Globalization and trade flow

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Staff Working Paper ERSD-2010-12

Date: June 2010

World Trade Organization
Economic Research and Statistics Division

Globalization and trade flows: what you see is not what you get!

Andreas Maurer and Christophe Degain WTO Manuscript date: 22 June 2010

Disclaimer: This is a working paper, and hence it represents research in progress. This paper represents the opinions of theauthors, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154,CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

Globalization and trade flows: what you see is not what you get!
Andreas Maurer and Christophe Degain1

Abstract: The trade collapse that followed the recent financial crisis has led to a renewed interest on the measurement issues affecting international merchandise trade statistics in the new globalized economy. Theinternational fragmentation of industrial production blurs the concept of country of origin and calls for the production of new statistics on the domestic content of exports, with a view of estimating trade in value added. Alongside, the international statistical community has revised in 2010 the concepts and definitions on both, international merchandise trade and trade in services statistics.This paper discusses the various issues related to the concepts of "goods for processing" and "intra-firm trade" in trade statistics, and provides an overview of the method of analysing the impact of the fragmentation of production in international value chains.

Keywords:

trade statistics, goods for processing, intra-firm trade, trade in intermediate products, trade in value added

JELClassification:

C49, F13, F23, F49

1

With contributions from Florian Eberth, Hubert Escaith, Andreas Lindner and Yann Marcus.

Page 2

A. Introduction The 2008 financial crisis, which translated into a global economic crisis, impacted on trade in a harsh manner. As of the fourth quarter of 2008, trade flows started to deteriorate, although unevenly across regions. While Europerecorded a 16 per cent year-on-year decline of its merchandise exports, comparable rates in North America and Asia were only 7 and 5 per cent respectively. Estimates of 2009 point towards a merchandise trade to GDP elasticity of up to 5 at world level while a long-term world average of annual values between 1960 and 2008 indicates an elasticity of 1.6. However, for manufactured goods this value isslightly higher (2.1), that is, manufactures respond more to changes in GDP than non-manufactures. Several explanations have been advanced to explain this over-shooting of trade in relation to GDP movements, amongst them global production chains and vertical specialization, decline of transport costs and tariffs, and improved infrastructure services. Merchandise trade statistics record trade flows ona "gross basis" whereas the gross domestic product (GDP) aggregate measures the value added created during the production of goods and services (i.e. output less intermediate consumption). Thus, trade in intermediate products is only taken into account in GDP through the additional value produced at each step of the production process.2 In merchandise trade statistics, in contrast, intermediategoods are counted at full value each time they cross the border. The share of intermediate manufactured products in non-fuel world trade was around 40 per cent in 2008.3 This proportion can vary among countries depending on their export specialization: for Brazil, China or India the share of intermediate goods in total flows in the manufacturing sector was about 70 per cent in 2005.4 Through the...
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