enterprises.Innovations in infrastructure services have paved theway for improvements in international transport, enablingeconomies to increase their engagement in the globalvalue chain process. A dramatic increase in the averagesize of merchant ships after the 1950s transformed bulkfreighters, with ships growing from an average of lessthan 20,000 deadweight tonnes (dwts) in 1960 to about45,000 dwts in the early 1990s. 2 Maritime transport alsounderwent a qualitative revolution with the invention in themid 1950s of the container by an American former truckdriver, Malcom McLean. As a result of such changes, thetime needed to move goods around the world shrank, asdid the cost. Freight rates are estimated to have declinedby 65 per cent between the 1950s and 1990s.The quality of infrastructure services is increasinglyseen as a determinant of the trade performance ofdeveloping economies and an important factor in globalvalue chains. The following sections focus principallyon two international modes of transport (sea and air);however, the importance of land-based modes (rail androad) should not be overlooked, as they provide thelink between factories and main ports but also remainthe main modes of transport, particularly but not solelywithin Europe and North America. In 2008, for example,road and rail accounted for 45.9 per cent and 10.8 percent respectively of total goods transported within the27 countries of the European Union, while intra-maritimetransport accounted for 36.6 per cent. 3B. Merchant fleet and containerization: Key determinants of world tradeInternational trade and the shipping industry have longmoved in tandem. Despite competition from other modesof transport, seaborne trade continues to increase, aidedby the growing efficiency of shipping. According toMaritime International Secretariat Services (Marisec),approximately 90 per cent of world trade in terms ofvolume is carried by the international shipping industry.Marisec calculates that there are around 50,000merchant ships trading internationally, transporting everykind of cargo. The world fleet is registered in over 150nations and manned by over a million seafarers. 4The development of maritime transportation cannot bedissociated from containerization, a simple idea thatchanged the landscape of international trade. The ideaof taking the body of a tractor-trailer and using thissame container from origin to destination changed notonly international transportation, but also the outlook,management and organization of international tradeand global production. It is estimated that 100 millioncontainers cross the oceans each year, carrying mostof world trade. In the words of author and economistMarc Levinson, before the existence of containerization“transporting goods was so expensive that it did not payto ship many things halfway across the country, muchless halfway around the world.” 5 Containerization, byintroducing standardization, automation, inter-modality,traceability, and security from loss and damage, hasradically contributed to the development of the globalsupply chain production system. Intermediate goodsmove faster to manufacturers and final goods reachcustomers quickly, safely and securely.In 2009, of the top 10 leading world ports in terms ofcontainer traffic, five were located in China, with one each inHong Kong (China), the Republic of Korea and Singapore. 6In 2008, these four economies represented 38 per centof the world’s container port traffic. Figure 1 illustratesthe increase in container port traffic in all the selectedeconomies of the Asian region. 7 China in particular hasregistered a remarkable average annual growth of 14 percent during the 2000-2008 period. The five economieswith the most container port traffic, i.e. China, Hong Kong(China), Japan, the Republic of Korea and Singapore,are also the five that have traded the highest volumes ofintermediate goods among the Asian economies.30

Trade Patterns and Global Value Chains in East AsiaFigure 2World air transport (freight), 1990-2008 (Index, 1990=100)3002502001501005001990199119921993199419951996199719981999200020012002200320042005200620072008Source: World Bank, World Development Indicators Database.D. Information and communication technology (ICT)Instant access to information for decision makers,e-commerce for consumers, logistics managementand communication between the numerousstakeholders in the global value chain all depend onthe availability and level of development of informationand communication technology (ICT). Communicationinfrastructure is therefore one of the basic conditionsfor the growth and sustainability of global valuechains and production networks. Access to marketinformation aids international transparency and pavesthe way for international integration. Advances in ICT(from telex, to fax and to the Internet) enable fasterreactions and speed up the whole logistical Internetprocess.Figure 3 shows the development of ICT expenditureover the period 2003 to 2009. For China, Hong Kong(China), India, Indonesia, the Philippines and Thailand,expenditure more than doubled, while for the othereconomies, it still grew, but more slowly. However, itshould be noted that economies such as the Republicof Korea, Malaysia, Singapore and the United Stateshad already attained higher levels of ICT expenditureby 2003.32

Figure 3ICT expenditure (current US$) of selected Asian economies and the United States (Index, 2003=100)I. From massdemand to globalsupply chains300280260240220II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chains200180160IV. The evolutionof tariff policies140120100V. Foreign directinvestment2003200420052006200720082009ChinaIndonesiaIndiaJapanKorea, Rep. ofMalaysiaPhilippinesSingaporeThailandHong Kong (China)Viet NamUnited StatesVI. IntegrateddiversityNote: as the index is based on current dollars, the seemingly poor performance of the Republic of Korea in 2008 and 2009 is mainly due to the depreciation of the Won.Source: World Bank, World Development Indicators Database.E. Cost and time to trade at the borderThe ability of enterprises and of economies to join theglobal supply chain is heavily affected by the efficiencyof border processes and customs practices. The tradingenvironment that exporters face within their own countriescan have a huge impact on their competitiveness.Domestic regulations and trade-related bureaucracyare among the cost factors that determine whether anenterprise can meet external demand in a competitiveand timely fashion. The World Bank’s Doing BusinessDatabase 9 identifies the documents required and thetime and costs involved in exporting and importing, andranks countries on the ease of trading across borders.In its 2010 ranking of 183 economies, Singapore andHong Kong (China) appear in first and second placerespectively, both in terms of the ease of doing businessin general and in trading across borders in particular. Oncost 10 to export criteria, Malaysia, Singapore and Chinaare the lowest-cost economies. On the import side,Singapore and Malaysia are the least costly, with Chinain fourth place, behind the United Arab Emirates. Chinareceives a good ranking despite a modest performance intime to export (21 days) and import (24 days), comparedto Singapore’s 5 and 4 days, respectively.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth33

Trade Patterns and Global Value Chains in East AsiaFigure 4 shows the evolution of cost and time to export atthe border in 2005 and 2008. 11 Cost to export increasedslightly for almost all countries in the sample, with thenotable exception of Thailand, for which it fell by some26 per cent. Time to export declined for all countries withthe exception of China (where it rose by three days); thebiggest decreases were in Thailand, India and HongKong (China) (a reduction of 10, 10 and seven days,respectively). Bigger trade volumes could explain therise in China’s time to export. Larger trade volumes couldincrease congestion and lessen the efficiency of tradeinfrastructure, leading to a positive estimated effect oftime costs on trade. As an example of the latter, whentrade volumes surged in China in 2003, the wait timeat Shanghai’s port expanded by two days on average. 12Figure 4Cost to export and time to export, 2005 and 2008120030100025US$ per container800600400201510No. of days200500JapanIndiaPhilippinesKorea, Rep. ofChineseTaipeiIndonesiaThailandHong Kong(China)Viet NamChinaSingaporeMalaysiaCost to export2005Cost to export2008Time to export2005Time to export2008Same time to export2005-2008Source: World Bank, Doing Business Database.Figure 5 shows the cost and time it takes to import at theborder. The cost to import has increased for most of theeconomies in the sample, i.e. China, Hong Kong (China),Malaysia, the Philippines, Singapore, Chinese Taipei andViet Nam. India, Indonesia, the Republic of Korea andThailand, however, have managed to reduce the costof importing goods. Time to import has either remainedsteady or decreased for all countries in the sample. Aspectacular 70 per cent drop is registered for HongKong (China); other significant decreases occurred forIndia and Thailand (down 50 per cent and 40 per centrespectively).34

Trade Patterns and Global Value Chains in East AsiaIV. The evolution oftariff policies• Asian economies have relatively low applied tariffs on imports, and theyare still decreasing.• Some Asian economies, e.g. Hong Kong (China) and Macao (China), arefully duty free.• Trade in Asia is dominated by semi-processed products, which have thelowest applied tariffs.• Low tariffs belie real trade liberalization because of non-tariff measures.36

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. An overview of Asia’s tariff commitments to the WTOB. Applied tariffs in Asia are low and still decreasingC. Regional trade agreements accentuate the growth of Asian tradeD. Tariffs in Asia vary significantly among sectorsE. Effective protection rates become highly “ineffective” in global supply chainsF. Non-tariff measures mitigate the benefits of low tariffs383941434445V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth37

Trade Patterns and Global Value Chains in East AsiaA. An overview of Asia’s tariff commitments to the WTOAs we saw in the previous chapter, the lowering oftransaction costs through better infrastructure has beenkey to promoting global value chains in Asia. Anotherkey element in facilitating trade is lower tariffs, or duties.At the WTO, a major focus of free trade negotiationshas been market access, or tariff, issues. Specifically,the negotiations aim to reduce the tariff ceilings towhich members are formally committed, known as their“bound” levels, and so increase the transparency oftrade relations.A WTO member’s tariff commitment to the WTO laysdown the maximum duty that it can impose on specificimports (bound duty) and the number, or percentage,of products that it has formally agreed to bind (bindingcoverage). Out of the 153 WTO Members, 111 have“bound” – set maximum tariffs – for at least 90 per centof their products. In Asia, Japan and Chinese Taipeiboth have almost full binding coverage and low boundduty levels. It is also worth mentioning that only in Asiaare there two economies that are duty free on boundproducts, even if the binding coverage is much less than90 per cent. These are Hong Kong (China) and Macao(China).Figure 1 gives an overall picture of tariff commitmentson goods in terms of binding coverage and bound dutylevels for all WTO members (the European Union isrepresented as one). The vertical left axis represents themember’s average bound duty level, while the verticalright axis shows the corresponding binding coveragerepresented by the shaded area. But while bound ratesare the rates to which members are formally committedunder WTO agreements, in practice they often applylower levels of duty. These actual levels are called“applied” tariffs.Figure 1Bound duty commitments of WTO members (percentage)All WTO members180Members with at least 90% binding coverage(sorted by increasing average bound duty)Members with less than 90% binding coverage(sorted by decreasing binding coverage)100160901408012070Average bound duty10080605040Binding coverage60304020201000Japan China Indonesia MalaysiaChineseTaipeiViet NamKorea,Rep. ofBinding coverageThailandIndiaSingaporePhilippinesHong Kong(China)Average Bound dutySource: WTO (2010a).38

B. Applied tariffs in Asia are low and still decreasingI. From massdemand to globalsupply chainsIn the Asian region, applied tariffs under the WTO’smost favoured nations (MFN) principle are generally low,mostly in the 5-10 per cent range (see Figure 2 for MFNapplied tariff levels). The MFN principle guards againstdiscrimination by ensuring that all WTO member statesbenefit from the best tariff terms that any member isprepared to offer. India and the Republic of Korea deviateslightly from this pattern of low applied tariffs, with ratesof 12.9 per cent and 12.1 per cent, respectively. ButIndia has been cutting its applied tariffs, with averagerates down 19.5 percentage points in 2009 comparedto 2001 levels.II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityFigure 2Latest applied duties in the world (percentage)Source: WTO (2010a).Range of MFN applied dutiesin selectedAsian economiesDuty free - 2.5%2.5% - 5.0%5.0% - 7.5%7.5% - 10.0%10.0% - 12.5%12.5% - 15.0%15.0% +No available datain rest ofthe WorldVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth39

Trade Patterns and Global Value Chains in East AsiaFigure 3 shows that major Asian traders have significantlyreduced their applied tariffs. China, India and Viet Nam,the countries which lowered overall tariffs the most,relative to 2001, have also seen the highest annual ratesof trade growth. Some countries, like Indonesia and thePhilippines, have registered a slight increase in tariffs.But while they are core actors in regional value chainsdealing with motor vehicles and parts, their applied tariffsin 2001 were already relatively low. The rate was 6.3 percent for Indonesia and 4.8 per cent for the Philippines,compared to 16.9 per cent for China and 25.7 per centfor India. Even Malaysia’s rate was 18.6 per cent.Figure 3Applied MFN tariff reduction and annual trade growth in selected Asian economies, 2001-2009 (percentage)25 302025Tariff reduction151052015105Annual trade growth00-5-5China*Hong Kong(China)IndiaIndonesiaJapanKorea, Rep. ofMalaysiaPhilippinesSingaporeTaipei,Chinese*ThailandViet Nam*Overall TariffReduction*Joined the WTO after 2001.Tariff reduction in motorvehicles and partsSources: WTO, Integrated Database; UN Comtrade Database.Overall Annual TradeGrowth (right axis)Annual trade growth in motorvehicles and partsFigure 4Binding overhang in 2009 for selected Asian economies (percentage)6050403020100IndiaIndonesiaPhilippinesThailandMalaysiaSingaporeKorea, Rep of.Viet NamChinaTaipei, ChineseJapanHong Kong(China)Binding overhangApplied tariffsSource: WTO (2010a).40

Bound tariffs serve to protect export-oriented enterprisesagainst unexpected tariff surges. Many Asian membershave formally high tariff commitments, but as we haveseen, their actual applied MFN rates are much lower(see Figure 4). The 10 members of the Association ofAsia is a highly integrated trading bloc, with buoyantintra-regional commerce (58 per cent of its trade in2009, see Figure 5). Furthermore, it has diversified itsextra-regional markets to reach beyond its traditionalpartners, the European Union and the United States.The share of extra-regional trade excluding theEuropean Union and the United States has increasedfrom 12.9 per cent in 2001 to 18 per cent in 2009.The numerous regional trading agreements (RTAs)among Asian economies have contributed to regionalintegration. The ASEAN Free Trade Area (AFTA) isan almost completely duty-free zone. Under AFTA’sSoutheast Asian Nations (ASEAN), which joined themultilateral trading system during the Uruguay Round,and India, have the highest binding overhangs (theoverhang is the gap between applied and bound rates).C. Regional trade agreements accentuate the growth of Asian tradeCommon Effective Preferential Tariff (CEPT), fiveASEAN states – Indonesia, Malaysia, the Philippines,Singapore and Thailand – started in 2010 to offerduty-free access on more than 99 per cent of tradedproducts (tariff lines). Viet Nam’s target date for zeroCEPT tariffs is 2015. ASEAN countries also have freetrade agreements with China, India, Japan and theRepublic of Korea, among others, which are all in theimplementation phase. Most Asian countries are partiesto at least one RTA. Singapore is party to 18 RTAs ongoods. Indonesia, Malaysia, the Philippines, Thailandand Viet Nam are parties to at least six more RTAs inaddition to the AFTA (see Figure 6).I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentFigure 5Asia’s merchandise trade by region (percentage)2001US$ 3.2 Trillion2009US$ 7.3 TrillionVI. IntegrateddiversityRest of the World12.9%Europe14.4%18.5%United States 3.7%Other Asia50.5%Intra-Asia 12Rest of the World18.0%13.0%Europe11.2%53.3%Intra-Asia 12VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsUnited States4.5%Other AsiaIX. Vertical tradeand trade invalue addedNote: “Intra-Asia 12” comprises China, Hong Kong (China), India, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailandand Viet Nam.Source: UN Comtrade Database.X. Cross-regionalspillover ofeconomic growth41

Trade Patterns and Global Value Chains in East AsiaFigure 6Regional Trade Agreements in goods notified to the GATT/WTO and in force by country/territory (number)Japan11India12Thailand10Singapore18China9Republic of Korea6Chinese TaipeiHong Kong (China) 3Viet Nam 27 Philippines8Malaysia8Indonesia7Number of notified RegionalTrade Agreements on goodsNo notification1-23-56-1011-1415-1920-2425-30Source: WTO, Regional Trade Agreements Database.42

D. Tariffs in Asia vary significantly among sectorsI. From massdemand to globalsupply chainsIndustrial tariffs 1 are lower in Asian countries thanagricultural ones (see Figure 7). Agriculture tariffsin India and the Republic of Korea are among the 10highest in the world, with the latter’s tariff for agriculturalproducts being more than seven times the average tarifffor industrial products. While Japan’s industrial productstariff is relatively low, its duties on agricultural imports arecomparable to those of Asian developing countries.The dominating position of semi-processed productsin Asian trade is reflected in the tariffs that countries inthe region impose. Tariffs on semi-processed productsare low compared to either raw materials or processedproducts. In the cases of the Republic of Korea andThailand, tariffs on semi processed products areless than one-third of those for raw materials. As foragricultural products, duties on raw materials remainhigh in most Asian economies (see Figure 8). But thereis little evidence of tariff escalation, the practice ofimposing higher tariffs the more processing is involvedin the imported product.II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsFigure 7Agriculture vs. industrial tariffs in Asia, 2009 (percentage)IV. The evolutionof tariff policies504540V. Foreign directinvestment353025VI. Integrateddiversity2015105VII. An evolutionaryperspective onproduction networksin the Asia-US region0Republic of KoreaAgricultureIndiaJapanIndustryThailandChinese TaipeiViet NamChinaMalaysiaPhilippinesIndonesiaVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedSource: WTO (2010a).X. Cross-regionalspillover ofeconomic growth43

Trade Patterns and Global Value Chains in East AsiaFigure 8Tariff escalation in selected Asian economies, 2009 (percentage)35302520151050Republic of KoreaIndiaThailandViet NamChinese TaipeiJapanChinaPhilippinesMalaysiaIndonesiaRaw Semi-processed ProcessedSource: WTO, Integrated Database.E. Effective protection rates become highly “ineffective” in global supplychainsClosely related to the issue of tariff escalation is thenotion of effective protection. When tariff escalation issteep, all firms that produce finished products will benefitfrom high protection. They will be able to sell dear andbuy cheap. On the other hand, firms selling intermediategoods will scarcely benefit from high tariff protection,and will have to pay high duties for any processed goodsthey need to import. In the latter case, their effectiveprotection rate (EPR) will be low. It may even be negativeif the duty paid on the inputs is higher than any nominalprotection received on the output.Effective protection becomes highly “ineffective” whencountries participate in international supply chainsbecause an increasing volume of traded industrial outputis made of intermediate goods (see Chapter VIII). Effectiveprotection, computed for each industry according to itsinput-output structure, and the corresponding tariffs, hasbeen decreasing over time in East Asia and the UnitedStates. But some sectors, like textiles and clothing,automobiles, and some food industries, still benefitfrom high levels of effective protection (see Figure 9).However, according to 2005 data, negative protectionis now relatively rare, unlike in previous decades.Overall, the trend towards lower applied tariffs has beeninstrumental in reducing negative protection.There is a tendency for highly protected sectors to seetheir effective protection rate reduced over time. Therate of correlation between the level of EPR in 1995 andthe variation between 1995 and 2005 is negative andrelatively large (-0.7) across all sectors and countries,indicating a tendency towards a more neutral, flatter tariffstructure.44

