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Global value chains and trade in services Sébastien Miroudot OECD “Selected Outstanding Issues in Services, Trade and Development” 3-5 May 2011 – Manila, Philippines

Outline of the presentation 1. Global value chains: the role of services a) The fragmentation of production and global value chains analysis b) Services in the value chain c) Vertical specialisation in services

2. Evidence and measurement issues a) Trade in intermediate services b) Intra-firm trade in services c) From vertical trade to the measurement of trade in value-added terms for services

3. Policy implications a) Trade in tasks and offshoring in services b) Trade liberalisation and trade costs in services

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1. GLOBAL G O VALUE CHAINS: C S THE ROLE OF SERVICES

Background: the fragmentation of production • The second “unbundling” (Baldwin, 2006) – First unbundling (1850-1914 / 1960s to present): separation p of p production and consumption p – Second unbundling (from mid-1980s): separation of production in different stages (geographically and organisationally)

• Causes: – Reduction of trade costs (container, Internet…) … but also services trade liberalisation – Changing global demand structures (emerging economies)

• Consequence: New firm strategies of vertical specialisation

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Typology of sourcing strategies Offshoring

Domestic country O u t s o u r c i n g

Foreign country

Inside the firm

Domestic in-house production

Vertical foreign direct investment

Indepen dent supplier

Domestic outsourcing

Offshoreoutsourcing

Global value chains analysis • The “commodity chain” (Hopkins and Wallerstein, 1977) • The “global commodity chain” (Gereffi, 1994) Textile companies

The apparel commodity chain (Appelbaum and Gereffi, 1994)

Natural Fibres: Cotton, wool, silk etc.

Yarn (spinning)

Fabric (weaving, grading)

Apparel manufacturer Garment factories (design, pattern, nesting, cutting sewing, press & packaged)

Synthetic fibre: Oil & natural gas

Raw material networks

Petrochemicals

Synthetic fibre

Component networks

Retail outlets

Brand-named apparel (design & brand) Overseas buying offices

Department stores Specialty stores Mass merchandise chains Discount chains

Domestic & overseas subcontractors

Trading companies

Production networks

Export networks

Factory outlets Marketing networks

• The “global value chain” (Gereffi, Humphrey and Sturgeon, 2005) • “Global production networks” (Coe and Hess, 2007)

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The value chain: importance of services

• The value chain is a systematic approach to the analysis of the competitive advantage of companies, developed by M.E. Porter in his book, Competitive Advantage (1985). • The chain consists of a series of activities that create and build value, distinguishing between “primary activities” and “support activities”.

Source: OECD, 2007

Costs and fragmented production (Jones & Kierzkowski, 2004) Single production block, constant returns to scale Two production blocks, each better suited to a region Further degrees g of fragmentation lowering total marginal costs of production

Cost of service link activities (fixed cost)

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Vertical specialisation in services • Mudambi and Venzin (2010): the banking industry – 5% of world GDP – Some banks are highly internationalised: Citigroup is present in g bank (in 100 countries, HSBC in 87 countries. ICBC is the largest terms off market k capitalisation l in 2009), 162 overseas subsidiaries – Growth by serving new markets and by disintegrating the valuecreating activities – Branch offices at the end (contacts with customers) but most activities can be supplied cross-border due to their high degree of digitalisation – Value-creating activities are undertaken in financial services hubs (such as London and New York) and in offshored locations with skilled human resources and processing capabilities. – Example of vertical integration: Unicredit group • “Competence centers”: core banking competences located in Italy, asset management in Ireland, investment banking in Germany, loans and mortgages in Austria, credit card in Turkey, payments in the Czech Republic.

The offshore services global value chain (Gereffi, 2010)

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Mapping of activities by country

India

Philippines

Chile

Czech Republic

Source: Gereffi (2010)

2. EVIDENCE C AND MEASUREMENT ISSUES

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Trade in intermediate services Imports of intermediate goods and services (1999=100)

As a share of total trade

250

% 100%

200

80%

150

60%

100

40%

90%

70%

50%

30% 20%

50

10% 0%

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Goods

Services

Goods

Services

Source: Miroudot et al. (2009)

Intra- and inter-regional imports of intermediate services (billion USD, 2005) The map represents imports of intermediate services above 5 billion USD. Circles stand for intra-regional imports and arrows for inter-regional imports. Arrows and circles are proportional to the value of the flows.

Source: Miroudot et al. (2009)

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Share of regions in world imports of intermediate services (2005)

Construction 1.0 0.9

Other services

Trade and repairs

0.8 0.7 0.6 0.5

Other Business activities

Hotels and Restaurants

0.4 0.3 0.2 0.1 0.0

R&D

Transport, storage and aux.

