A broader perspective using value addition in trade
By Aakanksha Shrawan
After almost a year of tariff retaliation, a mutual decision between the US and China seemed in sight when both agreed for talks to reduce the momentum of the trade war. However, no end seems in sight as the Donald Trump administration, in addition to the existing levies, increased tariffs from 10% to 25% on $200 bn worth of Chinese imports in May 2019. In 2018, the levies imposed by the US impacted $250 bn worth of Chinese imports where the US imported $539 bn worth of Chinese goods (almost 46%). Retaliation by China, in turn, led to imposition of tariffs on $110 bn worth of imports when in 2018 China imported $120 bn worth of US goods (92%). While these numbers give an impression that the tariffs imposed by the US on China will only affect Chinese exports, the impact is not so easy to isolate. According to the WTO and the World Bank, two in three products exported today come from the global value chains. In an integrated world order, trade flows no longer only involve two nations, i.e. an exporter and an importer. Most goods are a part of global value chains (GVC) where different stages of the production process such as manufacturing, assembling and trading happen in different countries, depending on the comparative advantage of each nation. The manufacture of a mobile phone, for example, involves the participation of around 10 countries.
Analysis using data on gross exports or imports fails to account for the presence of GVCs. The value of gross exports or imports is shared by a number of countries that were involved in even one stage of the production process. Thus, it becomes worthwhile to examine the actual losers and gainers. A tool that can help is the World Input Output Database (WIOD). It is a compilation of tables for 43 countries that constitute 85% of the world’s GDP. It includes a table for each country that reflects how much of each commodity is produced and further used by each of the 35 industries as an intermediate good. For example, we can estimate ‘how many dollars of Belgian fabricated metal products are used by the French transport equipment industry’. These tables provide a description of the interdependent nature of production processes and how these interdependencies manifest themselves into global trade flows.
Consider the example of US imports of electrical machinery and food products manufactured by China. These two were amongst the major imports of the US in 2018. Since the latest data for WIOD is for 2014, we try to evaluate the value added by China in its exports of the above two items. While the total gross output of electrical machinery and equipment was valued at $1,186.4 billion in 2014, intermediate consumption was $920.521 billion (77.58%). So, the domestic value added by China in exports of electrical machinery to the US was a paltry 22%. Similarly, in the case of food products (processed fruit and vegetables, snack foods, spices), the total value of output was $1,807.71 billion, of which only 23% of the value in production was added by Chinese factors of production. Although it has been documented that the domestic value added in Chinese exports has seen an upward trend, a considerable share of raw materials is still imported from other countries.
Similarly, soybean was the largest US agri-export to China. But with the trade war, China has temporarily paused its purchase of soybean from the US. While the total value of production of ‘Manufacture of food products and beverages’ (the category in which soybean falls into) was $970.3 bn for the US, the value added by American capital and labour was only $245.01 bn (25.2%). This indicates that whatever tariff is imposed by China on the US (as tariffs range from 5-25%), the net impact on the US will only be on about 25% of the value of production.
Thus, the conventional reporting of international trade overstates the impact of the tariff war on exporting and importing nations. This analysis, therefore, suggests that a move such as the ongoing tariff retaliation by the US and China needs to be more seriously evaluated by the two nations, given the globalised nature of trade. While the direct losers in the trade war are the consumers in the US and China, along with the sectors that are facing retaliatory tariffs from the other country on account of rising production costs, the impact of the tariffs on other nations (transmitted because of GVCs) should also be considered. Also, an evaluation based on individual commodities or products should be undertaken since WIOD only evaluates trade flows based on broad categories of goods and services.