Figure 9Effective protection rate (percentage) in 2005 and changes 1995-2005, United States and selected Asianeconomies1009080706050403020100-10-20I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies-30-40-50-60Iron oreShip-buildingElectronics and electronic productsOther metallic oreNon-metallic ore and quarryingCrude petroleum and natural gasNon-ferrous metalForestryAll products (simple average)Leather and leather productsBeverageOther made-up textile productsKnitted productsMeat and dairy productsTires and tubesPlastic productsNon-food cropsWearing apparelMotor vehiclesMilled grain and flourV. Foreign directinvestmentVI. IntegrateddiversityEffective protection rate 2005 Rate of variation 1995-2005Note: Simple average of effective protection rates calculated for 10 countries.Source: Elaborated on the basis of IDE-JETRO and WTO data.F. Non-tariff measures mitigate the benefits of low tariffsWhile tariffs have generally been falling, the trendtowards further trade liberalization is being mitigated byincreased use of what are termed non-tariff measures(NTMs). These are administrative instruments that canaddress legitimate public policy concerns but maylimit imports. They can cover anything from licensingand quantitative controls to health and phytosanitarymeasures. Governments resort to NTMs for a variety ofreasons, sometimes using them as trade policy tools.In 2007, a multi-agency support team of experts 2 onnon-tariff measures proposed the following definition ofNTMs: “Non-tariff measures (NTMs) are policy measures,other than ordinary customs tariffs, that can potentiallyhave an economic effect on international trade in goods,changing quantities traded, or prices or both.”Table 1 gives an overview of the types of NTMscommonly used. The principles of transparency and nondiscriminationare for the most part the only benchmarksby which NTMs and other trade policies are evaluatedunder WTO jurisdiction. Hence, the statistics on disputesettlement in Table 1 relate more to the issue of whetherthe NTMs or any other trade regulating instrumentsabide by WTO principles rather than to the “legitimacy”of these trade instruments per se.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth45

Trade Patterns and Global Value Chains in East AsiaTable 1Common Non-Tariff Measures practiced and dispute settlement cases involving selected WTO MembersWTO memberLicensing, prohibition andquantity controlsNon-Tariff MeasuresTechnical measuresincluding santary andphytosanitary measuresPrice controlof which antidumpingDISPUTE SETTLEMENTNumber of requests forconsultation in disputeswhere member iscomplainant/respondentChina 7/20Hong Kong (China) 1/0India 19/20Indonesia 5/4Japan 14/15Republic of Korea 14/14Malaysia 1/1Philippines 5/6Singapore 1/0Chinese Taipei 3/0Thailand 13/3Viet Nam 1/0Sources: Martinez et al. (2009); WTO Trade Profiles (2010).46

EndnotesI. From massdemand to globalsupply chains1Refers to the non-agricultural sector, based on the WTOdefinition which includes any product not in Annex 1 ofthe WTO Agreement on Agriculture (see www.wto.org/agriculture).2Multi-Agency Support Team (MAST), organized by UNCTADand made up of experts from several organizations dealingwith substantive analysis of non-tariff measures.II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth47

Trade Patterns and Global Value Chains in East AsiaV. Foreign directinvestment• Asia doubled its share of total FDI inflows from 1985 to 1995. In 2008, theshare was still nearly twice as high as in the mid-1980s.• China has emerged as an attractive destination for FDI flows, but its shareis declining, while that of India is rising.• Merchandise exports mirror increasing FDI inflows in most leading Asianeconomies.• FDI inflows to Asia are shifting from the manufacturing sector to services.48

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. The situation at a glanceB. A key factor in Asia’s trade growthC. Foreign direct investment: From manufacturing to servicesD. Investing abroad: Turnover of Japanese and US foreign affiliates in Asia on the rise50525556V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth49

Trade Patterns and Global Value Chains in East AsiaA. The situation at a glanceForeign direct investment (FDI) contributes tothe structural and geographical diversification ofmultinational enterprises. Its principal aims are to “sliceup” the production process and seize the comparativeadvantages particular to each participant in the supplychain (“efficiency-seeking FDI”), but also to gain accessto foreign markets and sell directly to clients (“marketseekingFDI”) (Figure 1). The impact on internationaltrade flows is a priori ambivalent as some investments willboost exchanges (in particular in intermediate goods),while others will reduce it (“build-where-you-sell”, seeChapter I). But FDI has been instrumental in the shiftto international production networks, and economiesthat have experienced the largest FDI inflows have alsoseen the largest expansion in merchandise exports. 1The fragmentation of production presents producers indeveloping countries with a golden opportunity to widentheir export markets. Indeed, developing economiesmake up three of the top six destinations for FDI flows,with China moving up to become the second largest FDIrecipient in 2009, 2 behind the United States.Figure 1Complementarity versus substitution between trade and FDICOUNTRY ACOUNTRY B“Market-seeking”(horizontal) FDIMultinationalenterprise(producer)Foreignsubsidiary(producer)FinishedproductsFinishedproductsMarket AMarket BFinishedproductsComponents“Efficiency-seeking”(vertical) FDIMultinationalenterprise(producer,marketer)FDIForeignsubsidiary(assembler)Finished productsTrade flowsFDI flowsSource: WTO Secretariat.FDI flows to Asia have leapt since the mid-1980s whenthey were just some US$ 5 billion a year. In 1990,these flows reached US$ 23 billion and by 2008 theyhad multiplied to US$ 307 billion, despite some largedeclines during and after the 1997-98 Asian financialcrisis. 3 Asia’s share of worldwide FDI inflows doubledbetween 1985 and 1995 – from 10 to 19 per cent– and has remained at that high level ever since (seeFigure 2). At the same time, Asia’s share in the exports ofintermediate goods climbed from 26 per cent in 1995 to35 per cent in 2009.50

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processFigure 2Regional share of FDI inward and outward flows in world – 1985, 1995 and 2008 (percentage)CIS505040302010046North America322924 24221985 1995 2008504030201003149Europe425035541985 1995 20085040403020100Middle East0 0 1 0 7 31985 1995 2008504030201001017Asia23 19 19161985 1995 2008Africa3020Central and South America5040301001 0 120 51985 1995 20085040302010041985 1995 2008141 20201008 1 1 26 71985 1995 2008Inward OutwardSource: UNCTAD Stat Database.III. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth51

Trade Patterns and Global Value Chains in East AsiaFigure 3 shows the evolution of the regional breakdownin value terms. Europe’s FDI inflows still tower over therest of the world, but Asia has become increasinglyattractive, surpassing North America in 2005, a year inwhich the latter suffered a sharp decline.Figure 3FDI inflows by region and world level (in billions of US$)1,6551,6001,5001,4001,3671,3001,2001,1001,0009979008007006005004003003182001000521985 1995 2000 2005 2008Europe North America Asia Central and South AmericaCIS Middle East Africa WorldSource: UNCTAD Stat Database.B. A key factor in Asia’s trade growthWhen measured in relation with the country’s grossdomestic product (GDP), China’s FDI inflows peakedin 1995. Its share of overall Asian FDI has declined,while others, such as India and Viet Nam, have becomeincreasingly important destinations. Nevertheless, interms of the levels of FDI, China and Hong Kong (China)still absorb the largest amounts in the region (see Figures4 and 5).Figure 5 shows the level of merchandise exports and FDIinflows in 1985, 1995 and 2008. As already mentioned,there is not always a direct positive relationshipbetween FDI and exports. But it is interesting to notethe difference between mature industrial economies,such as Japan in 1995, and an emerging economy suchas China in 2008. Japan, as a large mature economy,dominated exports in 1995, but ranked relatively low oninward FDI flows. China, on the other hand, is dominantfor both exports and FDI flows in 2008. Interestinglyenough, India in 2008 is in the same situation Chinawas in 1995, with relatively low exports but high FDIinflows.52

Figure 4FDI inflows received by selected Asian economies (percentage of GDP and economies’ shares in Asia)I. From massdemand to globalsupply chains198519900,6 1,0-0,8As percentage of GDP19955,24,3 4,32000 2005 2008 20093,4 3,2 2,4 1,936,618,927,7ChinaHong Kong(China)1985 1995 2000 2005 20082639As share in FDI inflows to Asia4121521042203519II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chains0,0 0,1 0,6 0,8 0,93,3 2,6India25 6413IV. The evolutionof tariff policiesJapan0,0 0,1 0,0 0,2 0,1 0,5 0,215,1 13,717,812,35,99,20,6Singapore5105139 826 94V. Foreign directinvestment2,9 1,8 0,9Indonesia53VI. IntegrateddiversityThailand0,43,0 1,2 2,8 4,6 3,1 2,30,2 0,3 0,21,7 0,8 0,90,0Korea, Rep. of264 3 534 3 43VII. An evolutionaryperspective onproduction networksin the Asia-US region0,02,88,6 4,1 3,88,94,9Viet NamMalaysia11 113VIII. Trade inintermediate goods2,25,9 6,5 4,0 2,9 3,30,7Chinese Taipei230 3 224 1 21IX. Vertical tradeand trade invalue addedPhilippines0,3 1,22,03,01,9 0,9 1,21Sources: UNCTAD Stat Database and World Bank, World Development Indicators Database.02 11X. Cross-regionalspillover ofeconomic growth53

Trade Patterns and Global Value Chains in East AsiaFigure 5FDI inflows and merchandise exports to/of selected Asian economies – 1985, 1995 and 2008 (in millionsof US$)1985Exports200,0002,5002,000150,0001,500100,000 1,000FDI50,00050000 -500JapanChineseTaipeiKorea, Rep. ofHong Kong(China)ChinaSingapore1995IndonesiaMalaysiaIndiaThailandPhilippinesViet Nam500,00040,00035,000400,00030,000Exports300,00025,00020,000FDI200,000 15,000100,0000 0JapanHong Kong(China)ChinaKorea, Rep. ofSingaporeChineseTaipei2008MalaysiaThailandIndonesiaIndiaPhilippinesViet Nam10,0005,0001,600,000120,0001,400,000100,0001,200,000Exports1,000,00080,000800,000 60,000FDI600,00040,000400,000200,00020,0000 0ChinaJapanKorea, Rep. ofHong Kong(China)SingaporeChineseTaipeiMalaysiaIndiaThailandIndonesiaViet NamPhilippinesMerchandise exportsFDI InflowsSources: ITC Investment Map and WTO Secretariat.54

C. Foreign direct investment: From manufacturing to servicesI. From massdemand to globalsupply chainsIncreasingly, companies are offshoring not onlymanufacturing but also parts of their business functions,such as accounting or similar activities. Multinationalcompanies are often the driving force behind thistrend, which is reflected in a shift in FDI flows fromthe so-called secondary (mainly construction andmanufacturing) to the tertiary (services) sector.A large part of FDI flows to China, Malaysia, Thailandand Viet Nam still go to the secondary sector. Malaysiaand Viet Nam are in fact exceptions to the generalregion-wide trend of shifting to the tertiary sector: bothFigure 6FDI inward flows by sector (in millions of US$)have witnessed surges reflecting the consolidation ofMalaysia’s role in global value chains, or the relativelyrecent insertion of Viet Nam. On the other hand,although Singapore was receiving US$ 8.2 billionof FDI inflows to the manufacturing sector in 2000,these slumped to US$ 1.5 billion in 2005. During thesame period, FDI flows to the tertiary sector increasedfrom US$ 7.4 billion to US$ 18.9 billion. A similartrend was observed in India, where investments to thetertiary sector increased from US$ 0.8 billion in 2000to US$ 16.7 billion in 2008 (see Figure 6).II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesJapanChina30000 80000 25002000060000 2000Viet Nam25002000PhilippinesV. Foreign directinvestment10000040000 150020000 10000 50015001000500VI. Integrateddiversity-10000020052008-20000 02000 20062000 200502000 2008250002000015000100005000010000India2000 2008IndonesiaThailandHong Kong (China)10000 1000005000500000-5000 02000 20082000 2008MalaysiaUnited States100004000003000020000100000-100000Singapore2000 2005VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goods50000-500080006000400020000300000200000100000PrimarySecondaryTertiaryUnspecified (merchandiseand services)IX. Vertical tradeand trade invalue added-100002000 2005Source: ITC Investment Map.-20002000 200802000 2008X. Cross-regionalspillover ofeconomic growth55

Trade Patterns and Global Value Chains in East AsiaD. Investing abroad: Turnover of Japanese and US foreign affiliates in Asiaon the riseThe relationship between multinational firms and theirpartners abroad can range from simple joint ventures orcontractual arrangements to acquiring shares, taking acontrolling stake or launching a full takeover. So called“green field” FDI refers to cases where the affiliate isbuilt from scratch, rather than by taking control of anexisting company. Because FDI implies a long-termcommitment and high financial stakes, it is a complexdecision-making process which involves not onlyeconomic considerations, but also institutional, politicaland cultural ones. More than 50 per cent of affiliatescontrolled by Japanese companies are located in Asia.Their turnover grew steadily throughout the 2000s (seeFigure 7).Figure 7Turnover of Japan’s majority-owned affiliates in manufacturing, 2000-2007 (Index, 2000=100)1000900800700600500400300200100AsiaChinaHong Kong (China)IndonesiaIndiaKorea, Rep. ofMalaysiaPhilippinesSingaporeThailandChinese Taipei0Source: OECD.Stat Database.Study of majority-owned affiliates of US companiesshows that US companies were particularly active inChina, India and Indonesia, where turnover grew fastest(see Figure 8).Figure 8Turnover of US majority-owned affiliates in manufacturing, 2000-2007 (Index, 2000=100)600Asia500ChinaHong Kong (China)400Indonesia300IndiaPhilippines200Singapore100ThailandChinese Taipei020002001200220032004200520062007200820002001200220032004200520062007Source: OECD.Stat Database.56

EndnotesI. From massdemand to globalsupply chains1See Broadman (2005), Chapter 7.2UNCTAD, World Investment Report.3UNCTAD, FDI database.II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth57

Trade Patterns and Global Value Chains in East AsiaVI. Integrated diversity:The production systemand employment inthe Asia-US region• Structural diversity and a high degree of complementarity arecharacteristic features of production systems in the Asia-US region.• The complementarity of production systems is both a cause and anoutcome of deepening economic interdependency among countries. Theforces for regional integration were first centred on Japan, and graduallyshifted to China.• Global value chains translate into “trade in tasks”, with partnersspecializing in specific skills according to their comparative advantages.This creates new trade and job opportunities, the net balance of whichdepends on the labour intensity of the products and the overall tradebalance of each economy.58

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. Structural diversity and complementarity of the Asia-US regionB. The impact of international trade on employment6068V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth59

Trade Patterns and Global Value Chains in East AsiaA. Structural diversity and complementarity of the Asia-US regionAs shown in the previous chapter, global value chainsfoster the parallel development of trade and foreigndirect investment. Industrial clusters created by supplychains tend to grow up around specific tasks andbusiness functions. The process is cumulative and, intime, modifies the production system of an economy.The last few decades have been marked by a series ofmajor events that have moulded the current landscapeof Asia’s production systems. The Plaza Agreement in1985, for example, led to a sharp appreciation of the yenagainst the US dollar. This made domestic productionrelatively expensive for Japanese manufacturers and thusdrove them to a massive relocation of production basesin neighbouring Asian countries. This movement wasreinforced a decade later by the Asian currency crisis of1997, which forced some emerging economies in EastAsia to stop pegging their currencies to the US dollardue to a shortage of foreign reserves. The consequentshift to floating exchange rates resulted in an immediatedepreciation of their currencies against the yen and theUS dollar.The accession of China to the WTO in 2001, and that ofChinese Taipei in 2002, accelerated the reorganisationof regional production systems. China was extremelysuccessful in promoting its exports, notably in the case ofthe special economic zones along its coastal areas (seeChapters II and X). This encouraged a massive inflowof foreign capital and made the country internationallyrecognized as “the factory of the world”.This dynamic reorganisation of the production systemhas opened up a number of development paths for Asiancountries. Figure 1 compares the industrial profiles ofnine East Asian economies for 1985 (the green line) and2005 (the black line). Each chart in the diagram presentsan economy’s degree of specialization in 24 aggregatedindustrial sectors. The degree of specialization is attainedby measuring the extent to which an industry’s share ofan economy deviates from the regional average (seethe technical notes). It is apparent from the charts thatthe degree and form of specialization differ significantlybetween countries, revealing sharp industrial diversityand heterogeneity in the region. 1The degree of economic diversity among countries isfurther illustrated by Box 1 and Figures 2, 3 and 4, whichare known as “skyline charts”.Comparing the chart of the United States with that ofChina, the difference is apparent. The US skyline ismuch flatter, showing very little over- or underproductionof the economy. Also, the output share of the servicesector is remarkably large. These observations are ratherstraightforward illustrations of two famous classicalstatements: Leontief’s proposition on the structureof development, and the Law of Petty-Clark. WassilyLeontief, the founder of input-output economics, believedthat the maturity of an economy can be observed inthe form of a flat skyline, where full self-sufficiency isachieved without too much reliance on foreign marketsfor demand and supply of products. 2 The Law of Petty-Clark, on the other hand, states that when the per capitaincome of an economy rises, the share of its industrialoutput shifts from primary to secondary, and then fromsecondary to tertiary industries. In this respect, the USeconomy certainly falls under the category of a “maturedand advanced” industrial structure, while China’s doesnot reflect the same development path.Japan, another advanced economy in the region, exhibitsa similar pattern to that of the United States, althoughthe predominance of the service sector is less salient.Japan’s skyline also features some “humps” overmanufacturing sectors, which point to a surplus vis-à-visdomestic production requirements. Indonesia’s skylinehas a prominent standalone skyscraper in the primaryindustry, which is the crude petroleum and natural gassector (006).The Republic of Korea, Singapore and Chinese Taipei,which belong to the newly industrialised economies(NIEs), and Malaysia, the Philippines and Thailand, to begrouped as the emerging ASEAN economies, all exhibita similar pattern, with highly overshooting productionsurpluses in the computer and electronic equipmentsector (018). Comparing the two groups, the emergingASEAN economies slightly lag in terms of Petty-Clark’sdevelopment scenario, even though the productionsurplus of their electronic equipment industriessignificantly surpasses that of the NIEs.Despite a high degree of diversity among individualcountries, the Asia-US region as a single economic entitypresents quite a balanced and complete profile. Figure 4illustrates this point. The skyline is very flat, and staysclose to the self-sufficient benchmark for the whole rangeof industries (with some surplus in the manufacturingsectors). Even though each of the constituent economiesof the region is quite heterogeneous, the Asia-US regionexhibits a high level of self-sufficiency, revealing thestrongly complementary nature of the region’s productionsystems. 360

Figure 1Industrial specialization of selected Asian countries, 1985 and 2005 (index)I. From massdemand to globalsupply chains021020021020ChinaRepublic of Korea001019 007018017023 024022016015014001019 007018017021020023 024022016013002012Philippines002003004015011014 013 012003004011010010005006008009005006008009019 007018017IndonesiaMalaysiaSingaporeSource: The Asian International Input-Output Tables, 1985 and 2005 (preliminary), IDE-JETRO.021020019 007018017023 024022016021020015014001013002012003004011010005006008009019 007017024 001 002023022016015014013012003004023 024 001 002001003023 024 002003022004022004016015014013012011010005006008009018021020011010005006008009019 007018017016015014 013 012001 Rice (paddy) 013 Petroleum and petro products002 Other agricultural products 014 Rubber products003 Livestock and poultry 015 Non-metallic mineral products004 Forestry 016 Metals and metal products005 Fishery 017 Machinery006 Crude petroleum and natural gas 018 Transport equipment007 Other mining 019 Other manufacturing products008 Food, beverage and tobacco 020 Electricity, gas and water supply009 Textile, leather, and the products thereof 021 Construction010 Wooden furniture and other wooden products 022 Trade and transport011 Pulp, paper and printing 023 Other services012 Chemical products 024 Public administration011010005006008009021020Japan001019 007018017021020019018017021020023 024022016015014013002012Chinese TaipeiThailand001013003004011010005006008009006019 007018017023 024022016023 02402201601501401501400101300201200201200300401100300401101001000500600500800900700800919852005II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth61