Computer and related activites

Post and Telecommunications

Renting of Machinery and  Equipment Asia

Finance

Europe (excluding intra‐EU trade)

North America

Source: Miroudot et al. (2009)

Measuring trade in intermediates: goods versus services Stage 1: collection of bilateral trade data (by product) OECD ITCS database (SITC Rev. 3)

Mijpt

Stage 2: estimation of bilateral flows of intermediate inputs (by product/industry) BEC classification

Iijpt

Goods

OECD TISP & UN database (EBOPS)

Services

Stage 3: identification of the using industry k

I/O coefficients in import matrix αipkt

Mijpt

I/O coefficients ffi i in import matrix - αipt

Iijkpt

Iijpt

Assumption: Share of intermediate services in bilateral services imports is the same across all partners

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The ratio of FDI to trade 350% 300% 250% 200% 150% 100% 50% 0% 1995

1996

1997

1998

1999

FDI to services trade

2000

2001

2002

FDI to goods trade

2003

2004

2005

FDI to trade

Source: Miroudot et al. (2009)

Intra-firm trade in services Cross-border trade in Other Private Services for the US in 2008 Exports

Imports

A. Other private services 1. Education 2. Financial services 3. Insurance services 4 Telecommunications 4. 5. Business, professional, and technical services Computer and information services

Total 233,529 17,796 60,190 10,756 9 163 9,163 113,525 12,599

Affiliated 74,551 [1] 9,723 [2] 3 916 3,916 55,483 4,124

Share 0.32 [1] 0.16 [2] 0 43 0.43 0.49 0.33

Total 153,267 5,204 19,143 42,939 7 193 7,193 76,284 16,139

Affiliated 60,762 [1] 7,636 [2] (D) 50,603 12,417

Computer and data information services

8,044

3,495

0.43

15,214

11,962

0.79

4,555 26,942 17,139 7,942 48,901 1,399 4,019

629 23,705 14,292 2,412 10,952 809 2,832

0.14 0.88 0.83 0.30 0.22 0.58 0.70

925 21,565 14,885 958 22,736 2,269 2,194

455 18,529 10,877 517 8,263 518 822

0.49 0.86 0.73 0.54 0.36 0.23 0.37

Database and other information services Management and consulting services Research and development and testing services Operational leasing Other business, professional, and technical services Accounting, auditing, and bookkeeping services Advertising Architectural, engineering, and other technical services

Share 0.40 [1] 0.40 [2] 0.66 0.77

5,918 1,097 0.19 1,086 411 0.38 Construction 1,679 652 0.39 827 205 0.25 Industrial engineering 3,776 609 0.16 1,603 714 0.45 Installation, maintenance, and repair of equipment 9,661 1,386 0.14 4,945 2,648 0.54 g services 7,269 , 136 0.02 1,902 , 153 0.08 Legal Mining services 3,080 1,159 0.38 728 8 0.01 Trade-related services 6,112 1,626 0.27 1,047 741 0.71 Training services 1,414 45 0.03 779 37 0.05 6. Other services 22,099 5,428 0.25 2,505 (D) Film and television tape rentals 13,598 5,428 0.40 1,878 (D) Notes: Millions of US Dollars; (D) - Suppressed to avoid disclosure of data of individual companies. [1] Education consists of expenditures for tuition and living expenses by students studying in foreign countries, so these are transactions between unaffiliated parties. [2] Most insurance services transactions are deemed to be unaffiliated even when they are between affiliated companies, because the services are deemed to be provided to the policyholders who pay the insurance premiums and who are unaffiliated with either company. Source: US Bureau of Economic Analysis

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Share of Affiliated in Total Exports (i.+ii.)

Share of Affiliated in Total Imports (i.+ii.)

i. Share of US Parents in Total  Exports

i. Share of US Parents in Total  Imports

ii. Share of US Affiliates in Total Exports

ii. Share of US Affiliates in Total Imports

2008 8

2007 7

2006 6

2005 5

2004 4

2003 3

2002 2

2001 1

2000 0

1999 9

1998 8

1997 7

1996 6

1995 5

1994 4

1992 2

2008 8

2007 7

2006 6

2005 5

0% 2004 4

0% 2003 3

5%

2002 2

5%

2001 1

10%

2000 0

10%

1999 9

15%

1998 8

15%

1997 7

20%

1996 6

20%

1995 5

25%

1994 4

25%

1993 3

30%

1992 2

30%

1993 3

Share of intra-firm trade in US private services imports and exports

Source: US Bureau of Economic Analysis

Sales of vertical affiliates: estimates based on firm-level data Percentage of affiliates Manufacturing industries Horizontal FDI Vertical FDI Complex FDI

Australia Austria Belgium Canada Chile Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy

39.2% 28.1% 32.7%

Sales of vertical foreign affiliates

As a share of cross-border trade (imports)

Total (Mil. USD)

Goods (%)

Services (%)

