Trade in value added, what is the difference?

 

iPod Ad in Beijing

Christopher Findlay, Dean of Faculty of Professions, University of Adelaide

Would you believe it?  Indonesia actually has a trade surplus with China.  How did this happen?  This is what we find in a new data set released by the OECD and the WTO last month.

We are familiar with the iPod story: it is exported from China but only about 10% of the value of the product is actually added in China.  The rest comes from other countries, either inputs to the item or services that facilitate the process of its assembly. This sort of case study has prompted work on the new data set, which is constructed to find out where the value in a product is created, from foreign sources or domestic.

What are the key messages from the dataset about Indonesia?

The key messages from the authors of the data set about Indonesia are the following (taken from here). These messages challenge a number of understandings about Indonesian trade.

  1. A value-added analysis of trade shows that Indonesia exports to a broader set of countries than its main Asian trading partners.  It produces inputs that are further processed in Japan and Korea and subsequently exported to third countries.
  2. Imports from China are lower in value-added terms than in gross terms, and instead of a bilateral deficit Indonesia has a surplus with China. The trade surplus with Japan and Korea is reduced
  3. Indonesia is well connected to global value chains in sectors such as machinery, electronics and textile products
  4. The services content of Indonesian gross exports is rather low (22%). Manufacturing industries use less services inputs than in other countries in the database.

The paper says that when looking at the flows of value added,

Japan is no longer the main destination of Indonesian exports.  A significant share of exported value-added goes to the US (13%) and European countries including Germany (3%), the United Kingdom (2%) and France (2%).

Indonesia remains therefore critical interested in the global trading system, as importer and exporter.

Indonesia exports intermediate inputs that are used by Japanese and Korean firms to produce goods further exported to other countries.

The paper also reports that imports into Indonesia are actually higher from Japan and the US than the gross figures suggest, while imports of value added in China are less than the flows suggested by the gross values of trade.

For these reasons, a deficit with China turns into a surplus in value added terms!

There is a view that Indonesia is not well connected to global value chains.

The report from the new data base says, when breaking down the value of exports in gross terms to value added which is imported and that which is locally produced,

  • The foreign content of gross exports is relatively low in the primary sector and for food products [this might be expected for products at early stages of the production process, Australia shares this feature]
  • but Indonesia is well connected to global value chains in industries such as machinery, electronics and textiles.
    • For machinery, 40% of the value of gross exports consist of embodied foreign value-added, indicating that Indonesia is involved in processing activities.
    • The percentage is slightly lower for textile products and electronics, but a high percentage of imported intermediate inputs in these products are used to produce exports

However it looks like there is a problem in the services sector.   The report observes that

  • Indonesia exports fewer services than other countries in the database.
  • Only 21% of the value of gross exports represents value-added from the services industries.
  • Not only is the services content of exported services lower (indicating that goods used as inputs represent a high share of costs for exporting services companies) but also manufacturing industries tend to incorporate fewer services inputs than in other countries.

The report suggests that Indonesia firms are much more integrated, and providing services in-house, compared to their peers.  This is a big topic for further work.

 

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1 Comment

Filed under East Asia, Economic Integration, Indonesia, Review of article, Services, Trade

One response to “Trade in value added, what is the difference?

  1. Pingback: TiVA and saving the world trade | adakalanya

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