Trade Patterns and Global Value Chains in East AsiaBox 1. The skyline chartThe skyline chart is a useful tool for analysing a domestic economy’s self-sufficiency and industrial structure. Each of the buildings/towers in a skyline corresponds to one particular industry in the economy, and the shape of the building is determined by twofactors: the width represents the output share of the industry, and the height represents its self-sufficiency ratio.For the sake of simplicity, let us take just one “building” in a skyline chart, corresponding to a particular industry in the economy(see Figure 2 below). The demand structure is considered first. The total demand for a product is either induced by domesticdemand such as consumption and investment, or by foreign demand in terms of export. From the bottom of the building, theamount of output induced by domestic demand is taken to be 100%. On top of this, the building gains extra height from theamount of output induced by export demand, as a percentage of this basic structure.The economy would be self-sufficient if it could satisfy all of the induced demand by its own domestic production, but this is notthe case in reality. If domestic output is in short supply, the economy has to import products from overseas. This is indicated byadding two floors to the building. The top floor shows the amount of domestic output saved or displaced by imports. The bottomfloor, therefore, indicates the self-sufficiency ratio of the industry.Note that Figure 2 has three tiers. The top two correspond to the breakdown of the effects of imports from the Asia-US region (inlight purple) and imports from outside the region (in dark purple), respectively.Figure 2The skyline chartExport-inducedoutputImport-inducedoutput(negative)100%TOTAL DEMANDDomesticdemand-inducedoutputSelf-sufficiencyratioTOTAL SUPPLYOutput ShareSource: IDE-JETRO.Self-sufficiency ratio Import from outside the region Import from the region001 Rice (paddy)002 Other agricultural products003 Livestock and poultry004 Forestry005 Fishery006 Crude petroleum and natural gas007 Other mining008 Food, beverage and tobacco009 Textile, leather, and the products thereof010 Wooden furniture and other wooden products011 Pulp, paper and printing012 Chemical products013 Petroleum and petro products014 Rubber products015 Non-metallic mineral products016 Metals and metal products017a Industry machinery017b Computers and electronic equipment017c Other electrical equipment018 Transport equipment019 Other manufacturing products020 Electricity, gas, and water supply021 Construction022 Trade and transport023 Other services024 Public administration62

Figure 3The skyline charts of the countries in the Asia-US region, 2005I. From massdemand to globalsupply chains600550500450400350300ChinaII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chains250200150100IV. The evolutionof tariff policies500001002003004005007008009010011012013014015016017a017b017c018019020021022023024V. Foreign directinvestment006SECTOR CODES600Agricultureand miningManufacturingUnited StatesServicesVI. Integrateddiversity550500450400350300250200VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goods150100500IX. Vertical tradeand trade invalue added001008010005 002017a017c018019020021022023024Agricultureand mining011012013014016017bManufacturingSECTOR CODESServicesX. Cross-regionalspillover ofeconomic growth63

Trade Patterns and Global Value Chains in East Asia600Japan550500450400350300250200150100500001004 003 006009011012014013015016017a017b017c018019020021022SECTOR CODES023024Agricultureand miningManufacturingServices600Indonesia550500450400350300250200150100500004001002003005006007012014008009010011013015016017b017c018019020021017a022023024SECTOR CODESAgricultureand miningManufacturingServices64

The Republic of Korea, Chinese Taipei and SingaporeI. From massdemand to globalsupply chains55050045040017001150II. Organizationof the globalproduction process3503002502001050III. Infrastructureservices in globalvalue chains15010050IV. The evolutionof tariff policies0001002011010003007005012013015014016017a017bV. Foreign directinvestment550Malaysia, the Philippines and Thailand1850VI. Integrateddiversity5004504003503001100900VII. An evolutionaryperspective onproduction networksin the Asia-US region250200150100VIII. Trade inintermediate goods500001002003005007008009010012013017a017b017cIX. Vertical tradeand trade invalue added004006011016017c018019020021022SECTOR CODES023024ManufacturingServicesAgricultureand mining018019020021022023024Agricultureand mining015014ManufacturingSource: The Asian International Input-Output Table, 2005 (preliminary), IDE-JETRO.SECTOR CODESServicesX. Cross-regionalspillover ofeconomic growth65

Trade Patterns and Global Value Chains in East AsiaFigure 4The skyline chart of the whole Asia-US region600550500450400350300250200150100500003002001007008009010011012013015016017b017c018019004014017a020021022023024SECTOR CODESManufacturingServicesAgricultureand miningSelf-sufficiency ratioImport from outside the regionSource: The Asian International Input-Output Table, 2005 (preliminary), IDE-JETRO.The complementarity of Asian production systems isboth a cause and a result of the deepening economicinterdependency between countries. Figure 5 tracesthe development of cross-border supply networks forintermediate products over the last two decades. Thediagrams are contour maps drawn according to the“strength” of linkages, or interconnectedness, betweencountries, as defined by a simple average of forward andbackward linkages across industries (see the technicalnotes for further description). In 1985, it can be seenthat the cross-national linkages were quite weak andsporadic. From the 1990s onwards, however, thelinkages started to develop around Japan. By 2005, theyhad spread further and captured most of the region,becoming especially intense around China.66

Figure 5Development of cross-national production linkages, 1985-2005I. From massdemand to globalsupply chains1985ChinaIndonesia1995ChinaIndonesiaII. Organizationof the globalproduction processJapanKorea, Rep. ofMalaysiaChinese TaipeiJapanKorea, Rep. ofMalaysiaChinese TaipeiIII. Infrastructureservices in globalvalue chainsPhilippinesSingaporeThailandPhilippinesSingaporeThailandIV. The evolutionof tariff policiesChina Japan Malaysia Philippines ThailandIndonesia Korea,Rep. ofChineseTaipeiSingapore UnitedStates2000United StatesChinaIndonesiaJapanChina Japan Malaysia Philippines ThailandIndonesia Korea,Rep. ofChineseTaipeiSingapore UnitedStates2005United StatesChinaIndonesiaJapanV. Foreign directinvestmentVI. IntegrateddiversityKorea, Rep. ofKorea, Rep. ofChina Japan Malaysia Philippines ThailandIndonesia Korea,Rep. ofChineseTaipeiSingapore UnitedStatesMalaysiaChinese TaipeiPhilippinesSingaporeThailandUnited StatesChina Japan Malaysia Philippines ThailandIndonesia Korea,Rep. ofChineseTaipeiSingapore UnitedStatesMalaysiaChinese TaipeiPhilippinesSingaporeThailandUnited StatesVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsSources: The Asian International Input-Output Tables, 1985, 1995, 2000 and 2005 (preliminary), IDE-JETRO.IX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth67

Trade Patterns and Global Value Chains in East AsiaB. The impact of international trade on employmentDeepening economic interdependency has significantimplications for the employment structure of the region.Job opportunities travel across borders as countriesengage in international trade, and the relationshipbetween trade and employment is always at the heart ofdebates over the issue of globalization.International trade affects employment in bothmacroeconomic and microeconomic ways. The numberof jobs associated with trade is determined by overalltrade balances, with a positive balance favouring a netincrease in demand for labour. But demand for labouris also affected by the structure of trade. Net exportsof services, for example, are more labour-intensive thanthose of mining. The composition of the labour forcedepends on the comparative advantage of each economyin global value chains; some economies focus on tasksrequiring high-skilled employees, such as research anddevelopment (R&D), while others specialize in low-skilledmass production.The Asian International Input-Output Table, whenconnected to the labour statistics of each individualcountry, can be extended to analysing the impact ofinternational trade on employment. Table 1 presentsmatrices of the cross-border transfer of employmentopportunities among the countries of the region for 2000and 2005 (see the technical notes for the calculationmethod). The table gives the simulated number of jobsgenerated in each country (shown in the left column), bythe final demand of its trade partners (shown in the toprow).The findings provide strong evidence for the benefitsof international trade because of the numerous jobopportunities considered to have been generatedthrough countries’ engagement in regional trade.Also, the simulated numbers significantly increasedover time for most countries, reflecting the deepeninginterdependency of regional employment.Table 1Cross-border transfer of employment opportunities, 2000 and 2005 (thousands of persons)2000 China Indonesia Japan Korea,Rep. ofMalaysiaChineseTaipeiPhilippines Singapore Thailand UnitedStatesChina 911 18,817 3,406 916 1,425 362 839 992 28,509 56,177Indonesia 1,138 3,733 702 612 591 244 525 399 5,406 13,350Japan 420 66 264 112 285 63 94 123 1,816 3,244Korea, Rep. of 340 32 373 30 88 31 25 29 736 1,685Malaysia 201 47 569 109 111 50 260 84 1,051 2,484Chinese Taipei 373 22 318 59 42 25 21 38 722 1,620Philippines 314 30 1,506 228 127 213 52 98 2,780 5,348Singapore 33 8 43 18 31 20 14 16 146 328Thailand 473 149 1,539 182 278 243 123 247 2,516 5,751United States 250 38 822 237 69 214 45 65 61 1,801Total 3,543 1,303 27,720 5,206 2,221 3,190 956 2,128 1,839 43,682 91,787Total2005 China Indonesia Japan Korea,Rep. ofMalaysiaChineseTaipeiPhilippines Singapore Thailand UnitedStatesChina 1,943 23,266 5,521 1,055 2,617 481 844 2,032 51,542 89,301Indonesia 1,795 3,032 746 610 417 166 686 508 4,422 12,382Japan 1,003 110 425 62 349 57 46 204 1,754 4,009Korea, Rep. of 727 44 330 20 71 18 12 45 599 1,866Malaysia 1,030 170 776 221 156 62 185 300 2,044 4,944Chinese Taipei 818 31 308 83 32 33 13 55 593 1,966Philippines 1,565 107 1,249 282 101 204 34 238 1,606 5,385Singapore 82 59 69 58 27 15 12 23 110 456Thailand 1,203 422 1,568 246 249 213 94 122 2,418 6,536United States 406 56 661 245 40 147 48 69 82 1,753Total 8,629 2,942 31,258 7,827 2,195 4,189 973 2,010 3,486 65,089 128,598TotalSources: The Asian International Input-Output Tables, 2000 and 2005 (preliminary), IDE-JETRO.68

Table 2 shows disaggregated results for each industrialsector in 2005. The simulated number for the agriculturalsector is remarkably large, yet the result requires carein its interpretation. Full engagement of workforceis relatively rare in rural areas where agriculturalindustries predominate (the presence of “disguisedunemployment”), and it may thereby overstate the impacton employment creation of primary industries.Service sectors are generally considered labourintensive.Within the service sector, the share of tradeand transport is more or less the same for most countries.But there is significant variation in the “other services”section, reflecting differences in the sort of businessescategorized under this heading.I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processTable 2Cross-border transfer of employment opportunities by industrial sector, 2005 (thousands of persons andpercentage)2005 Agriculture,forestry andfisheryChina 30,60734.3%Indonesia 5,38243.5%Japan 45111.2%Mining Manufacturing Electricity,gas andwater supply2,0172.3%3693.0%30.1%25,95229.1%1,96715.9%1,72242.9%9761.1%180.1%180.5%Construction2560.3%540.4%431.1%Trade andtransport20,64423.1%3,44127.8%1,11927.9%Other services8,8499.9%1,1519.3%65316.3%Total89,301100.0%12,382100.0%4,009100.0%III. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesKorea, Rep. of 25313.6%Malaysia 92518.7%Chinese Taipei 1266.4%60.3%280.6%20.1%79342.5%1,64033.2%1,17359.7%70.4%150.3%80.4%50.3%931.9%160.8%52127.9%1,74835.4%32216.4%28015.0%49510.0%31816.2%1,866100.0%4,944100.0%1,966100.0%V. Foreign directinvestmentPhilippines 1,98236.8%Singapore 71.5%Thailand 3,60055.1%390.7%00.00%140.2%1,16121.6%26758.6%1,50723.1%280.5%10.3%110.2%1833.4%20.5%80.1%1,62630.2%459.9%80812.4%3676.8%13329.2%5879.0%5,385100.0%456100.0%6,536100.0%VI. IntegrateddiversityUnited States 1106.3%201.1%67538.5%171.0%160.9%39522.5%51929.6%1,753100.0%Total 43,44333.8%2,4991.9%36,85828.7%Source: The Asian International Input-Output Table, 2005 (preliminary), IDE-JETRO.1,0990.9%6780.5%30,66923.8%13,35210.4%128,598100.0%VII. An evolutionaryperspective onproduction networksin the Asia-US regionFigure 6 illustrates the contribution made to employmentcreation by both domestic and cross-border sources ofdemand. As can be seen, foreign final demand is quiteimportant for job creation in many East Asian countries.Particularly salient are the cases of Malaysia andSingapore, followed by Chinese Taipei and Thailand. Incontrast, the United States and Japan, even allowing forthe size of their economies, are far more domesticallyoriented. The figures refer to a pre-crisis year (2005),when global imbalances were growing. The postcrisisrebalancing of this macroeconomic distortionshould contribute to the establishment of a sustainableproduction system in the Asia-US region.VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth69

Trade Patterns and Global Value Chains in East AsiaFigure 6Contribution to employment creation, by source of demand, 2005 (percentage)1009080706050403020100China Indonesia Japan Korea, Rep. of Malaysia Chinese Philippines Singapore Thailand UnitedTaipeiStatesSource of employment creationDomestic final demandChina’s final demandUS final demandJapan’s final demandNIES3 final demandASEAN4 final demandOther countriesSource: The Asian International Input-Output Table, 2005 (preliminary), IDE-JETRO.Production techniques differ from country to country,according to comparative advantages. Developedeconomies tend to become vertically specialized inhighly-skilled tasks. Specialization can also lead tothe production of different varieties of broadly similarproducts. Work done by the economist Peter K. Schottindicates, for example, that high-wage economiesproduce and export better quality products than their lowcostcompetitors. This greater variety of similar productsoffered by trade contributes to the final consumers’welfare by offering a choice of price and quality.The relative contribution of different labour skillsembedded in exports can be identified by pairinginternational input-output data with other economicand labour surveys. The results presented in Figure7 are derived from preliminary data obtained by theWorld Input-Output Database (WIOD) project. Theycontrast the labour composition in net trade of threeEast Asian countries (China, Japan and the Republic ofKorea), which represent different stages of economicdevelopment. China specializes in low-skill jobs, and thisspecialization has increased since 1995, reflecting theparticular role the economy plays in East Asian supplychains (as well as higher wages paid to unskilled factoryworkers). Japan, in contrast, has specialized in exportactivities that are intensive in medium- and high-skilledlabour. The Republic of Korea, which had adopted anapproach halfway between the two, has recently movedcloser to the Japanese pattern.70

Figure 7Labour content of net trade by skill level, China, Japan and the Republic Korea, 1995-2006 (percentage)I. From massdemand to globalsupply chains1008060China1008060Japan1008060The Republic of KoreaII. Organizationof the globalproduction process40200-20-4040200-20-4040200-20-40III. Infrastructureservices in globalvalue chains-60-60-60Low skill Medium skill High skillLow skill Medium skill High skillLow skill Medium skill High skill1995 2006Note: Percentage of the total value of the domestic labour cost embedded in traded products. Net trade represents exports minus imports.Source: Adapted from M. Timmer (unpublished) on the basis of preliminary results from the WIOD project (www.wiod.org).IV. The evolutionof tariff policiesSimilar results are observed in case studies of the globalvalue chains of a specific product. Using the iPod asan example of global manufacturing, Linden, Dedrickand Kraemer (2009) estimate that this product and itscomponents created about 41,000 jobs worldwide in2006, of which about 27,000 were outside the UnitedStates and 14,000 within it (including retail). The jobslocated outside the United States were mostly in lowwagemanufacturing. The employment generated withinthe United States was more evenly divided between highwageengineers and managers (over 6,000 professionaland engineering jobs) and low-wage retail and nonprofessionalworkers (close to 8,000, although thesejobs are not dependent on the cross-border organizationof the supply chains).V. Foreign directinvestmentVI. IntegrateddiversityEndnotes1However, the level of heterogeneity, as defined by the industrialaverage of Coefficients of Variation, has decreased over time,from 45.8 in 1985 to 41.7 in 2005, showing some convergencein industrial profiles among countries in the last two decades.2See Leontief (1986).3The issue is fully discussed in Ozaki (2004) for the caseof the EU, and in Washizu (2008) for the case of East Asia.The work here in this chapter is just to confirm the findings ofthese previous studies by using more recent data.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth71

Trade Patterns and Global Value Chains in East AsiaVII. An evolutionaryperspective on productionnetworks in theAsia-US region• In the last two decades, the regional production network of the Asia-USregion has been strengthened by a number of key players, while showinga gradual shift of weight towards China.• The supply chains in East Asia are characterized by a high degree offragmentation and sophistication, incorporating substantial amounts ofvalue-added from the countries involved.• The growing presence of China and a relative decline of the United Statesand Japan can be seen in the international distribution of value addedand the emergence of a “tri-polar trade” structure.72

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. Evolution of regional production networksB. Cross-border transfer of value added in the Asia-US region7476V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth73

Trade Patterns and Global Value Chains in East AsiaA. Evolution of regional production networksThe last few decades have witnessed the rapiddevelopment of vertical production networks within theAsia-US region. Production processes are fragmentedinto several stages and countries specialize in eachproduction stage according to their own comparativeadvantages.For World Bank economist Nihal Pitigala, East Asia’semerging economies have benefited considerably fromthe development of vertical production networks. Thesenetworks have enabled them to join at the productionstage that best corresponds to their level of technology,with the result that they have enjoyed rapid trade andoutput growth.In order to investigate the backdrop to the rapiddevelopment of vertical production networks, crossbordersupply chains in the Asia-US region will beevaluated from the perspective of the “strength” and“length” of their linkages. Figure 1describes the evolutionof regional networks over the last two decades. Arrowsrepresent selected supply chains among the countries ofthe region, with the direction of the arrows correspondingto the flow of intermediate products. Each arrow has twofeatures: thickness and length. The thickness indicatesthe strength of linkages between industries, while thelength, as measured against the rings in the background,indicates the level of technological fragmentation ofthat particular supply chain (see Appendix 2 for thevisualization method.)In 1985, there were only four key players in the region:Indonesia (I), Japan (J), Malaysia (M) and Singapore(S). The basic structure of the production network wasthat Japan built up supply chains from resource-richcountries like Indonesia and Malaysia. In this initial phaseof regional development, Japan drew on a substantialamount of productive resources (natural resources) fromneighbouring countries to feed to its domestic industries.By 1990 the number of key players had increased.In addition to the four countries already mentioned,Japan had extended its supply chains for intermediateproducts to the Republic of Korea (K), Chinese Taipei(N) and Thailand (T). While still relying on the productiveresources of Indonesia and Malaysia, Japan started tosupply products to other East Asian countries, especiallyto the newly industrialized economies (NIEs). This isthe phase when the relocation of Japanese productionbases to neighbouring countries, triggered by the PlazaAgreement in 1985, was accelerating. It saw the buildingof strong linkages between core parts’ suppliers in Japanand their foreign subsidiaries.Then in 1995, the United States (U) came into thepicture. It drew on two key supply chains originating inJapan, one via Malaysia and the other via Singapore.These two countries came to bridge the supply chainsbetween East Asia and the United States. Also to benoted is the length of the arrows between Malaysia andSingapore. Compared to others, their shortness indicatesthat the supply chains involve fewer production stages,suggesting that the degree of processing is relativelylow. The product flows between these countries areconsidered to be distributional rather than value adding.In 2000, on the eve of its accession to the WTO, Chinabegan to emerge as the third economic giant. The countryentered the arena with strong production linkages to theRepublic of Korea and Chinese Taipei. It then gainedaccess to Japanese supply chains through the latter.The United States also brought a new supply chain fromthe Philippines (P), and thus the basic structure of thetri-polar production network in the Asia-US region wascompleted. 1The regional production networks thereafter showeddramatic development. By 2005, the centre of thenetwork had completely shifted to China, pushing theUnited States and Japan to the periphery. China becamethe core market for intermediate products, from whichfinal consumption goods were produced for export to theUnited States and to European countries. Also of note isthe nature of the supply chains that China develops withothers. The notable length of the arrows surroundingChina indicates that the supply chains towards Chinaare characterized by a high degree of fragmentationand sophistication, incorporating substantial amountsof value-added from each country involved. Thecompetitiveness of Chinese exports, therefore, is notonly attributable to its cheap labour force, but also stemsfrom the sophisticated intermediate products it receivesfrom other East Asian countries, as embedded in goodslabelled “Made in China”. 274