2.2% 3.2% 0.2% 1.4% 0.2% 0.0% 1.0% 13.4% 10.0% 5.2% 0.0% 1.1% 0.4% 23.0% 5.2%

9.4% 41.9% 21.2% 0.1% 0.0% 6.5% 3.0% 1.0% -

7,633 7,840 31,499 21,135 69 57 4,154 76 9,954 , 95,825 70,369 363 1,245 664 16,854 174 29,766

Percentage of affiliates Services industries Horizontal FDI Vertical FDI Complex FDI

Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic p Slovenia Spain Sweden Switzerland United Kingdom United States Total OECD members

30.6% 32.5% 36.9% Sales of vertical foreign affiliates

As a share of cross-border trade (imports)

Total (Mil. USD)

Goods (%)

Services (%)

2.9% 0.0% 125.2% 0.2% 1.5% 13.4% 0.0% 0.0% 0.3% 0.2% 4.5% 4.8% 62.2% 0.9% 7.2% 5.6%

25.4% -

53,763 583 26,492 720 10,830 48 9,468 59 626 229 495 27,032 16,414 107,403 53,946 257,192 863,024

Source: Lanz and Miroudot (2011)

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Vertical trade in services: the import content of crossborder services exports Finance and insurance

Trade and repairs

Other business activities

Post and telecommunications 1995 2005

Computer activities

Research and development

Construction

Transport, storage & auxiliary activities

0%

5%

10%

15%

20%

25%

30%

Source: Miroudot and Ragoussis (2009)

Towards the measurement of trade in value-added terms

•

Traditional international trade statistics do not adequately describe current trade flows nor allow full understanding of the nature and impact of economic globalisation whether in terms of income or employment.

•

When a g good or service crosses borders several times at different stages g of p processing, g, conventional trade statistics record each time the full value of the product, including embodied (imported) intermediate inputs. – Leads to “multiple-counting” – Tends to hide actual patterns of trade among countries as the economy producing the final good or service seems to export the whole value when in reality it may have only marginally contributed to this value.

•

What can we do? – New indicators to assess the impact of vertical specialisation on trade and to understand international production networks. – Measuring the value-added content of trade and calculating the contribution of each economy to the global value chain.

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Issues regarding value-added trade in services • Low quality of bilateral services trade statistics by industry – Many missing observations (when a full matrix would be needed) – Disaggregated data represent a small share of aggregate totals

• BEC classification does not cover services: lack of adequate methodology to distinguish between intermediate and final consumption • Weak correspondence between EBOPS and ISIC classifications • But we need services: – Exports of goods in value added terms have to account for imported services – Vertical specialisation in services industries

• Services traded through Mode 3: ‘domestic’ value-added?

3. POLICY O C IMPLICATIONS C O S

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Trade in tasks and offshoring in services •

Division of labour is an important source of productivity gains…

• •

Fragmenting services activities: the “trade in tasks” paradigm Concerns about the number of jobs “offshorable” but offshoring in services remains limited:

– … but affects patterns of employment

– Trade d costs in services are still ll h high h – Tasks may come as a “bundle” : complementarities

•

How trade affects labour markets is a complex question – No effect on total employment – Effect on the composition of labour demand (and potentially wages but evidence is mixed) – Polarisation in the US and the EU: shift towards high-skill and low-skill jobs at the expense of medium-skill jobs. Trade or skill-biased technological change?

•

Evidence that offshoring lowers the costs, enhance productivity and create space for expansion and new hiring in the offshoring firm: – Off Offshoring h i iintermediate di services i enhance h iinnovation i iin Irish i h fi firms (Gö (Görg and d Hanley, l 2009) – In Germany, offshoring of tasks is associated with a shift towards more non-routine and interactive tasks being performed onshore (Becker et al., 2009)

•

Benefits of trade in tasks: – Expanding variety and transmission of productivity gains across international boundaries – Optimal spending share on intermediates (Jones, 2011)

Trade liberalisation and trade costs in services

• •

•

•

105

Trade costs indices for goods and services (cross-border trade)

Trade costs index (1995=100) 90 95 100

•

Trade costs in services remain high and could explain why vertical specialisation is lower in services than in goods (despite an important increase in recent years) No progress in multilateral trade negotiations on services (GATS was 17 years ago) Many new RTAs with improved services commitments but services trade liberalisation is mainly ‘unilateral’ Key sectors for global value chains are still highly regulated (e.g., transport, financial services, professional services) – also an impediment on goods trade. Complementarities between services: about 40 different types of services are i involved l d when h a manufacturing f t i fi firm internationalizes its production (Swedish National Board of Trade, 2010). To what extent non-discrimination commitments translate into lower trade costs for firms?

85

•

1995

2000

2005

2010

Year Goods

Services

Source: Miroudot, Sauvage and Shepherd (2010)

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www.oecd.org/trade

Contact [email protected]

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