Export, Innovate, Invest - The Canadian Trade Commissioner Service

Is global value chain-driven trade on the wane?

World trade has experienced a slowdown, as illustrated in the previous CanadExport facts and figures “Post-crisis world exports: neither desirable nor dire”. Breaking down world trade into three types of goods (intermediate, consumption and capital) reveals that a fall in intermediate exports is a large contributing factor behind this deceleration in world trade.

Trends in World Exports by Type of Goods

Data: UNComtrade, BEC
Source: Office of the Chief Economist, DFATD

Intermediate goods are inputs used in the production process. They comprise various industrial supplies, mineral fuels, lubricants, as well as parts and accessories. Consumption goods are products destined for final use, such as food and beverages, consumed by households. Capital goods are durable products used in industrial production such as machinery, electrical equipment, locomotives and aircraft.

From 2000 to 2008, world exports surged nearly US$8 trillion, corresponding to an 11.8% average annual increase1. Of this US$8 trillion expansion, US$4.3 trillion, or 54.3%, was due to the rise in exports of intermediate goods. Trade in intermediate goods is indicative of integration into global value chains (GVCs) because intermediate goods link production processes across borders and sites. When trade in inputs increases, the entire production process becomes more fragmented internationally and GVCs become more elaborate. Hence, trade in intermediate goods can be used as a proxy to measure GVCs.

Global growth in GVCs during 2000-2008, as evidenced by the surge in intermediate exports, was likely due to several factors.

First, continuing improvements and the lower cost of information and communication technologies allowed for the more efficient management of complex production arrangements, making participation in GVCs more feasible. Second, a decline in trade barriers and more liberal foreign direct investment regimes provided additional incentives to firms, particularly multinational corporations, to expand their operations across borders. Growth in trans-border merger and acquisition activities from 2002 until the first half of 2007 is an indication of this trend2. Third, a continuing decline in transportation costs and improvements in technology made it easier and less costly for firms to participate in GVCs. Finally, the gains seen by those firms entering GVCs likely caused an imitation effect, with competitors also fragmenting their production internationally in order to stay on a level playing field.

After 2008, world trade plummeted in response to the global financial crisis, but fully recovered in a span of two years and continued to grow into 2011. In 2012, however, growth in world exports slowed to 0.3% from 18.3% a year prior, in a context of global GDP growth decelerating from 3.1% to 2.6%.

As with the 2000 to 2008 boom, the more recent slowdown was led by exports of intermediate goods; while total exports rose US$47.5 billion in 2012, intermediate exports fell by US$ 116.8 billion. The greater movement in intermediates is partly a magnification effect, as intermediate goods cross borders much more frequently than final goods do. The slowdown in exports of final goods leads to a greater slowdown, if not a decline, of intermediate exports.

More importantly, this decline could also indicate firms’ withdrawal from participating in GVCs, and there are several possible reasons why this could indeed be the case. First, large natural disasters, such as the 2011 tsunami in Japan and flood in Thailand highlighted the vulnerability of GVCs to possible breaks in the supply chain, motivating some firms to turn to closer, less vulnerable domestic sources of intermediate inputs.

Second, production processes have become more automated and less reliant on labour, while at the same time, labour-intensive production processes in emerging markets are becoming more costly with local workers pressing for higher wages3. All of these factors are reducing incentives to outsource or offshore, thus decreasing the use of GVCs and lowering trade in intermediates.

The Upshot

Intermediate goods drove pre-crisis world trade to unprecedented levels and stood behind the recent slowdown as well. The shrinking of trade in intermediate goods may indicate that participation in GVCs is also on the wane.

For more information, visit Foreign Affairs, Trade and Development Canada’s Office of the Chief Economist.


1 In this analysis “world exports” refer to a group of 95 countries for which 2000-2012 trade statistics are made available by UNComtrade. This group of countries accounts for 85.5% of total world exports in 2012. Moreover, total world exports are greater than the sum of intermediate, consumption and capital exports because there are some exported goods that do not fall in any of these three categories.

2 KPMG Press Release: Global Deal Environment Set to Deteriorate into H2 2008, Claims KPMG’s Global M&A Predictor.

3 For instance, according to The Economist magazine (January 2013), recent growth in Chinese wages has outpaced productivity growth.

Subscribe to: E-magazine and RSS Feed

Twitter@TCS_SDC
Use #CanadExport