Figure 1Evolution of regional production networks, 1985-2005I. From massdemand to globalsupply chainsI1985 1990KMJT JSINMSII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chains1995 2000IV. The evolutionof tariff policiesTJMSUTJMSUPV. Foreign directinvestmentNNCKVI. IntegrateddiversityNTPJC2005MSKUICIJKMChinaIndonesiaJapanRepublic of KoreaMalaysiaNPSTUChinese TaipeiPhilippinesSingaporeThailandUnited StatesVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedSource: IDE-JETRO.X. Cross-regionalspillover ofeconomic growth75

Trade Patterns and Global Value Chains in East AsiaB. Cross-border transfer of value added in the Asia-US regionThe evolution of regional production networks, asillustrated above, has created a distinctive structure forthe Asian-US production system, understood as the “tripolartrade through China” model. In this structure:1. East Asian countries, except China, producesophisticated parts and components and exportthem to China,2. China assembles them into final products, and3. these are further exported to the US market forconsumption.See chapter VIII (Section F) for more details on thesetrade interconnections.The “tri-polar trade through China” system hassignificantly enhanced China’s presence in the region,as demonstrated in Figure 2. The figure shows crossbordertransfers of value-added for the years 1985and 2005 (see the technical notes for the calculationmethod). The vertical axis indicates the degree of valueaddedthat each country is able to obtain from a givenlevel of final demands of other countries in the region (thevalue-added gain potential). The horizontal axis showsthe degree of value-added that each country can “giveout” to others in the same fashion (the value-added giveoutpotential). It is apparent from the figure that China’spresence has dramatically increased over the last twodecades, while the influence of the United States andJapan shows a sharp decline.Figure 2Cross-border transfer of value added in the Asia-US region, 1985 and 20055.04.54.03.5Value added gain potential3.02.52.0ChinaJapan1.5United States1.00.50.00.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0Value added give-out potential19852005Sources: The Asian International Input-Output Tables, 1985 and 2005 (preliminary), IDE-JETRO.76

Due to their relative size, other economies in the regionare less significant in terms of shaping the structureof value-added distribution. Nevertheless, if we lookmore closely at the cluster by origin (Figure 3), it turnsout that most of them have advanced in at least one ofthe two “potentials”, indicating that they have becomemore involved in regional production networks overthe decades. It is considered that these emergingeconomies, as a group, now have a significant influenceon the distribution of regional value-added.Figure 3Cross-border transfer of value-added in the Asia-US region, 1985 and 2005, emerging economiesI. From massdemand to globalsupply chainsII. Organizationof the globalproduction process1.00.9Korea, Rep. ofIII. Infrastructureservices in globalvalue chains0.8Value added gain potential0.70.60.50.40.3MalaysiaSingaporeIndonesiaThailandChinese TaipeiChinaIV. The evolutionof tariff policiesV. Foreign directinvestment0.20.1 Philippines0.00.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0VI. IntegrateddiversityValue added give-out potential19852005Sources: The Asian International Input-Output Tables, 1985 and 2005 (preliminary), IDE-JETRO.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsEndnotes1Interestingly, none of the poles, i.e. the United States, Japanand China, shows a direct linkage to either of the others.Instead, they are mutually connected only through the supplychains of other East Asian countries. This feature persistedeven in 2005.2Chapter IX presents new measures of international tradeaiming at identifying the origin of value-added embedded inthe final products of supply chains.IX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth77

Trade Patterns and Global Value Chains in East AsiaVIII. Trade inintermediate goods• Intermediate goods dominate world merchandise trade.• Europe and Asia lead trade in intermediate goods. Regional supplychains involve huge intra-Asian imports of intermediate goods.• “Tri-polar trade” between China, the United States and Japan sees thelatter two export intermediates to China and get more and more finalgoods in return.• Intermediate products traded by Asian economies are increasinglycomplex.78

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. Trade in intermediates: An indicator for offshoring activitiesB. Intermediate goods drive world tradeC. Europe and Asia lead trade in intermediate goodsD. Asia imports more intermediate goods than it exportsE. Intra-Asian trade in intermediate goods on the riseF. Bilateral trade in intermediate goods between China, Japan and the United StatesG. Towards more complex intermediate goods and concentrated trade80818285878889V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth79

Trade Patterns and Global Value Chains in East AsiaA. Trade in intermediates: An indicator for offshoring activitiesThe growing international flows in intermediate goods 1reflect the evolution of intra-industry trade, the impactof offshoring and the prominent role of networks ofmultinational enterprises (MNEs) in world trade. Acommon way to assess trade in intermediate goods isto use the United Nations’ Broad Economic Categories(BEC) classification, which groups commodities bymain end-use, principally distinguishing betweenconsumption, capital and intermediate goods.The definition and measurement of trade in “intermediateservices” is much more complex and subject tolimited data availability. 2 Currently no official tradeclassification enables precise differentiation betweenfinal and intermediate services. One way of assessinginternationally-outsourced intermediate services is toconsider trade in “other commercial services”, which isa very broad aggregate including a number of businessservices that can be subject to offshoring. See, forexample, Chapter II, Section C, on “Business processoutsourcing and computer services”.Figure 1 illustrates the historical evolution of trade inintermediates along with that of total trade in merchandiseand commercial services. It is apparent from the chartthat trade in intermediate goods and services hassignificantly increased in the last 20 years. This reflectsincreased globalization and the development of offshoringactivities (“slicing-up of the value-added chain” 3 ) in themanufacturing and business services sectors, leading tothe “trade in tasks” that has grown so markedly in recentyears.Figure 1Trends in world trade in merchandise and commercial services, 1995-2009 (Index, 1995=100)Note: Data are normalized at 100 in 1995.Sources: UN Comtrade Database and WTO estimates.80

B. Intermediate goods drive world tradeI. From massdemand to globalsupply chainsIn 2009, world exports of intermediate goods exceededthe cumulated amounts recorded for consumption andcapital goods (see Figure 2) and represented 51 percent of non-fuel merchandise exports. World exports ofintermediate goods nearly doubled between 1995 and2009, from around US$ 2,774 to US$ 5,373 billion (seeFigure 3), an annual average growth rate of 4.8 per cent.A feature of world trade in intermediate goods is thatits share of total trade has remained quite stable overthe past 15 years. As a matter of fact, world exports inthe three categories of goods – capital, consumptionand intermediates – evolved at similar speeds between1995 and 2009, in line with the overall growth of totalmerchandise trade. Intermediate goods are embedded infinal goods and the values generated within the differentintermediate trade flows are reflected in the subsequentflows of the final (consumer or capital) goods, hencethe stability of shares and growth between the threecategories.The apparent contradiction with the growth of internationalsupply chains is explained mainly by statistical effectsof reporting intra-firm trade and trade in goods sent/received for processing, and the difficulty of distinguishingintermediate from final goods in some categories. 4Figure 2World non-fuel merchandise exports by type of good, 1995-2009 (in billions of US$ and percentage)II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies60006Value (US$)5000400030002000100054321Annual average growth rate (%)V. Foreign directinvestmentVI. Integrateddiversity0ValueIntermediategoodsSources: UN Comtrade Database and WTO estimates.ConsumptiongoodsCapitalgoodsOthers notclassifiedFigure 3World non-fuel merchandise exports by type of good, 1995-2009 (in billions of US$)800070006000500040003000Annual average growth rate 1995 to 20090VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue added200010000199519981999Sources: UN Comtrade Database and WTO estimates.2000200120022003200420052006200720082009Intermediate goodsConsumption goodsCapital goodsX. Cross-regionalspillover ofeconomic growth81

Trade Patterns and Global Value Chains in East AsiaC. Europe and Asia lead trade in intermediate goodsIn 2009, the production and export of intermediate inputshave been mainly concentrated in Europe, Asia and NorthAmerica. Unlike those of Europe and North America, Asianexports of intermediate goods grew much faster (7.2 percent) than the world average (4.8 per cent) between 1995and 2009. Exports of intermediate goods from a fewdeveloping regions (Central and South America, Africa) andthe Commonwealth of Independent States (CIS) economiesgrew much faster than those from Western economies(see Figure 4). The volume of trade in intermediate goodsgives an indication of the level of integration of a region inproduction sharing. Although the overall value is still very lowcompared with Western economies, developing economiestend to join global supply chains at a sustained pace sinceit is a clear opportunity for them to enter international tradethrough production sharing.The shares of North American and European exportsof intermediate goods in world trade declined notablybetween 1995 and 2009 (see Figure 5), whereas Asia’sincreased by almost 10 percentage points, reaching 35 percent of world exports of intermediate inputs in 2009. WhileNorth American and European economies tend to furtherdiversify their trade in intermediates towards services,new international production capacity and related trade inmanufacturing intermediates are increasingly originating inAsia as a result of industrial fragmentation in this region.Figure 4Regional Exports of intermediate goods, 1995-2009 (in billions of US$ and percentage)6000Value (US$)500040003000200010001412108642Annual average growth rate (%)0WorldEuropeAsiaNorthAmericaC & SAmericaCISMiddleEastAfrica0Value (2009)Annual average growth rate 1995 to 2009Note: No data is available for Middle East for 1995.Sources: UN Comtrade Database and WTO estimates.Figure 5Regional shares in world exports of intermediate goods (percentage)Asia26% 17%North America3%Central and SouthAmericaAsia35%14%North America4%Central and SouthAmerica1%Middle East1%Africa2%CISSources: UN Comtrade Database and WTO estimates.1995 200950%Europe822%Middle East2%Africa2%CIS41%Europe

As shown in Figure 6, intermediate goods constitutemore than 60 per cent of Asia’s total imports. Asia isthe world’s key player in international production sharing,mainly in the processing and assembling of manufacturedgoods. However, the share of exports in intermediates isaround 50 per cent as Asia tends to transform importedintermediate goods into final goods for export.Figure 7 illustrates the magnitude of intra-regionalimports of intermediate goods as well as of major interregionalflows. At US$ 2,050 billion, Europe had thehighest value of intra-regional imports in 2008. Intraregionaltrade represented nearly half of its total importsof intermediate goods. Europe was followed by Asia, withUS$ 1,479 billion. Intra-regional exchanges representedmore than 64 per cent of Asia’s imports of intermediategoods, which underllines the high intensity of productionsharing in that part of the world.Figure 6Shares of intermediate goods in total non-fuel exports and imports, 1995-2009AsiaImportsAsia has not only developed its own industrial networks,it has also contributed to production chains linkedto Western economies. Accordingly, the major interregionalflows in intermediate goods involved Asia eitheras the origin (exporter) or as the destination (importer)of trade flows, essentially with its core partners NorthAmerica and Europe. For instance, the highest interregionalimport flows of intermediate goods wereobserved between Europe and Asia (US$ 384 billion)and between North America and Asia (US$ 330 billion).Asia has been a major supplier of intermediate goodsto North America. As a result, North America’s intraregionalimports of intermediate goods (US$ 412 billion)were – with a share of 39 per cent of its total imports ofthis type of goods – of lower importance than for Asiaand Europe.Exports1995 2000 2005 2008 2009 1995 2000 2005 2008 200960 62 65 66 64CIS66 67 70 7066I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentAfrica6455 55 5542CentralandSouthAmerica67 66 6663 64VI. IntegrateddiversityWorld 54 5452 53 52CentralandSouthAmerica52 55 55 55 52MiddleEastAfrica61 646546 47755969 6961VII. An evolutionaryperspective onproduction networksin the Asia-US regionEurope 53 50 5149 48MiddleEast51 5249NorthAmerica 49 47 46 4642 4143Asia 52 52 52 53 53NorthAmerica58 56 56 57 52World 52 52 52 53 51VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedCIS31Sources: UN Comtrade Database and WTO estimates.5142 4139Europe 49 49 4948 47X. Cross-regionalspillover ofeconomic growth83

Trade Patterns and Global Value Chains in East AsiaFigure 7Intra-regional and major inter-regional imports of intermediate goods, 2008 (in billions of US$)Imports of Asiafrom Europe:US$ 301 bnShare of 39%Intra-North Americanimports US$ 412 bnImports of Europefrom North America:US$ 202 bnShare of 71%Imports of Europefrom Asia:US$ 384 bnIntra-Europeanimports US$ 2050 bnImports of NorthAmerica from Europe:US$ 223 bnShare of 64%Intra-Asianimports US$ 1479 bnImports of NorthAmerica from Asia:US$ 330 bnImports of Asiafrom North America:US$ 287 bnTotal TradeIntra TradeShare of 25%Intra-CSAimports US$ 63 bnShare of 10%Intra-Africaimports US$ 19 bnSources: UN Comtrade Database and WTO estimates.The level of imports of intermediate goods for Central andSouth America, Africa, and Australia and Oceania was low,especially for intra-regional exchanges – all with shares ofbelow 30 per cent of total imports of intermediate goods.This reflects the fact that these regions are still newcomersto international production chains.84

D. Asia imports more intermediate goods than it exportsI. From massdemand to globalsupply chainsIn 2009, Asia imported more intermediate goods than itexported, showing its high level of engagement in worldproduction chains. Asia’s developing economies werethe principal contributors to this outcome as advancedeconomies like Japan and the Republic of Korea exportedmore intermediate goods than they imported. Chinaplays the role of assembler within the Asian region, itsimports in intermediate goods accounting for more than33 per cent of Asian imports of intermediates in 2009.As a consequence, China’s rankings – in terms of theshare of intermediates in its total trade – are invertedfor exports and imports (see Figure 8). Economies likeIndia and Viet Nam also had markedly higher shares ofintermediates in their imports than in their exports. Theopposite was the case for Japan and Chinese Taipei.Chinese Taipei had the highest share of intermediategoods in its exports among the major Asian traders. 5II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsFigure 8Share of intermediate goods in total non-fuel trade of major Asian traders, 2009 or latest year available(percentage)IV. The evolutionof tariff policiesExportsImports0 10 20 30 40 50 60 70 80Chinese72TaipeiSingapore 680 10 20 30 40 50 60 70Philippines 76China 7580V. Foreign directinvestmentIndonesia 68India 73Malaysia 68Philippines 63Hong Kong(China)Japan 56Republic ofKorea54Asia 53Thailand 52India 52China 39Viet Nam 33Sources: UN Comtrade Database and WTO estimates.Figure 9 presents the level of trade in intermediate goodsand average annual growth rates of the major Asiantraders. Within the top five exporters (China, Japan, theRepublic of Korea, Hong Kong (China) and Singapore),China grew the strongest. Its average growth rate of17 per cent is significantly above the Asian average.Of all the economies shown, only Viet Nam’s exports ofintermediate goods grew at a faster speed during thisperiod (23 per cent).59Malaysia 72ChineseTaipei71Thailand 71Republic ofKoreaViet Nam 70Indonesia 66Singapore 66Asia 64Hong Kong(China)Japan 51China was not only the top importer of intermediategoods in Asia, it was the largest in the world. This reflectsthe recent development of processing activities in Chinabased on inputs from other Asian economies, as wellas the development of a domestic industry. China, Indiaand Viet Nam have been the most dynamic importers ofintermediate goods within the last 15 years, with averagegrowth rates of between 12 and 16 per cent, far beyondthe regional average of 7 per cent.6070VI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth85

Trade Patterns and Global Value Chains in East AsiaFigure 9Exports and imports of intermediate goods of major Asian traders, 1995-2009 (in billions of US$ andpercentage)500Exports2545040020Value3503002502001501510Annual average growth rate1005500ChinaJapanRepublic ofKoreaHong Kong(China)SingaporeChineseTaipeiIndiaMalaysiaThailandIndonesiaPhilippinesViet Nam0Value (2009)Annual average growthrate 1995 to 2009Asia: Annual averagegrowth rate 1995 to 2009Imports7001860016Value5004003002001001412108642Annual average growth rate0ChinaRepublic ofKoreaHong Kong(China)JapanSingaporeChineseTaipeiIndiaMalaysiaThailandIndonesiaViet NamPhilippines0Value (2009)Annual average growthrate 1995 to 2009Asia: Annual averagegrowth rate 1995 to 2009Sources: UN Comtrade Database and WTO estimates.86

E. Intra-Asian trade in intermediate goods on the riseI. From massdemand to globalsupply chainsFigure 10 shows that for most of the major Asian traders,the share of intra-regional imports of intermediate goodsincreased significantly between 1995 and 2009. In thecase of Hong Kong (China), it was over 83 per cent forimports in 2009. For almost all economies, the intra-Asian part represented more than half of their trade inintermediate products, with the exception of India (40 percent for both flows in 2009). The importance of the regionalmarket remained more or less stable for China’s imports.But it fell for its exports from 70 per cent in 1995 to 51 percent in 2009. This is linked to China’s growing integrationin world markets (the growing global diversification ofChina’s markets, both for final and intermediate goods)and the generally strong increase in China’s trade volume.China’s trade surplus is generally linked to processingtrade activities 6 (see Chapter 2 on global production).As a result, it has positive trade balances with developedeconomies in processing trade, while the opposite is thecase for most of its East-Asian partners. Also, India’sintra-Asian share in total exports of intermediate goodsremained quite stable (41 per cent in 1995, 40 per cent in2009), while its share of imports increased.II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsFigure 10Intra-Asian imports and exports of intermediate goods, value and shares in total trade, 1995 and 2009(in billions of US$ and percentage)Imports90 700IV. The evolutionof tariff policiesShare8070605040302010600500400300200100ValueV. Foreign directinvestmentVI. Integrateddiversity0Hong Kong(China)ThailandIndonesiaMalaysiaSingaporeRepublicof KoreaShare (1995) Share (2009) Value (2009)Exports90 500ChinaJapanIndia0VII. An evolutionaryperspective onproduction networksin the Asia-US regionShare807060504030201045040035030025020015010050ValueVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue added0Hong Kong(China)SingaporeThailandMalaysiaIndonesiaJapanRepublicof KoreaShare (1995) Share (2009) Value (2009)ChinaIndia0X. Cross-regionalspillover ofeconomic growthSources: UN Comtrade Database and WTO estimates.87

Trade Patterns and Global Value Chains in East AsiaF. Bilateral trade in intermediate goods between China, Japan and theUnited StatesIn both 1995 and 2009, US exports to China consistedmainly of intermediate goods, while its imports wereprincipally final goods, highlighting China’s role as amanufacturer for the United States (see Figure 11). A shiftwithin final goods from consumption towards capital goodscan be observed in the import structure of the UnitedStates, vis-à-vis China. It is also noticeable for Japan.At the same time, the share of capital goods in USexports to China decreased markedly (a phenomenonthat is also due to the increasing use of offshoring byUS MNEs), although in value terms they grew at anaverage 8 per cent per year. The situation between1995 and 2009 is quite similar for bilateral Japan-Chinatrade. The structure of trade between Japan and theUnited States remained quite stable for Japan’s importsfrom the United States, while the share of capital goodsin Japanese exports to the United States decreasedbetween 1995 and 2009.Figure 11Bilateral trade flows between China, the United States and Japan, 1995 versus 2009, by type of good(percentage)UnitedStates1995200918% 22% 53% 8%16% 22% 58% 4%26% 6%47% 20%17% 8% 44% 32%19952009Japan2009199519952009Capital GoodsConsumption GoodsIntermediate Goods31% 43% 24%15% 66% 18%5%13%71% 11%29% 66%2%3%2%1%29% 6% 62%4%17% 69% 11%4%6% 62% 26% 6%20% 44% 34%2%20091995Others incl. fuels/non-specified19952009ChinaSource: UN Comtrade Database.88

G. Towards more complex intermediate goods and concentrated tradeI. From massdemand to globalsupply chainsAs shown in Figure 12, the share of complex 7intermediary products in total exports of intermediategoods has increased significantly for all selected Asiantraders since 1996, with a particularly sharp increase in2009. Shares on the import side remained more stableover the years, with the noticeable exception of Japanwhere it grew continuously, reaching 46 per cent in2009. Japan’s high specialization in integrated circuits(see Figure 13) clearly impacts on its overall trade in thecomplex products category.Figure 13 shows the top 10 intermediate productstraded by China and Japan in 2009. Out of around 2,800products present in this end-use category, the top 10made up 26 per cent of China’s exports and 39 per centof its imports.Figure 12Share of high complexity intermediate goods in total exports/imports of intermediate goods (percentage)80ExportsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies70605040V. Foreign directinvestment3020100Japan Korea, Rep. of China Chinese Taipei Thailand Malaysia PhilippinesVI. Integrateddiversity8070199620002009ImportsVII. An evolutionaryperspective onproduction networksin the Asia-US region60504030VIII. Trade inintermediate goods20100Thailand Malaysia Korea, Rep. of Japan PhilippinesChinese TaipeiChinaIX. Vertical tradeand trade invalue added1996Source: UN Comtrade Database.20002009X. Cross-regionalspillover ofeconomic growth89

Trade Patterns and Global Value Chains in East AsiaFigure 13Top 10 products in exports and imports of intermediate goods(shares in total exports/imports of intermediate goods, percentage), 2009ChinaExportsParts andaccessories ofdata processingequipment nesMonolithic integratedcircuitsParts of linetelephone/telegraphequipment, nesPhotosensitive/photovoltaic/LEDsemiconductor devicesElectronic printedcircuitsParts for radio/TVtransmit/receiveequipment, nesStructures and partsof structures, iron orsteel, nesParts of printingmachinery andancillary equipmentTaps, cocks,valves and similarappliances, nesElectric conductors,nes < 80 volts, withconnectors0 5 10 15 20ImportsMonolithicintegrated circuitsIron ore,concentrate, not ironpyrites,unagglomeratedSoya beansCopper cathodes andsections of cathodesunwroughtParts of line telephone/telegraph equipment,nesParts and accessoriesof data processingequipment nesElectronicprinted circuitsCopper ores andconcentratesCopper/copperalloy waste orscrapParts for radio/TVtransmit/receiveequipment, nes0 5 10 15 20JapanExportsMonolithicintegrated circuitsParts of printingmachinery andancillary equipmentTransmissions formotor vehiclesParts for radio/TVtransmit/receiveequipment, nesMotor vehicleparts nesPhotosensitive/photovoltaic/LEDsemiconductor devicesParts for sparkignitionenginesexcept aircraftParts of linetelephone/telegraphequipment, nesChemical prep,allied inElectrical switch,protector, connecterfor < 1kV nes0 5 10 15 20ImportsMonolithicintegrated circuitsCopper ores andconcentratesIron ore, concentrate,not iron pyrites,unagglomeratedMaize except seed cornParts and accessoriesof data processingequipment nesParts of linetelephone/telegraphequipment, nesParts for radio/TVtransmit/receiveequipment, nesIgnition/other wiringsets for vehicles/aircraft/shipAluminiumunwrought, notalloyedHeterocyclic compoundswith N-hetero-atom(s)only, nes0 5 10 15 20Source: UN Comtrade Database.For Japan, too, the top 10 products took a high shareof the total trade of intermediate goods, totalling 23 percent for exports and 26 per cent for imports. For bothflows, monolithic integrated circuits were the mosttradedintermediate product of Japan – and were alsoChina’s largest import. Generally speaking, the IT andelectronic sectors take a huge share of the most-tradedintermediate goods in Asia.90

EndnotesI. From massdemand to globalsupply chains1The definition for intermediate goods applied in this chapterincludes all parts and accessories (BEC codes 42 and 53) aswell as industrial primary and processed intermediate goods(BEC codes 111, 121, 21, 22). The “fuels and lubricants”category (BEC code 3) was excluded.2See Miroudot et al. (2009).3WTO (2008), p. 37.4See Sturgeon and Gereffi (2009).5The following twelve economies, referred to as “Major Asiantraders”, represented around 95 per cent of Asia’s trade inintermediate goods in 2009: China, Hong Kong (China), India,Indonesia, Japan, the Republic of Korea, Malaysia, Philippines,Singapore, Chinese Taipei, Thailand and Viet Nam.6See Xing (2011).7For the definition of “product complexity” see Abdon et al.(2010).II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth91

Trade Patterns and Global Value Chains in East AsiaIX. Vertical trade andtrade in value added:Towards new measuresof international trade• The evolution of global supply chains and the related expansionof vertical trade call for the development of new measurements ofinternational trade.• Trade in value added takes into account the fragmentation of the valuechains and provides a decomposition of gross exports by domestic andforeign origin.• New perspectives for trade analysis can be explored through thevalue added approach.92

Trade Patterns and Global Value Chains in East AsiaA. Measuring trade from a different perspectiveGlobal production chains have blurred the relevance ofsome conventional trade indicators, like bilateral tradebalances, when products are “made in the world” ratherthan in a single country. The final product and the valueadded that goes into it come from different places (seeFigure 1). The speed and depth of such changes have ledto the need to revise statistical concepts and methods(national accounts, balance of payments, customsbasedtrade statistics) for measuring trade flows. At thesame time, new approaches have been explored anddeveloped to adapt traditional statistics and to betterevaluate how economies fit into the new global economy.Vertical trade is one of the new elements of internationalexchanges that require the application of innovativemetrics. The production of final goods (ready forconsumption) relies on successive production and tradesteps in which countries that belong to a supply chaincreate goods and services and export them to othercountries as inputs for further processing and (re-)export. The sequence ends once the final goods havereached their destination market.Attributing the entire commercial value of an exportedgood to the last link of the chain – the economy exportingthe final good – can lead to a statistical bias and tomisunderstandings, which may alter trade analysis andhave potential implications for trade policy and multilateraltrade negotiations.Box 1. The concept of “country of origin” in questionThe concept of “country of origin”, which is used for the compilation of customs-based merchandise trade statistics, has becomepartially obsolete as various operations leading to the production of final consumption goods – from design to manufacture ofcomponents and assembly – have spread across the world. As illustrated in the example of the Boeing 787 Dreamliner (seeFigure 1), more and more products are effectively “made in the world”, rather than made in a specific economy.In order to deal with this difficulty, a set of criteria – the “rules of origin” – has been established by the WTO to determine wherea product comes from. These rules are applied essentially to the implementation of trade policy instruments, such as antidumpingand countervailing duties, origin marking and safeguard measures.The rules applied to trade statistics to determine the most appropriate country of origin of a trade flow differ from those used fortrade policy. When two or more countries take part in the production of a good, its origin can change whenever a “substantialtransformation” of the product has been made, or when the product changes name, tariff code, character or use (for instance froma wheel to a car) during a manufacturing step. Due to the constraints to be met when implementing such criteria, the conceptsand definitions applied to merchandise trade statistics 1 propose other types of partner country attribution, such as the “countryof purchase”, the “country of consignment” or the “country of shipment”, which deviate from the actual manufacturing source ofthe product. The World Customs Organization (WCO) and the WTO are driving a process of harmonization of the definitions andcriteria applied to rules of origin.But in all cases, the full value of the product is assigned to one country. This does not reflect the geographical fragmentation ofthe production chain. A more recent methodological development, the “trade in value added” approach, can help circumvent thedifficulty of assigning the country of origin faced by traditional trade statistics. This additional measure of international trade flowsenables the domestic content embedded in exports to be assigned to each country that participated in the supply chain that ledup to production of the final good.94

Figure 1The fragmentation of production: The example of the Boeing 787 DreamlinerI. From massdemand to globalsupply chainsWing box: JapanWing ice protection: UKVertical stabilizer: USRaked wing tips: KoreaRear fuselage: USCentre fuselage: ItalyLavatories: JapanForward fuselage: Japan, USEscape slides: USDoors & windows: USFlight deck seats: UKII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsHorizontal stabilizer: ItalyAuxiliary power unit: USPassenger doors: FranceCargo doors: SwedenPrepreg composites: JapanLanding gear: FranceElectric brakes: FranceTires: JapanFlight deck controls: USEngines: US, UKEngine nacelles: USCentre wing box: JapanIV. The evolutionof tariff policiesV. Foreign directinvestmentTools/Software: FranceNavigation: USPilot control system: USWiring: FranceFinal assembly: BoeingCommercial Airplanes, USVI. IntegrateddiversitySource: Meng and Miroudot (2011).B. The notion of value added in trade flowsTrade in value added takes into account the specificityof trade occurring between the different actors of aproduction chain. While traditional trade statisticsrecord trade across borders on a gross basis, and mightdouble- or even multi-count vertical trade flows, trade invalue added estimates commercial flows on a net basis,at each step of the vertical trading chain. It allows thespecificity of the new business model behind globalmanufacturing to be incorporated, complementing usualtrade statistics, where trade in goods and services isprogressively being substituted by “trade in tasks”.Addressing the domestic value added incorporated inexported goods can – inter alia – help economies:• to identify the sources of internationalcompetitiveness and comparative advantages andto better reflect the actual contribution of the variousindustrial sectors in the production process of itsexported goods• to evaluate the actual impact of foreign trade oneconomic growth and employment• to provide another angle for the examination ofbilateral trade balances or regional transactions• to question the economic relevance of some tradepolicy instruments, such as antidumping, which mayaffect national businesses and “damage the supplychains of globalized companies”. 2VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth95

Trade Patterns and Global Value Chains in East AsiaBox 2. On the measurement of value addedThe domestic content of a country’s exports is often referred to as the value-added content of exports. In such cases, the valueadded of an exported good comprises the good’s total value minus direct and indirect imported inputs, and includes all thedomestic intermediate goods and services used for the production of the good. From a methodological point of view, this is notso different from the notion of sectoral value added derived from the system of national accounts, which corresponds to the finalvalue of the output of an industry, net of the goods and services it purchased from other industries or imported for its production.The domestic content of any export will include the direct value added from the exporting industrial sector, plus the value addedfrom other domestic sectors indirectly embedded during the production process. In addition, some correction can be done tomeasure the domestic content of imported inputs (re-imports).Figure 2 illustrates a simplified vertical production chaininvolving three countries. The production sequencestarts in Malaysia and in the United States with themanufacturing of car components (for example, bodyparts, tachometer) for export to Thailand, where thenext production phase takes place. A Thai productionunit combines the imported components with domesticparts and accessories into the final assembly of the carpredestined for the US market. One of the characteristicsof the car finally purchased in the United States is thatit is composed of elements originating from variouscountries, including the United States. The specificity oftrade occurring between the different actors of the chainleads to some questions:Which is the share in the value of the car exported to theUnited States to be attributed to Thailand, the ultimateexporter in the chain, or indeed to US producers? Whatis the foreign content of Malaysian or Thai exports?The trade in value added approach addresses thesequestions.The “value added” column in the diagram highlightsthe sources of domestic value added in each countryinvolved in the chain. In this example, it is assumed thatMalaysia and the United States produce car componentsfrom scratch, without using any foreign input. Thus, thevalue in the “vertical specialization” column, reflectingthe amount of imported input in their respective exportsto Thailand, is set to zero.The value of Malaysia’s and US exports to Thailand isthe same whatever the valuation method applied (i.e. thevalue added or traditional method); however, this is notthe case when evaluating Thailand’s exports to the UnitedStates. According to traditional measurement, Thailand’sexports to the United States amount to a value of 100,including the value added of parts and componentsimported from Malaysia and the United States itself. Thisdemonstrates the double-counting issue observed withtraditional trade statistics since the value of intermediategoods manufactured in Malaysia and in the UnitedStates are counted twice: once when the goods areexported from these countries to Thailand and again ascomponents of the car exported from Thailand to theUnited States. For this reason, Thailand’s exports tothe United States are numerically overstated when oneconsiders the whole production process. As shown inthe example, measuring trade flows in value added termsovercomes this problem. The domestic value added ofThailand’s exports to the United States amounts to 75(see Figure 2, “VA measure” column), excluding the valueof goods non-sourced from Thailand. Since value addedis one of the components of gross exports, the estimateof trade in value added is necessarily equal or lowerthan the traditional value. In parallel, the level of verticalspecialization for Thai exports is set to 25, gathering thevalues of all inputs imported to produce the car.It would require an enormous amount of work to measuredirectly the different sources of added value for eachproduct traded in the world. An indirect way of estimatingvertical trade and trade in value added relies on inputoutput(I-O) tables or – preferably – their internationalcounterparts, international input-output (II-O) tables.These combine national accounts and bilateral tradedata on goods and services into a consistent framework.II-Os allow the value added contained in exports to beevaluated and decomposed into its foreign and domesticcontent (see Box 3).The domestic content of exports corresponds to theaccumulation of the value added incorporated in eachof the various domestic sectors that contributed to thesupply chain. The foreign content of exports, or importcontent of exports, serves as an estimate of the tradebetween countries involved in international productionchains. It can be measured through the application ofthe vertical specialization (VS) formula, developed byHummels et al. (2001), based on the use of II-Os. Thus,the impact of the fragmentation of production chains oninternational trade can be assessed by computing thevertical specialization phenomenon.96

Figure 2Measuring value added and vertical specialization through an international production chain:an illustrative example (hypothetical values and constellation)Production chainValue VerticalAdded Specialization(VA)VAmeasureExportTraditionalmeasureI. From massdemand to globalsupply chainsII. Organizationof the globalproduction processMALAYSIAProduction of parts andcomponentsTHAILAND1001010III. Infrastructureservices in globalvalue chainsForeign input (Malaysian origin)+Foreign input (US origin)+Capital + labor40IV. The evolutionof tariff policies+Domestic input=Final good35V. Foreign directinvestmentUNITED STATESFinal consumption25(=10+15)075(=40+35)15100(=10+40+35+15)15VI. IntegrateddiversityProduction of partsand components15Source: WTO Secretariat.Export flowBox 3. The input-output tables, a statistical tool for the indirect measurement of trade in value addedBased on the old statistical concept of the “tableau économique”, developed in the 18th century by François Quesnay, the inputoutput(I-O) tables represent a nation’s economy in a matrix form, including international exchanges. The I-O model was furtherdeveloped by Wassily Leontief in the middle of the 20th century. 3International input-output (II-O) tables enable the origin and the use of intermediate goods and services to be identified bycountry and sector.I-O (or II-O) tables provide relevant assets for the analysis of trade verticality as they make clear the inter-sectoral nature of themodern production processes and their international connections. Thus, they take into account all backward linkages betweencountries and sectors present in the table, and they capture the value of imported inputs used directly and indirectly (at all stagesof a country’s production) in the manufacturing of exported goods. They can also trace the domestic content of imports, like theUS parts embedded in the car imported into the United States from Thailand in Figure 2.Although data limitations and methodological constraints exist, the I-O framework constitutes a relevant statistical tool to analysetrade from a different and complementary perspective in comparison to traditional trade statistics.International statistical cooperation is being organized to improve the data coverage, availability and quality of II-Os, 4 which – inthe coming years – will foster the development of such a tool for the study of trade and its link to other macroeconomic variableslike employment and environmental factors.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth97

Trade Patterns and Global Value Chains in East AsiaC. Vertical specialization in East Asia and the United StatesThe following calculations are based on the IDE-JETROAsian input-output (AIO) tables covering nine Asiancountries (China, Indonesia, Japan, the Republic ofKorea, Malaysia, the Philippines, Singapore, ChineseTaipei and Thailand) as well as the United States.Figure 3Historical evolution of the vertical specialization of selected Asian economies and the United States,1985-2008 (percentage)706050403020JapanChinese TaipeiChinaRepublic of KoreaSingaporeIndonesiaThailandUnited States9 Asian Reporters100198519901995200020052008Note: The “Asia 9 reporters” aggregate includes Malaysia and the Philippines, not shown in this figure.Source: The Asian international input-output table, IDE-JETRO.The trade-weighted average share of vertical specialization(VS) of the nine countries, available in the AIO data set,increased by more than 47 per cent between 1985 and2008, reaching 28 per cent in 2008 (see Figure 3). Allcountries’ VS increased noticeably during that period.Indonesia and China’s VS presented the highest growth;their shares of imported goods in exports have more thandoubled (even tripled in the case of Indonesia) since1985. These countries joined the regional productionchains later than other countries, which is reflected in theirlow VS shares observed in 1985.A few patterns of evolution can be observed:• Singapore and Chinese Taipei presented shares ofimported inputs in exports largely above the group’saverage. In 2008, 58 per cent of Singaporeanexports were made up of imported content. Due totheir high degree of specialization, mainly in logisticsand high technology, these economies have alwaysbeen central to Asian production networks (seeChapters II and VIII).• High VS shares were observed for the Republicof Korea and Thailand. Since the 1980s, Thailandhas become a regional manufacturing hub playingthe role of an export-platform, specialized – interalia – in the automotive industry and used by variousforeign manufacturers (e.g. Toyota, Mazda and Ford).• The VS rates noticed for Japan and Indonesiawere far below the group’s average. The evolutionof Japan’s VS has been similar to that of theUnited States. Their shares increased significantlybetween 1995 and 2008, most probably due tothe expansion of offshoring and intra-firm activitiescarried out by Japanese and US MNEs. The lowVS shares observed for these countries overall canbe related to their economic size, which enablesthem to produce a large proportion of parts andcomponents domestically (see Chapter VI for moreinformation on respective production systems).Interestingly, the VS observed for Indonesia isclose to that of the two developed economies, withonly 13 per cent of imported content in its exportsin 2008, a figure that has even slightly decreased98

since 2000. The reason lies in Indonesia’s exportstructure, which is essentially composed of primaryproducts that do not require intensive use offoreign inputs (agricultural goods, fuels and miningaccounted for 61 per cent of total exports in 2008).• Economies with constantly rising rates ofimported content during the period 1985-2008were Chinese Taipei (from 32 to 47 per cent)and the United States (from 7 to 15 per cent).• The estimates of China’s import content of exports(19.7 per cent in 2008) appear to be excessivelylow. This is because standard II-Os, used forVS calculation, do not give specific treatment toprocessing zones’ trade. For China, the share ofexports from processing zones in total exportswas more than 47 per cent in 2008. The importcontent of exports is obviously underestimated asChina’s export processing zones employ far moreimported inputs than exports stemming from nonprocessingtrade. In 2008, the import content ofexports from Chinese processing zones has beenestimated at 56 per cent. The revised estimate ofChina’s vertical specialization, combining the twotypes of trade (processing and non-processing),amounts to 37 per cent instead of 19.7 per centwith standard AIO tables. 5In the Asian region, vertical specialization – similar to whatis observed for trade in intermediate goods - is closelyrelated to manufacturing activity (see Figures 4 and 5).I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsFigure 4Historical share of vertical specialization of nine Asian main traders, by sector 6 , 1985-2008 (percentage)IV. The evolutionof tariff policies353025201510AgricultureManufacturingTrade and transportOther servicesV. Foreign directinvestmentVI. Integrateddiversity501985Source: The Asian international input-output table, IDE-JETRO.The high vertical specialization of “petroleum and petroproducts” (see Figure 5) shows that several major Asianeconomies, among which Japan (VS of 91 per cent inthat sector in 2008) and the Republic of Korea (VS of 82per cent in 2008), are net importers of oil-based primaryand semi-finished products.As shown within the presentation of trade in intermediategoods in Asia (see Chapter VIII), electronic parts andcomponents are the most traded types of inputs withinAsian supply chains. They are also amongst the mostcomplex products. This is echoed here through theconstantly high VS shares observed for “computersand electronic equipments” and “other electricalequipment”. Logically, “transport equipment” and other19901995200020052008manufacturing-related sectors present relatively highVS shares reflecting the high fragmentation of themanufacturing sector within East Asia; VS is above all amatter of the manufacturing industry.The VS share of the “other services” sector for the nineEast Asian economies, which includes a wide range ofbusiness services, more than doubled between 2000and 2008, reaching 22.3 per cent in 2008. Such asharp evolution denotes the increasing role of servicesin supply chains, notably in the areas of transport,communication and logistics (see Chapter II, on theparticular roles of Hong Kong (China) and Singapore),and the link they establish between successivemanufacturing operations.VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth99

Trade Patterns and Global Value Chains in East AsiaFigure 5Nine Asian traders’ average share of vertical specialization, by sector*, 2000-2008 (percentage)0 10 20 30 40 50 60 70 80Petroleum and petro products636670Computers and electronic equipment464746Other electrical equipmentChemical products283336373934Metals and metal products263132Industrial machinery192328Forestry111227Transport equipment152227Other manufacturing products272724Non-metallic mineral products171924Other services111322Rubber products222226Food, beverage and tobacco182021Pulp, paper and printing182725Wooden furniture andother wooden products221918Electricity, gas and water supply141728Textiles, leather and the products thereof152226Livestock and poultryCrude petroleum and natural gas776121312Fisheries111317Other miningTrade and transportOther agricultural products111110131089616Rice (paddy)Public administration78661114200020052008*The construction sector is not shown as data were not available for several countries.Note: The nine Asian traders are China, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Chinese Taipei and Thailand.Source: The Asian international input-output table, IDE-JETRO.100

Figure 6Computers and electronic equipment: 7 Exports and their domestic and imported contents, 2000 and2008 (in billions of US$ and percentage)Shares1009080706050403020100 0MalaysiaPhilippinesSingaporeThailandChineseTaipei2000Republicof KoreaChinaIndonesiaUnitedStatesJapan12010080604020ValueShare of import contentShare of domestic contentExport valueI. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies1002008300V. Foreign directinvestment90Shares80706050403020100PhilippinesMalaysiaSingaporeThailandChineseTaipeiChinaRepublicof KoreaIndonesiaJapanUnitedStates250200150100500ValueShare of import contentShare of domestic contentExport valueVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionSource: The Asian international input-output table, IDE-JETRO, and WTO estimates.As can be seen in Figure 6, the share of the domesticcontent of exports from Malaysia and Thailand grewsignificantly between 2000 and 2008, from 26 to 41per cent in the case of Malaysia and from 35 to 42per cent in the case of Thailand. This can, inter alia, bedue to the increase of FDI towards these countries (seeChapter V) to produce locally parts and componentsused in regional production chains and technologytransfers occurring within the outsourcing andoffshoring strategies of MNEs. China’s contribution toworld exports of “computers and electronic equipment”increased considerably between 2000 and 2008. Thecomposition of its exports, by domestic and foreignvalue, remained quite stable, with a slight increase ofthe import content in exported goods and services,from 38 to 44 per cent.VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth101

Trade Patterns and Global Value Chains in East AsiaFigure 7Industrial Machinery: 8 Exports and their domestic and imported contents, 2000 and 2008 (in billions ofUS$ and percentage)200010090803530Shares70605040252015Value3020100IndonesiaSingaporeThailandPhilippinesMalaysiaChineseTaipeiRepublicof KoreaChinaUnitedStatesJapan1050Share of import contentShare of domestic contentExport value2008100908014012070100Shares6050408060Value3020100SingaporeThailandMalaysiaIndonesiaRepublicof KoreaChineseTaipeiPhilippinesChinaJapanUnitedStates40200Share of import contentShare of domestic contentExport valueSource: The Asian international input-output table, IDE-JETRO, and WTO estimates.Figure 7 outlines that the highest increase in the share ofimport content of exports between 2000 and 2008 wasestimated for Japan (from 9 to 17 per cent, an increaseof 90 per cent) – though from a low base in comparisonto other economies shown. The domestic content sharesincreased for Indonesia and the Philippines, while thesituation stayed quite stable for China. In 2008, thehighest shares of import content were observed forSingapore, Thailand and Malaysia.102

Figure 8Trade and transport services: Exports and their domestic and imported contents, 2000 and 2008 (inbillions of US$ and percentage)Shares1009080706050403020100SingaporeMalaysiaRepublicof KoreaPhilippinesIndonesia2000ThailandChineseTaipeiChinaUnitedStatesJapan180160140120100806040200ValueShare of import contentShare of domestic contentExport valueI. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies1002008180V. Foreign directinvestment90160Shares80706050403020100SingaporePhilippinesMalaysiaRepublicof KoreaChineseTaipeiIndonesiaChinaThailandUnitedStatesJapan140120100806040200ValueShare of import contentShare of domestic contentExport valueVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionSource: The Asian international input-output table, IDE-JETRO, and WTO estimates.As shown in Figure 8, a particularity of the “tradeand transport services” sector, noticeable for all theeconomies displayed, is the high fraction of domesticcontent in exports, which even increased significantlybetween 2000 and 2008. Trade (retail and wholesale)and transport-related services remain largely at nationallevel. The production of services is much less organizedwithin international supply chains than is the case formanufactured goods. Singapore’s exports of “trade andtransport services” showed the highest share of importcontent. China’s exports in this sector more than tripledduring the same period to accompany the growth ofits output of manufactured goods with complementaryservices. For China, the share of imported content ofexports was only 9 per cent in 2008 (down from 11 percent in 2000), whereas the respective ratio remainedquite stable for the United States at around 5 per centin both years.VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth103

Trade Patterns and Global Value Chains in East AsiaD. Using the value added approach to evaluate bilateral trade balancesIn addition to providing another angle for trade analysis,the value added approach raises questions about therelevancy of bilateral trade balances evaluated throughtraditional statistics.Bilateral trade balances, and more especially bilateraldeficits, are given a prominent role in trade policy. Thebilateral trade balance is expressed as the differencebetween an economy’s exports and its imports with anothereconomy. However, the goods exchanged between thetwo parties, particularly the manufactured ones, may resultfrom international production chains and may have multiplegeographical origins. Thus attributing the entire export orimport value to the referred partner country is inadequateand affects the analytical relevance of the trade surplus ordeficit observed between the two countries.This can be illustrated with the common example ofthe US trade deficit vis-à-vis China. The deficit, ascurrently measured between the two countries, isclearly overstated, as it does not originate only in China,but also in economic partners belonging to the sameproduction chains. By subtracting the estimated importcontent from conventional trade values, the valueadded approach enables bilateral transactions to beadjusted in line with the actual values created in thetwo countries.The 2005 US-China trade shortfall would have even beencut by more than half, from US$ 218 to US$ 101 billion,if it had been estimated in value added and adjustedfor processing trade (see Figure 9). Similarly, in 2008,the US$ 285 billion bilateral deficit would have beenreduced by more than 40 per cent. The difference mustbe attributed to the value added from other economies,such as Japan, the Republic of Korea, Malaysia, etc.,embedded in Chinese exports to the United States, asillustrated with the iPhone example below.Figure 9United States-China trade balance: Traditional statistics versus value added (VA) terms (in billions ofUS$)-42%-21%2008-53%-27%2005-20%2000VA estimates (incl. China processing trade)VA estimates-300-200-1000Traditional measureNote: China’s processing trade data not available for 2000.Sources: UN Comtrade Database and WTO estimates.104

Figure 10 presents a decomposition of the US tradedeficit in iPhones with China by the different countriesthat contributed to its production. 9 The derived shareof China to the US deficit reflects its role as the finalassembler in the iPhone production chain and variestremendously according to the statistical measureretained. Based on the value added estimation, ChinaFigure 102009 US trade balance in iPhones (in millions of US$)Traditional measureaccounts for less than 4 per cent of the US deficit iniPhones, while Japan, which is not included in thetraditional evaluation, accounts for more than 35 percent of the same deficit. This example also demonstratesthat, whatever the statistical method applied, the globaltrade balance of an economy remains unchanged.Value added measure-2,000 -800 -700 -600 -500 -400 -300 -200 -100 0 0 -100 -200 -300 -400 -500 -600 -700 -800-2,000-1,901 World-1,901of which:I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies-1,901ChinaJapanKorea, Rep. ofGermany-73-259-341-685V. Foreign directinvestmentRest of World-543VI. IntegrateddiversitySource: Meng and Miroudot (2011).EndnotesVII. An evolutionaryperspective onproduction networksin the Asia-US region1See United Nations (2010).2See Isakson (2007).3See Leontief (1951).4For example, the World Input-Output Database (WIOD)project: see http://www.wiod.org/.5See Maurer and Degain (2010).6The “trade and transport” sector in the AIO table comprises:wholesale and retail trade and transportation. The “otherservices” sector comprises: telecommunications, finance,insurance, real estate, education and research, medical andhealth service, restaurants, hotel and other services.7The “computers and electronic equipment” sector in theAIO table comprises: electronic computing equipment,semiconductors and integrated circuits, and other electronicsand electronic products.8The “Industrial Machinery” sector in the AIO table comprises:boilers, engines and turbines, general machinery, metalworking machinery, specialized machinery.9See Xing and Detert (2010).VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth105

Trade Patterns and Global Value Chains in East AsiaX. Cross-regional spilloverof economic growth:The territorial impact of globalmanufacturing in China• The coastal regions of China, in particular the East Coast and the SouthCoast, have demonstrated outstanding growth as a result of preferentialdevelopment policies strongly orientated towards exports.• These two coastal regions have made a significant contribution toregional development elsewhere, although other regions also playeddifferent and specific parts in transferring growth momentum from one tothe other.• The “unbalanced growth” strategy has fostered regional disparities,which have gradually pushed the government to look for more stable andsustainable development models.106

I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsContentsIV. The evolutionof tariff policiesA. Unbalanced economic growth: 1978-1998B. Rebalancing the regional disparities: 1999 to the present108111V. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth107

Trade Patterns and Global Value Chains in East AsiaA. Unbalanced economic growth: 1978-1998 1In 2010, China became the second-largest economy inthe world, surpassing Japan in terms of nominal grossdomestic product (GDP). Despite occasional slowdowns,the country has registered a high level of economic growthin the last 30 years or so, since the launch of the Reformand Open-Door Policy in 1978. Its development strategyis based on the “unbalanced” growth model of economistAlbert Hirschman, which asserts that “an economy, to liftitself to higher income levels, must and will first developwithin itself one or several regional centres of economicstrength” (Hirschman, 1958).Table 1 and Figure 1 present output growth rates in realterms, by region and by industry, over the final 10 yearsof the “unbalanced growth” period. 2 The output of thewhole country rose by 203 per cent during that period,but the speed of growth was quite uneven at the regionallevel. Two coastal regions, the East Coast and the SouthCoast, recorded higher average growth (242 per centand 368 per cent) than other regions, the contrastbeing especially sharp with regional neighbours, suchas the North East (119 per cent) and Central (142 percent). Comparing by industry, heavy industry and otherservices registered relatively high average growth (258per cent and 351 per cent), whereas mining experiencedthe lowest average growth (58 per cent).In order to elucidate the “unbalanced” structure ofdevelopment during the period, Tables 2 and 3 extractfrom Table 1 the cells with figures exceeding referentialrates of growth, which are the “whole country” rates forregional estimates and “all industries” rates for sectoralestimates. Looking at Table 2, two coastal regions,the East Coast and the South Coast, play the leadingroles in the growth of almost all industries. The NorthWest also shows strong growth, but this growth largelydepends on industries tied to primary products. Table3 shows that growth in every region is overwhelminglyinfluenced by heavy industry and other services. Lightindustry is also important in most regions, although itsperformance appears to be poor in the North East andNorth West.As shown below, the “unbalanced” development strategywas implemented in a way that gave highly preferentialtreatment to the coastal regions of China. In 1980, thegovernment established special economic zones atShenzhen, Zhuhai, Shantou and Xiamen, on the SouthCoast, with investment incentives for foreign-affiliatedfirms to set up factories there. In 1984, 14 other citiesin coastal districts were opened to foreign companies.Hainan, on the South Coast, also became a specialeconomic zone in 1988.Table 1Output growth rates by region and by industry, 1987-1997 (percentage)Agriculture Mining LightindustryEnergyHeavyindustryConstruction Transport Trade OtherservicesAllindustriesNorth East 131.1 11.3 114.2 53.2 151.5 106.6 79.1 168.8 230.6 119.3North Coast 107.2 56.3 202.0 62.2 261.8 192.8 136.8 136.3 398.0 193.0East Coast 96.3 82.2 259.4 122.9 266.8 258.3 119.4 186.5 525.7 242.0South Coast 126.2 112.8 477.8 287.0 569.3 323.8 368.6 165.9 603.1 368.1Central 79.1 73.3 209.2 82.8 200.4 120.5 121.1 82.5 199.9 141.7North West 181.5 141.9 184.8 144.9 228.2 252.6 251.6 178.2 298.9 208.7South West 118.2 49.5 194.9 81.0 246.4 212.6 129.9 113.7 279.9 175.9Whole country 108.4 58.2 234.2 100.4 258.1 197.0 152.5 141.4 351.3 203.2Note: See Annex 2 for the geographical coverage of each region.Sources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO 2003).108

Figure 1Output growth rates, 1987-1997 (percentage)I. From massdemand to globalsupply chainsNote: See Annex 2 for the geographical coverage of each region.312629North West(Xibei)2328South West(Xinan)25302224272054123North Coast(Huabei)151712Central(Huazhong)211816191410131169South Coast(Huanan)8North East(Dongbei)7East Coast(Huadong)Output growth rateLess than 150%150% - 200%200% - 250%250% - 300%300% and aboveII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversitySources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO, 2003). 3Table 2Regions with growth higher than “whole country” growth rates, by industry, 1987-1997Agriculture Mining LightindustryEnergyHeavyindustryConstruction Transport Trade OtherservicesNorth East + +North Coast + +East Coast + + + + + + + +South Coast + + + + + + + + + +Central +North West + + + + + + +South West + +All industriesWhole country /// /// /// /// /// /// /// /// /// ///VII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedNote: The “whole country” growth rates and “all industries” growth rates are calculated from official Chinese statistics, from which each of the regional/sectoral breakdownshas been estimated.Sources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO 2003) (based on Table 1).X. Cross-regionalspillover ofeconomic growth109

Trade Patterns and Global Value Chains in East AsiaTable 3Industries with growth higher than “all industries” growth rates, by region, 1987-1997Agriculture Mining LightindustryEnergyHeavyindustryConstruction Transport Trade OtherservicesAll industriesNorth East + + + + ///North Coast + + + ///East Coast + + + + ///South Coast + + + + ///Central + + + ///North West + + + + ///South West + + + + ///Whole country + + + ///Note: The “whole country” growth rates and “all industries” growth rates are calculated from official Chinese statistics, from which each of the regional/sectoral breakdownshas been estimated.Sources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO 2003) (based on Table 1).In order to analyse the impact of this preferentialdevelopment strategy, each of the growth rates in Table 2is decomposed in terms of the following factors: 41. contribution of domestic final demand, i.e.consumption and investment,2. contribution of foreign demand, i.e. exports,3. contribution of changes in production techniques,4. (negative) contribution of imports throughdisplacement of domestic production, and5. other unidentified factors.Figure 2 shows the results of decomposition by region(averaged over industries). In general, domestic finaldemand is the most dominant factor, though thevariation for other factors across the regions warrantsclose attention. The contribution of foreign demandis significantly higher for coastal regions, particularlyfor the East Coast and the South Coast, whereas theinland regions, Central, the North West and the SouthWest, are heavily domestic-oriented. Also, the (negative)contribution of imports through the displacement ofdomestic production presents a clear correlation with thedegree of export contribution, meaning that the growthfactors for coastal regions are highly foreign-dependentboth on the input side (=import) and the output side(=export).Figure 2Decomposition of growth factors (percentage)1009080706050403020Domestic Final Demand10Export0Technological change-10-20-30North EastNorth CoastEast CoastSouth CoastCentralNorth WestSouth WestDisplacement by importOther factorsSources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO 2003).110

Particularly interesting is the contribution made bychanges in production techniques. Again, significantlyhigher contribution rates are observed among the coastalregions. This indicates that the production techniques ofindustries in coastal regions have changed more rapidlythan in inland regions, helping to accelerate output growththere. This is related to the massive inflow of foreign capitalinto the special economic zones. As a result of the “CoastalArea Development Strategy” implemented in 1987, morethan 90 per cent of foreign firms are concentrated alongthe coast, and this is considered to have significantlyaffected industrial production systems there.The question, however, is to what extent benefits ofthe outstanding growth of coastal regions have beentransferred to, and shared by, other regions, especiallythe lagging inland regions, as postulated by Hirschman’s“unbalanced” development strategy. Table 4 and Figure 3illustrate the selected channels of cross-regional spilloverof regional output growth, with the above-averagecontribution rates from other regions being highlighted inred numbers (see the technical notes for the calculationmethod). The main features of the table can be summarizedas follows:1. Two coastal regions, the East Coast and the SouthCoast, make the largest growth contributions toalmost all regions. Also, their mutual influence isquite significant (EC→SC: 6.60 per cent, SC→EC:6.01 per cent), showing strong economic linkagesbetween them.Table 4Shares of growth contribution from each region, 1987-1997 (percentage)2. The East Coast is less affected by the performanceof other regions. It is a contributor, rather than abeneficiary, of cross-regional growth spillover. TheNorth Coast is the reverse; it benefits substantiallyfrom others yet contributes very little in return, exceptto the North West (NC→NW: 4.84 per cent).3. The North West receives its largest contribution fromCentral (C→NW: 5.47 per cent), as well as feelinga substantial impact from many other regions. Thisis attributed to the fact that the region is the biggestenergy supplier to industries all over the country. Incontrast, Central serves as an important transit pointfor transferring the growth spillover from coastalregions to the remote inner China.4. As one of the remotest regions, the North Eastreceives the smallest benefits from others. Endowedwith rich natural resources of land, energy and forests,the region was called the “industrial cradle of China”in the 1950s and played an important role in theearly stages of the country’s economic development.It has fostered a well-developed, yet relativelyindependent, industrial base with a high degree ofself-sufficiency. The South West, another remoteregion, also displays a high degree of independence.Yet this is mainly due to its unfavourable geographyand poor transport and communication networkswith the rest of the country. The region, however,gains some direct contribution from the East Coastand the South Coast. (EC→SW: 2.79 per cent,SC→SW: 4.78 per cent).North East North Coast East Coast South Coast Central North West South West TotalNorth East 95.8 -1.1 2.0 1.1 0.0 1.6 0.8 100.0North Coast 1.6 77.0 7.9 4.5 4.1 2.7 2.3 100.0East Coast 1.8 2.0 86.3 6.0 1.2 1.3 1.4 100.0South Coast 1.7 1.8 6.6 82.4 3.0 1.5 3.1 100.0Central 1.3 0.8 8.5 6.7 77.2 2.5 3.0 100.0North West 2.2 4.8 4.8 3.0 5.5 78.0 1.7 100.0South West 0.7 0.6 2.8 4.8 1.3 0.6 89.3 100.0Note: The average rate of cross-regional contribution is 2.72, and the number in a cell is highlighted if it exceeds this average, showing important channels of cross-regionalgrowth contribution.Sources: The Interregional Input-Output Tables of China, IRIO87 (Ichimura and Wang, 2003) and MRIO97 (IDE-JETRO 2003).I. From massdemand to globalsupply chainsII. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policiesV. Foreign directinvestmentVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionVIII. Trade inintermediate goodsB. Rebalancing the regional disparities: 1999 to the presentIX. Vertical tradeand trade invalue addedThe rapid development of the coastal regions led togrowing regional disparities, especially towards the endof the 1990s. To alleviate the problem, the “WesternRegions Development” strategy was launched in 1999,followed by the “Promotion of North-East Region” in2003. Since then, the development perspective of Chinahas gradually shifted towards one of balanced andsustainable growth.X. Cross-regionalspillover ofeconomic growth111

Trade Patterns and Global Value Chains in East AsiaFigure 3Selected channels of cross-regional growth spillover (based on Table 4)North East(Dongbei)North West(Xibei)North Coast(Huabei)Central(Huazhong)East Coast(Huadong)South West(Xinan)South Coast(Huanan)Note: Arrows indicate the selected channels with above-average contribution rates of growth spillover. Thicker arrows are assigned to the channels with more than 5%contribution rates.The global financial crisis provided a further spur tochange. In November 2008, the government announceda counter-crisis fiscal package of four trillion yuan(about US$ 520 billion). It was a fiscal commitmenton an unprecedented scale, far surpassing the one in1998 to meet the Asian currency crisis. It was stronglyorientated towards promoting the development ofinland regions (see Table 5) through rural infrastructureprojects, such as the construction of roads, railroadsand airports, as well as the supply of cheap houses.Also, substantial amounts (approximately 25 per centof the total) were allocated for reconstruction in theSichuan province after the devastating earthquake of2008.Figure 4 compares the output loss caused by the crisiswith the gain brought by the counter-crisis measures. 5As for the magnitude of output loss (crisis impact),coastal regions, such as the East Coast and the SouthCoast, suffered most due to their structural dependenceon exports. As for the output gain (policy impact), theimpact was felt most in the South-West region, whichis unsurprising given the Sichuan reconstructionprogramme. It is followed by Central, which may havebenefited from the South West’s expansion thanks to itsgeographical proximity.It is disturbing that the net effect on South Coast isnegative. This simulation outcome is partly attributed tothe magnitude of the impact of the crisis on the coastalregions. But the weakness of the impact of the countercrisismeasures on the South Coast is equally surprising.The export-oriented policies of the “unbalanced growth”strategy, with their aim of promoting the coastal regions,may have created serious structural problems for theSouth Coast. The region was strategically shaped to behighly foreign-dependent, with poor economic linkagesto domestic markets (see Figure 2). As a result, whileit has suffered considerably from the world recession,the South Coast may not have been able to benefitsufficiently from the government’s massive financialcommitment to developing inland regions. 6From 2011, the 12 th Five-year Plan will be implemented.It emphasizes the importance of structural transformationfrom an export-dependent architecture to a moreharmonious, sustainable economic system geared todomestic consumer demand. The speech of PremierWen Jiabao on the opening day of the 2011 NationalPeople’s Congress contained a strong message toreduce income inequality and improve the quality of life.After 30 years of ceaseless growth and expansion, theChinese economy is at a crossroads.112

Table 5Allocation of four trillion yuan (RMB) fiscal expenditureI. From massdemand to globalsupply chainsAllocation to: %Priority projects on roads, railways, airways, water supply and improvement of city electric networks 37.5Reconstruction of the Sichuan region 25.0Construction of low rent/low-priced housing 10.0Construction of rural infrastructure 9.3Investment in R&D to adjust the industrial structure 9.3Investment in energy-saving, environmental protection and restoring the ecosystem 5.3Investment in health, education, culture and social work 3.8Note: Investment is to be carried out in both 2009 and 2010.Source: 21 st Century Business Herald (in Japanese, 21 Shiji Jingji Baodao), 22 May 2009.Figure 4Comparison of crisis and policy impacts (in millions of US$)400,000II. Organizationof the globalproduction processIII. Infrastructureservices in globalvalue chainsIV. The evolutionof tariff policies300,000200,000100,000V. Foreign directinvestment0-100,000-200,000North EastNorth CoastNote: Crisis impact is the total value of the simulated amount of output declines from the third quarter of 2008. Policy impact is the additional output resulting from twoyears’ expenditure.Source: The Transnational Interregional Input-Output Table between China and Japan, 2000, IDE-JETRO.East CoastSouth CoastCentralNorth WestSouth WestCrisis impactsPolicy impactsNet effectsVI. IntegrateddiversityVII. An evolutionaryperspective onproduction networksin the Asia-US regionEndnotes1Much of the analysis in this chapter is based on twopreviously-written papers: Meng and Qu (2008), andOkamoto and Inomata (2011). The authors are most obligedto Mr. Chao Qu and Mr. Nobuhiro Okamoto for their kindconsent to use these works in this study.2The analytical data were converted into real terms using theGrid-Search Method, which was developed by Bo Meng andintroduced in Meng and Qu (2008).3The basic layout of the Interregional Input-Output Tables ofChina is very similar to the Asian International Input-OutputTables constructed by IDE-JETRO (see Annex 3 for a briefdescription).4See Round (1985), Dietzenbacher and Los (1998), and deBoer (2006) for the technical details of decomposition method.5In order to calculate the effect of China’s counter-crisismeasure, some assumptions were made in the simulationexercise. The composition of fiscal injection is indicated in Table5. In particular, 25 per cent of the expenditure is considered togo to the South-West region for the reconstruction of Sichuanprovince. It is assumed that 40 per cent of the expenditure is tobe carried out in 2009 and 60 per cent in 2010.6This outcome is theoretical and limited to the hypothesis statedfor the simulation. In particular it does not factor in the rapidrecovery of world trade in 2010.VIII. Trade inintermediate goodsIX. Vertical tradeand trade invalue addedX. Cross-regionalspillover ofeconomic growth113

Trade Patterns and Global Value Chains in East AsiaXI. GlossaryAntidumping duty: Duties imposed on goods deemed tobe dumped and causing injury to competitors in the importingcountry. Dumping is any good sold on an export market atbelow its home cost of production.Applied duty/Applied tariff: Duty that is actually charged onimports. This can be below the bound duty.Bilateral trade balance: The difference between aneconomy’s exports and its imports with another economy.Binding coverage: The percentage of products (or “tarifflines”) in a member’s list of commitments that are legallycommitted (or “bound”) in the WTO.Bound duty/Bound tariff: The tariff a WTO memberundertakes not to exceed. Once a rate of duty is bound, it maynot be raised without compensating the affected parties.Capital goods: Tangible items used in the production of othergoods. Examples include factories, machinery equipment (e.g.computers) and tools.Commercial services: All services except those provided bya government (i.e. services supplied neither on a commercialbasis, nor in competition with one or more service suppliers).Consumer goods: Goods destined for final consumption byindividual households or communities (e.g. food and beverages,video games, recorded CDs and DVDs, sports goods, etc.).Country of origin: According to the Kyoto Convention ininternational merchandise trade statistics, the country oforigin of a good (for imports) is determined by rules of originestablished by each country. Individual countries are free todefine origin, but within boundaries set by WTO rules.Demand chain: The demand chain is seen as the counterpartto the supply chain in the total value chain. It usually comprisesthe main activities in the context of marketing, sales andcustomer service. In demand-driven supply chains, researchand development are closely linked to marketing.Domestic content of exports (or domestic value addedcontent of exports): The domestic content of exportsmeasures exports net of imported inputs. It corresponds to theaccumulation of the value added created by each of the variousdomestic sectors that contributed directly or indirectly to thesupply chain.Entrepôt: A port or zone where goods can be imported andexported free of duties, without any additional processing.Export processing zone: Industrial zone with specialincentives to encourage both domestic and foreign firms investin export-oriented activities.Final consumption: Final consumption consists of goods andservices used up by individual households or the community.Final demand: Personal expenditures, capital expendituresand public sector expenditures for consumption and investmentby resident and non-resident agents.Fixed assets: Tangible or intangible assets that are producedand then themselves used repeatedly to produce other goods.Foreign Direct Investment: Investment in foreign assetsthrough joint venture, merger and acquisition, with a longtermperspective. It usually involves an active participation inmanagement from the foreign investor.Global manufacturing: Production activities in whichdifferent steps of the manufacturing process take place indifferent countries.Goods for processing: Materials or semi-processed goodsbelonging to country A which are shipped to country B fortransformation and then returned to country A.Information Technology Agreement: Concluded in 1996,the ITA provides for participants to completely eliminate dutieson IT products covered by the accord, including computersand semiconductors.Input coefficient matrix: The amount of goods and servicesdirectly required to produce one unit of output. It is derivedfrom the intermediate transaction matrix of the input-outputtable by dividing each of the transaction values by the totaloutput of the respective industry.Input-Output table: Presents all inputs and outputs of aneconomy’s industries, including intermediate transactions,primary inputs, and sales to final users. If the external sectoris also described, it is called International Input-Output (II-O)table.Intermediate goods and services: Tangible and intangibleproducts utilized as inputs in production, excluding fixed assets.114

Intermediate transaction matrix: The segment of the Input-Output table that captures the progressive commitment ofvarious industries in which the output of an industry is used asan intermediate input of others. It presents the entire nexus ofsupply-use relations between producers.Intra-industry trade: Trade within the same industry.Most-Favoured Nation (MFN): Key WTO principle thatbars signatories from any discrimination in treatment of othermembers.Non-tariff measures: Measures, other than ordinary tariffs,that can limit imports. Examples include health regulations orphytosanitary rules. Used interchangeably with the term “nontariffbarrier”.Offshoring: Describes an enterprise’s decision to contractthe supply of specific goods and services to foreign suppliers.These suppliers can be independent or affiliated firms.Offshore-outsourcing is a special case of outsourcing, whenthe contractual parties are not resident of the same economy.Outsourcing: An enterprise’s decision to acquire specificinputs and services from an outside (unaffiliated) company,instead of producing them internally.Production network: A group of interconnected companiesinvolved in the production of goods and/or services.Re-exports: Exports of foreign goods, in the same state aspreviously imported.Re-imports: Imports of domestic goods in the same state aspreviously exported.Sanitary and phytosanitary measures: Measures to ensurefood safety and animal and plant health.Self-sufficiency ratio: Expresses the size of production inrelation to domestic utilization.Tariff line: A product as defined in lists of tariff rates, based onthe most detailed level of disaggregation.Total input / Total output: The column end of Input-Outputtables shows the value of total input, which amounts to thesum of the value of Intermediate input and value added of eachindustry, and at the row end lies the value of total output, whichamounts to the sum of the value of intermediate demand and thevalue of final demand for each product. In a static framework,it is assumed that total input equals total output, so that thecolumn and row ends for a given industry should match exactly.Trade in value added: An alternative to the traditional measureof international exchanges in goods and services, adapted tothe evolution of global supply chains. Enables the domesticcontent included in gross export flows to be estimated.Twenty-foot equivalent unit (TEU): A unit of measurementequal to the volume occupied by a standard 20-foot container.Value added: The value of output minus the value of allintermediate inputs. It represents the contribution of, andpayments to, primary factors of production (wages, profit andtaxes).Value chain (global): The sequence of activities that firmsundertake to create value, including the various productionsteps (supply chain), but also all activities belonging to thedemand chain, such as marketing, sales and customer service.Vertical integration: Completing the different process stagesof a product within the same firm, or through establishmentsrelated to the same firm.Vertical specialization: Estimated as the proportion ofimported inputs or intermediate goods and services embeddedin a country’s exports.Vertical trade: International exchanges of goods and servicesassociated with the sequential operations of global supplychains.Supply chain: The sequence of steps, often completed indifferent firms and/or locations, needed to produce a final good.Tariff Escalation: Raising tariff barriers in line with the degreeof processing in any imported good.115

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XIII. Abbreviations and symbolsAIOAPECASEANAFTABECBOPc.i.f.CISdwtEPREPZEUEUROSTATFDIf.o.b.GDPICTIDBIDE-JETROI-OII-OILOIMFIMTSITALDCsMarisecMFNMNENAFTANIENTMOECDR&DSAARCSEZTEUUNCTADUNSDVAVSWIODWTOAsian input-outputAsia Pacific Economic CooperationAssociation of Southeast Asian NationsASEAN Free Trade Areabroad economic categoriesbalance of paymentscost, insurance and freightCommunity of Independent Statesdeadweight tonneeffective protection rateexport processing zoneEuropean UnionStatistical Office of the European Communitiesforeign direct investmentfree on boardgross domestic productinformation and communication technologyIntegrated Database (WTO)Institute of Developing Economies - Japan External Trade Organizationinput-outputinternational input-outputInternational Labour OrganizationInternational Monetary FundInternational Merchandise Trade StatisticsInformation Technology Agreementleast-developed countriesMaritime International Secretariat Servicesmost favoured nationmultinational enterpriseNorth American Free Trade Agreementnewly industrialized economiesnon-tariff measureOrganisation for Economic Co-operation and Developmentresearch and developmentSouth Asian Association for Regional Cooperationspecial economic zonetwenty-foot equivalent unitUnited Nations Conference on Trade and DevelopmentUnited Nations Statistics Divisionvalue addedvertical specializationWorld Input-Output DatabaseWorld Trade OrganizationThe following symbols are used in this publication:... Not available0 Figure is zero or became zero due to roundingUS$ United States dollarsBillion means one thousand million.119

Trade Patterns and Global Value Chains in East AsiaAnnex 1Composition of regions and other economic groupingsNorth AmericaBermuda Canada Mexico United States of AmericaOther territories in the region not elsewhere specifiedSouth and Central America and the CaribbeanAntigua and Barbuda Brazil Ecuador Jamaica Saint LuciaArgentina Chile El Salvador Netherlands Antilles Saint Vincent and theGrenadinesBahamas Colombia Grenada Nicaragua SurinameBarbados Costa Rica Guatemala Panama Trinidad and TobagoBelize Cuba Guyana Paraguay UruguayBolivarian Rep. Dominica Haiti Peruof VenezuelaPlurinational State of Dominican Republic Honduras Saint Kitts and NevisBoliviaOther territories in the region not elsewhere specifiedEuropeAndorra Denmark Iceland Montenegro Slovak RepublicAustria Estonia Ireland Netherlands SpainBelgium Finland Italy Norway SwedenBosnia and Herzegovina France Latvia Poland SwitzerlandBulgaria FYR Macedonia Liechtenstein Portugal TurkeyCroatia Germany Lithuania Romania United KingdomCyprus Greece Luxembourg SerbiaCzech Republic Hungary Malta SloveniaOther territories in the region not elsewhere specifiedCommonwealth of Independent States (CIS)Armenia Georgia Moldova TurkmenistanAzerbaijan Kazakhstan Russian Federation UkraineBelarus Kyrgyz Republic Tajikistan UzbekistanOther territories in the region not elsewhere specifiedAfricaAlgeria Congo Guinea Morocco South AfricaAngola Congo, Dem. Rep. of Guinea-Bissau Mozambique SudanBenin Côte d'Ivoire Kenya Namibia SwazilandBotswana Djibouti Lesotho Niger TanzaniaBurkina Faso Egypt Liberia, Rep. of Nigeria TogoBurundi Equatorial Guinea Libya Rwanda TunisiaCameroon Eritrea Madagascar São Tomé and Principe UgandaCape Verde Ethiopia Malawi Senegal ZambiaCentral African Republic Gabon Mali Seychelles ZimbabweChad Gambia Mauritania Sierra LeoneComoros Ghana Mauritius SomaliaOther territories in the region not elsewhere specified120

Middle EastBahrain, Kingdom of Israel Lebanese Republic Saudi Arabia, Kingdom of YemenIran, Islamic Rep. of Jordan Oman Syrian Arab RepublicIraq Kuwait Qatar United Arab EmiratesOther territories in the region not elsewhere specifiedAsiaAfghanistan Hong Kong (China) Malaysia Papua New Guinea TongaAustralia India Maldives The Philippines TuvaluBangladesh Indonesia Mongolia Samoa VanuatuBhutan Japan Myanmar Singapore Viet NamBrunei Darussalam Kiribati Nepal Solomon IslandsCambodia Korea, Rep. of New Zealand Sri LankaChina Lao People’s Dem. Rep. Pakistan Chinese TaipeiFiji Macao (China) Palau ThailandOther territories in the region not elsewhere specifiedASEAN (Association of Southeast Asian Nations) / AFTA (ASEAN Free Trade Area)Brunei Darussalam Lao People’s Dem. Rep. The Philippines Viet NamCambodia Malaysia SingaporeIndonesia Myanmar ThailandDeveloped economiesAndorra Finland Lithuania SpainAustralia France Luxembourg SwedenAustria Germany Malta SwitzerlandBelgium Greece Netherlands United KingdomBermuda Hungary New Zealand United States of AmericaBulgaria Iceland NorwayCanada Ireland PolandCyprus Italy PortugalCzech Republic Japan RomaniaDenmark Latvia Slovak RepublicEstonia Liechtenstein SloveniaDeveloping AsiaAfghanistan India Mongolia Solomon IslandsBangladesh Indonesia Myanmar Sri LankaBhutan Kiribati Nepal Chinese TaipeiBrunei Darussalam Korea, Rep. of Pakistan ThailandCambodia Lao People’s Dem. Rep. Papua New Guinea TongaChina Maldives The Philippines TuvaluFiji Macao (China) Samoa VanuatuHong Kong (China) Malaysia Singapore Viet NamNewly Industrialized Economies (NIEs)Hong Kong (China)Korea, Rep. ofSingaporeChinese Taipei121

Trade Patterns and Global Value Chains in East AsiaAPEC MembersAustralia Indonesia Papua New Guinea ThailandBrunei Darussalam Japan Peru United States of AmericaCanada Korea, Rep. of The Philippines Viet NamChile Malaysia Russian FederationChina Mexico SingaporeHong Kong (China) New Zealand Chinese TaipeiDeveloping economiesAfghanistan Cuba Lebanon RwandaAlbania Djibouti Lesotho Saint Kitts and NevisAlgeria Dominica Liberia, Rep. of Saint LuciaAmerican Samoa Dominican Republic Libya Saint Vincent and the GrenadinesAngola Ecuador Macao, China SamoaAntigua and Barbuda Egypt Madagascar São Tomé and PrincipeArgentina El Salvador Malawi SenegalAruba Equatorial Guinea Malaysia SerbiaBahamas Eritrea Maldives Serbia and MontenegroBahrain, Kingdom of Ethiopia Mali SeychellesBangladesh Falkland Islands Marshall Islands Sierra LeoneBarbados Fiji Mauritania SingaporeBelize French Polynesia Mauritius Solomon IslandsBenin FYR Macedonia Mexico SomaliaBhutan Gabon Micronesia South AfricaBolivarian Rep. of Venezuela Gambia Mongolia Sri LankaBolivia, Plurinational State of Ghana Montenegro SudanBosnia and Herzegovina Grenada Montserrat SurinameBotswana Guam Morocco SwazilandBrazil Guatemala Mozambique Syrian Arab RepublicBritish Virgin Islands Guinea Myanmar Chinese TaipeiBrunei Darussalam Guinea-Bissau Namibia TanzaniaBurkina Faso Guyana Nauru ThailandBurundi Haiti Nepal Timor-Leste, Dem. Rep. ofCambodia Honduras Netherlands Antilles TogoCameroon Hong Kong (China) New Caledonia TongaCape Verde India Nicaragua Trinidad and TobagoCayman Islands Indonesia Niger TunisiaCentral African Republic Iran, Islamic Rep. of Nigeria TurkeyChad Iraq Niue TuvaluChile Israel Northern Mariana Islands UgandaChina Jamaica Oman United Arab EmiratesColombia Jordan Pakistan UruguayComoros Kenya Palau VanuatuCongo Saudi Arabia, Kingdom of Panama Viet NamCongo, Dem. Rep. of Kiribati Papua New Guinea YemenCook Islands Korea, Dem. People's Rep. of Paraguay ZambiaCosta Rica Korea, Rep. of Peru ZimbabweCôte d'Ivoire Kuwait The PhilippinesCroatia Lao People's Dem. Rep. Qatar122

Annex 2Geographical coverage of Chinese regionsRegionGeographical coverageNorth EastNorth CoastEast CoastSouth CoastCentralNorth WestSouth WestLiaoning (6), Jilin (7), Heilongjiang (8)Beijing (1), Tianjin (2), Hebei (3), Shandong (15)Shanghai (9), Jiangsu (10), Zhejiang (11)Fujian (13), Guangdong (19), Hainan (21)Shanxi (4), Anhui (12), Jiangxi (14), Henan (16), Hubei (17), Hunan (18)Inner Mongolia (5), Shaanxi (27), Gansu (28), Qinghai (29), Ningxia (30), Xinjiang (31)Guangxi (20), Chongqing (22), Sichuan (23), Guizhou (24), Yunnan (25), Tibet (26)123

Trade Patterns and Global Value Chains in East AsiaAnnex 3The schematic presentation of the IDE-JETRO AsianInternational Input-Output (AIO) TableIntermediate Demand (A) Final Demand (F) Export (L)IndonesiaMalaysiaPhilippinesSingaporeThailandChinaChinese TaipeiKorea, Rep. ofJapanUnited StatesIndonesiaMalaysiaPhilippinesSingaporeThailandChinaChinese TaipeiKorea, Rep. ofJapanUnited StatesExport to IndiaExport to Hong Kong (China)Export to EUExport to R.O.W.Statistical DiscrepancyTotal Outputscode (AI) (AM) (AP) (AS) (AT) (AC) (AN) (AK) (AJ) (AU) (FI) (FM) (FP) (FS) (FT) (FC) (FN) (FK) (FJ) (FU) (LG) (LH) (LO) (LW) (QX) (XX)Indonesia (AI) A II A IM A IP A IS A IT A IC A IN A IK A IJ A IU F II F IM F IP F IS F IT F IC F IN F IK F IJ F IU L IG L IH L IO L IW Q I X IMalaysia (AM) A MI A MM A MP A MS A MT A MC A MN A MK A MJ A MU F MI F MM F MP F MS F MT F MC F MN F MK F MJ F MU L MG L MH L MO L MW Q M X MPhilippines (AP) A PI A PM A PP A PS A PT A PC A PN A PK A PJ A PU F PI F PM F PP F PS F PT F PC F PN F PK F PJ F PU L PG L PH L PO L PW Q P X PSingapore (AS) A SI A SM A SP A SS A ST A SC A SN A SK A SJ A SU F SI F SM F SP F SS F ST F SC F SN F SK F SJ F SU L SG L SH L SO L SW Q S X SThailand (AT) A TI A TM A TP A TS A TT A TC A TN A TK A TJ A TU F TI F TM F TP F TS F TT F TC F TN F TK F TJ F TU L TG L TH L TO L TW Q T X TChina (AC) A CI A CM A CP A CS A CT A CC A CN A CK A CJ A CU F CI F CM F CP F CS F CT F CC F CN F CK F CJ F CU L CG L CH L CO L CW Q C X CChinese Taipei (AN) A NI A NM A NP A NS A NT A NC A NN A NK A NJ A NU F NI F NM F NP F NS F NT F NC F NN F NK F NJ F NU L NG L NH L NO L NW Q N X NValued atproducer’spriceKorea, Rep. of (AK) A KI A KM A KP A KS A KT A KC A KN A KK A KJ A KU F KI F KM F KP F KS F KT F KC F KN F KK F KJ F KU L KG L KH L KO L KW Q K X KJapan (AJ) A JI A JM A JP A JS A JT A JC A JN A JK A JJ A JU F JI F JM F JP F JS F JT F JC F JN F JK F JJ F JU L JG L JH L JO L JW Q J X JUnited States (AU) A UI A UM A UP A US A UT A UC A UN A UK A UJ A UU F UI F UM F UP F US F UT F UC F UN F UK F UJ F UU L UG L UH L UO L UW Q U X UFreight and Insurance (BF) BA I BA M BA P BA S BA T BA C BA N BA K BA J BA U BF I BF M BF P BF S BF T BF C BF N BF K BF J BF UImport from India (CG) A GI A GM A GP A GS A GT A GC A GN A GK A GJ A GU F GI F GM F GP F GS F GT F GC F GN F GK F GJ F GUtrade between member countries (A**, F**)International freight and insurance on theImport from Hong Kong (China) (CH) A HI A HM A HP A HS A HT A HC A HN A HK A HJ A HU F HI F HM F HP F HS F HT F HC F HN F HK F HJ F HUValued at C.I.FImport from EU (CO) A OI A OM A OP A OS A OT A OC A ON A OK A OJ A OU F OI F OM F OP F OS F OT F OC F ON F OK F OJ F OUTotal Inputs (XX) X I X M X P X S X T X C X N X K X J X UImport from the R.O.W. (CW) A WI A WM A WP A WS A WT A WC A WN A WK A WJ A WU F WI F WM F WP F WS F WT F WC F WN F WK F WJ F WUDuties and Import Commodity Taxes (DT) DA I DA M DA P DA S DA T DA C DA N DA K DA J DA U DF I DF M DF P DF S DF T DF C DF N DF K DF J DF UValue Added (VV) V I V M V P V S V T V C V N V K V J V UImport duties and import commoditytaxes levied on all trade* Each cell of A** and F** represents a matrix of 76 x 76 and 76 x 4 dimension, respectively.In a column-wise direction, each cell in the table shows the input compositions ofindustries of a respective country. A II for example shows the input compositions ofIndonesian industries vis-à-vis domestically produced goods and services, i.e. domestictransactions of Indonesia. A MI in contrast shows the input composition of Indonesianindustries for imported goods and services from Malaysia. The cells A PI , A SI , A TI , A CI , A NI ,A KI , A JI , A UI , A GI , A HI , A OI , A WI allow the same interpretation for the imports from othercountries.BA and DA give international freight and insurance and taxes on these importtransactions.Turning to the 11 th column from the left side of the table, it shows the compositions ofgoods and services that have gone to final demand sectors of Indonesia. F II and F MI , forexample, maps the inflow into Indonesian final demand sectors, of goods and servicesdomestically produced and of those imported from Malaysia, respectively. The rest ofthe column is read in the same manner as the 1 st column of the table.L *G , L *H , L *O , L *W are exports (vectors) to India, Hong Kong (China), EU and the rest ofthe world.Vs and Xs are value added and total input/output, as seen in the conventional nationalI-O table.124

Annex 4Visualization of supply chainsThe conventional approach to this type of study is the linkage analysis, which generally seeks to measure the “strength”of interconnectedness among industries, as discussed in Chapter VI. The magnitude of backward and/or forwardlinkages is calculated between countries, using the Leontief/Ghosh inverse matrix of an international input-output table.In Chapter VII, however, a new perspective for the evaluation of cross-border production networks was introducedemploying the input-output model of Average Propagation Lengths (Dietzenbacher et al. 2005).Average Propagation Lengths (APL) is defined as:v ij= 1*a ij/ (l ij– δ ij) + 2*[A 2 ] ij/ (l ij– δ ij) + 3*[A 3 ] ij/ (l ij– δ ij) + ...= ∑ ([ ] ⁄ ∑[ ] )where A is an input coefficient matrix, a ijis its element, l ijis a Leontief inverse coefficient, δ ijis a Kronecker delta whichis δ ij= 1 if i = j and δ ij= 0 otherwise, and k is a number of production stages along the path. We also define v ij= 0 when(l ij– δ ij) = 0.The first term in the right-hand side of the upper equation shows that the impact delivered through one-step paths (k=1),i.e. direct impact, amounts to an a ij/ (l ij– δ ij) share of the total impact given by the Leontief inverse coefficient (less unityfor diagonal elements). Similarly, two-step paths (k=2) contribute an [A 2 ] ij/ (l ij– δ ij) share, and three-step paths (k=3) an[A 3 ] ij/ (l ij– δ ij) share of the total impact. This is evident from L = I + A + A 2 + A 3 + ... (L: the Leontief inverse matrix) which isrearranged as L – I = A + A 2 + A 3 + ... , and hence (L – I) ij= A ij+ [A 2 ] ij+ [A 3 ] ij+ ...As an illustrative example, consider the following hypothetical supply chain:Calculation of APLINDUSTRY AINDUSTRY El ae= 0.20 (100%)Industry D(2)l (2) = 0.10 (50%)(1)Industry CIndustry EIndustry A(1) (2)(3)(4)Industry B Industry C Industry D Industry El (4) = 0.02 (10%)(1)Industry B(2)Industry CIndustry D(3)Industry El (3) = 0.06 (30%)(3)Industry D(4)Industry El (4) = 0.02 (10%)Source: IDE-JETRO.125

Trade Patterns and Global Value Chains in East AsiaWhen the share of an impact for each path is calculated as given at the ends of the branches, the APL between IndustryA and Industry E is derived as:v ea= 1 x 0% + 2 x 50% + 3 x 30% + 4 x (10+10)% + 5 x 0% + … = 2.7.That is, APL is formulated as a weighted average of the number of production stages in which an impact from industry j goesthrough until it ultimately reaches industry i, using the share of an impact at each stage as a weight. It represents the averagenumber of production blocks lining up in every branch of all the supply chains, or, in short, an industry’s level of fragmentation.Using these two types of information, namely, the “length” and “strength” of linkages, the supply chains can be visualizedas per the following example. Table 1 shows the cross-national APL of Asia-US region in 1985, by country of origin (theleft column) and country of destination (the top row). The values of APL were first calculated at the level of seven industrialsectors, and then aggregated into one sector per country by taking weighted averages with output shares as weights.Table 1APL in the Asia-US region, 1985China Indonesia Japan Korea,Rep. ofMalaysiaChineseTaipeiPhilippines Singapore Thailand UnitedStatesChina 3.45 3.21 4.55 3.09 4.59 2.80 2.72 2.97 3.27Indonesia 3.33 3.27 3.23 3.05 3.35 2.67 2.67 3.19 3.26Japan 3.84 3.48 3.74 3.35 3.90 3.57 3.39 3.52 3.76Korea, Rep. of 5.24 3.18 3.35 3.09 3.63 3.09 3.01 3.35 3.45Malaysia 3.41 3.19 3.30 3.27 3.30 2.59 2.48 2.85 3.20Chinese Taipei 3.70 3.16 3.32 3.63 3.14 3.27 3.00 3.29 3.37Philippines 3.39 3.05 3.41 3.33 2.83 3.45 2.87 3.02 3.22Singapore 3.33 2.44 3.10 3.15 2.60 3.28 2.97 2.80 3.09Thailand 3.43 2.91 3.46 3.48 2.74 3.45 3.04 2.74 3.18United States 3.82 3.26 3.74 3.62 3.44 3.68 3.40 3.34 3.30Source: The Asian International Input-Output Table, 1985, IDE-JETRO.The “strength” of linkages, as defined in a technical note in Annex 5, is then referred to. If the strength of linkage is lessthan 0.018, this particular supply chain is omitted from the picture, resulting in a blank cell in the APL table. If, on theother hand, the strength registers as being more than 0.025, this supply chain is considered as a cardinal path, whichis translated as a bold number in a highlighted cell. The result of the operation gives the following new APL table. Notethat we only consider cross-border linkages, or off-diagonals, and that the values have been rounded up into integers.Table 2Screened-out Average Propagation Lengths in the Asia-US region, 1985China Indonesia Japan Korea,Rep. ofMalaysiaChineseTaipeiPhilippines Singapore Thailand UnitedStatesChina 3Indonesia 3JapanKorea, Rep. ofMalaysia 3 2Chinese TaipeiPhilippinesSingapore 3ThailandUnited StatesSource: The Asian International Input-Output Table, 1985, IDE-JETRO.The information given in Table 2 is mapped into the diagram in Figure 1 of Chapter VII as the supply chains amongIndonesia, Japan, Malaysia and Singapore in the case of the year 1985.126

Annex 5Other technical notesIndustrial specialization of countriesIndustrial specialization is measured by a deviation of output share of an industry from the average of output share ofthat industry across the countries, or more specifically:IS r i =x r i /Σ xr iΣ ( x r i /Σ xr i ) / nriiwhere x r is the output of industry i in country r, and n is the number of countries in the region. This measurementiis advantageous over the conventional Location Quotient (LQ) since it avoids the overwhelming size effect of largeeconomies (like the United States) on the industrial structure of the region.Strength of linkagesThe “strength” of linkages is formulated as a simple element-to-element average of Leontief inverse coefficients (lessunity for diagonals) and Ghosh inverse coefficients (less unity for diagonals), or {(l ij– δ ij) + (g ij– δ ij)}/2, where l ijis a Leontiefinverse coefficient, g ijis a Ghosh inverse coefficient, and δ ijis a Kronecker delta which is δ ij=1 if i=j and δ ij=0 otherwise.The values were first calculated at the level of seven industrial sectors, and then aggregated into one sector per countryby taking weighted averages with output shares as weights.Cross-border transfer of employment opportunitiesThe sectoral employment of each country generated by the final demands of its trade partners can be calculated in thefollowing form:Emp rs = E r L rs y swhere E r is a diagonal matrix with employment coefficients (the number of workers required in order to produce oneunit of output) of country r in its corresponding diagonal elements and zeros elsewhere, L rs is the international Leontiefinverse matrix, and y s is a final demand vector of country s (= a trade partner).Cross-border transfer of value addedTransfer of value added from country s to country r can be defined as follows:TVA rs = u’V r L rs y swhere V r is a diagonal matrix with value-added coefficients of country r in its corresponding diagonal elements and zeroselsewhere, L rs is the international Leontief inverse matrix, y s is a final demand vector of country s, and u is a summationvector. The calculated results are then standardized by taking a deviation of each country’s total figure from the regionalgrand average, to give indices of value-added gain and give-out potentials.127

Trade Patterns and Global Value Chains in East AsiaDecomposition of growth contribution by originsConsider a three-region I-O model as given as follows:x = (I – A) -1 y = L ywhere x, A, y and L are, respectively, a vector of output, a matrix of interregional input coefficients, a vector of finaldemand, and a matrix of the interregional Leontief inverse. They are defined in the following forms:1x 2A 11A 12A 13x 3 21A 31 22A 32 23A 33 2y 321L 3122L 3223L 33y 1 L 11 L 12 L 13x = ( ), A = ( ), y = ( ), L = ( ) = (I – A) -1where x 1 = (x 1 1 ,x1, 2 ...,x1 )’ represents the output vector of region 1 with n sectors, and I is an identity matrix with a dimensionnof 3n x 3n.Then the outputs of region 1 in the base year (0) and target year (t) can be given as follows.x 1 (0) = L 11 (0) y 1 (0) + L 12 (0) y 2 (0) + L 13 (0) y 3 (0)x 1 (t) = (L 11 (0) + ∆L 11 ) (y 1 (0) + ∆y 1 ) + (L 12 (0) + ∆L 12 ) (y 2 (0) + ∆y 2 ) + (L 13 (0) + ∆L 13 ) (y 3 (0) + ∆y 3 )Using the two equations above, the output growth rate of region 1 can be written as:[∆x 1 ] i/ [x 1 (0)] i= [(x 1 (t) – x 1 (0))] i/ [x 1 (0)] i(i = 1, 2, 3, ..., n)= [(L 11 (0) ∆y 1 + L 12 (0) ∆y 2 + L 13 (0) ∆y 3 )] i/ [x 1 (0)] i+ [(∆L 11 y 1 (0) + ∆L 12 y 2 (0) + ∆L 13 y 3 (0))] i/ [x 1 (0)] i+ [(ΔL 11 Δy 1 + ΔL 12 Δy 2 + ΔL 13 Δy 3 )] i/ [x 1 (0)] iin which the output growth of region 1 is decomposed into the contribution of its own domestic demand (Δy 1 ), of thedemand from region 2 (Δy 2 ), and of the demand from region 3 (Δy 3 ), and corresponding technical changes (ΔL 11 , ΔL 12 ,ΔL 13 ).128

© IDE-JETRO and World Trade Organization, 2011. Reproduction of materialcontained in this document may be made only with written permission of theIDE-JETRO and WTO Publications Managers.With written permission of the IDE-JETRO and WTO Publications Managers,reproduction and use of the material contained in this document for non-commercialeducational and training purposes is encouraged.WTO ISBN 978-92-870-3767-1This publication will also be available in French and SpanishFrench title ISBN: 978-92-870-3768-8Spanish title ISBN: 978-92-870-3769-5Printed by the WTO SecretariatPublication designed by Giacomo Frigerio© World Trade Organization 2011World Trade OrganizationCentre William RappardRue de Lausanne 154CH-1211 Geneva 21SwitzerlandEmail: publications@wto.orgOnline WTO bookshop: http://onlinebookshop.wto.orgPhoto credits: iStockphoto

The increasing internationalization of supply chains is challenging ourinterpretation of conventional trade statistics, as traditional concepts likecountry of origin, or the distinction between goods and services, becomeblurred.This publication, jointly produced by the WTO and IDE-JETRO, focuses on thefactors that have helped to shape global production. Starting with demand,it describes how a changing economic environment has contributed to thephenomenon of global production. Infrastructure services, tariffs, foreigndirect investment, cheaper technology and lower transportation costs haveall affected the trading environment and the international exchange of goods,fostering increased market access, amplifying cross-border links betweencompanies and causing trade in intermediate goods to increase. Thispublication considers the effect of these factors on international productionnetworks, with a particular focus on “Factory Asia”. It also shows how thedevelopment and evolution of these production networks has promotedeconomic growth and employment in Asia.A new statistical measurement – trade in value added – is proposedto complement conventional trade statistics for a deeper and morecomprehensive analysis of trade patterns. This methodology offers a newperspective for trade analysts, as it dramatically re-evaluates the importanceof some economies as “countries of origin”.The “Made in the World” initiative hasbeen launched by the WTO to support theexchange of projects, experiences andpractical approaches in measuring andanalysing trade in value added.www.wto.org/miwi9 789287 037671