The evolution of trade between the four regions in the West Pacific in both gross and value added terms is analyzed using international input-output tables. It is found that value added exports of computers and electronic equipment of the Asian economies are very limited in comparison with their gross exports, and that the largest shares of value added exports were accounted for by the services sectors in every region, particularly so in Japan and the US. Surpluses and deficits in bilateral trade balance in value added terms are generally lower than those in gross terms, and that Japan’s manufacturing sector played a central role in the production chains in the West Pacific, and the US contributed to the region by providing services in value added terms. The inter-temporal factor decomposition of trade shows that deepening input-output linkages between the four regions played an important role in promoting trade in value added in the West Pacific. This process was partly interrupted by the economic turmoil during the 1995-2000 period, but intensified toward 2005. The service sectors seem to have played an increasingly important role in enhancing trade in value added in the West Pacific.
The online version of this article (doi:10.1186/s40008-015-0014-7) contains supplementary material, which is available to authorized users.
Competing interests
The author declares that he has no competing interests.
1 Background
The recent trade literature has been increasingly focusing on trade in value added as against gross trade provided in official trade statistics. Foster-McGregor et al. [1], OECD-WTO [2] with the fragmentation of production processes across borders and the intensification of interconnectedness within supply chains, notably in East Asia, the importance of trade in intermediates has increased significantly in both goods and services trade. Hayakawa [3], Meng et al. [4], Miroudot et al. [5] official statistics on gross trade such as customs-clearance statistics include both final products and intermediates. The picture given by gross trade can be quite different from that by trade in value added; since in today’s production networks in East Asia, it is possible that the same intermediate goods and services are recorded many times as they go through customs. Value added generated by both domestic and foreign final demand, on the other hand, is more closely related with wages and employment, corporate profits, tax revenues, and finally national income. Data on gross exports and imports, however, are no less useful than before because they are indispensable to understand the technological structure of the cross-border production processes.
This study exploits a four region-country input-output system consisting of major Asian economies and the US, which builds upon the Asian International Input-Output Tables (AIO) for 1995, 2000, and 2005 constructed by the Institute of Developing Economies. (Institute of Developing Economies [6‐8]) Section 2 describes the analytical framework of this study to compare trade in gross terms and value-added terms in the four-region system and to make inter-temporal factor decomposition of trade in value added during the 1995–2005 decade. It also contains the construction of data. Section 3 presents the main results of the analysis. Section 4 concludes.
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2 Methods
2.1 Gross exports, value-added content of gross exports, and trade in value added
The formulation of trade in value added and other trade measures in this subsection basically follows that presented in Koopman et al. [9].
Letting n be the number of sectors, Aij be the n × n input coefficient matrix from region i to region j, Xj be the n × 1 gross output vector of region j, Fij be the n × 1 final demand vector of region j supplied by region i, and Rj be the n × 1 net export vector of region j to the rest of the world, this four-region system can be expressed as the following.
where \( {\widehat{V}}_j \) is the n × n diagonal value-added ratio matrix whose (k, k) element is defined as \( 1-{\displaystyle {\sum}_{i=1}^4{\displaystyle {\sum}_{l=1}^n{A}_{ij}\left(l,k\right)}} \), and Bij is the n × n block Leontief inverse matrix in Eq. 2. \( {\widehat{V}}_i{\displaystyle \sum {B}_{ik}{F}_{kj}} \) in the last matrix of Eq. 3 represents the n × 1 vector of value added generated in region i and is absorbed by final demand in region j through direct imports from region i and indirect imports from region i via third regions within the four-region system. Thus the off-diagonal elements of the last matrix of Eq. 3 represent value-added exports and the diagonal ones represent domestically consumed value added. Meanwhile, the n × 1 gross export vector from region i to region j is expressed as
yields value-added content of gross exports. Diagonal elements of Eq. 5 give the domestic value added contained in each region’s gross exports. Off-diagonal elements give the foreign value added contained in each region’s exports.
2.2 Inter-temporal decomposition of changes in trade in value added
Changes in trade in value added defined in Eq. 3 can be decomposed into those due to changes in final demand F = {Fij} and changes in the structural parameters \( \widehat{V} \) and A = {Aij} in the following manner, which is similar to the standard growth factor decomposition proposed by Chenery and Sylquin [10]. Letting superscripts denote periods 1 and 2,
where X1 = B1F1. The first term of the rightmost hand of Eq. 6 represents changes in trade in value added due to increases in final demand (ΔF) of the endogenous regions (the final demand factor). The second term gives effects of the intensification of intermediate input relations (ΔA) between the regions (the input coefficient factor). And the third term represents changes due to variations in value-added ratios (\( \varDelta \widehat{V} \)) in the sectors of each region ( the value-added ratio factor).
Equation 6 is the expression in terms of the structural parameters in period 2 and outputs in period 1. Decomposition can also be made in terms of the structural parameters in period 1 and outputs in period 2. A simple average of the two is taken to present the results of this decomposition in this study.
2.3 Data
The ten endogenous economies of AIO are aggregated into four regions: the NIES-ASEAN region or Asia 7 (Indonesia, Malaysia, the Philippines, Singapore, Thailand, Taiwan and Korea), China, Japan and the United States.
With respect to sectoral aggregation, 76 sectors of AIO (78 sectors of the 1995 table) are aggregated into 22 sectors which are shown in the Additional file 1. Imports of intermediate and final products from the exogenous regions are added on domestic intermediate inputs and domestic supply of final demand, and they are, at the same time, subtracted from net exports to the rest of the world. In other words, while imports from the endogenous regions are treated as non-competitive ones, imports from the exogenous regions are treated as being competitive.
3 Results and discussion
3.1 Gross trade and trade in value added
Table 1 shows gross exports of both intermediate and final goods and services between the four regions. It also presents bilateral trade balance in gross terms. Within Asia, Asia 7 had bilateral trade deficits with Japan. Japan had deficits with China, which in turn had deficits with Asia 7. All the three regions of Asia had surpluses with the US. During the 10-year period since 1995, China ballooned its surpluses with the US, while, at the same time, enlarging deficits with Asia 7.
Table 1
Gross exports and trade balance between four regions
Gross exports (mil. US dollars)
Trade balance (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
(1) 1995
Asia 7
0
23,674
71,119
109,236
5837
−59,773
25,620
China
17,837
0
31,741
25,550
−5837
4126
10,939
Japan
130,892
27,615
0
120,476
59,773
−4126
50,430
US
83,616
14,611
70,046
0
−25,620
−10,939
−50,430
(2) 2000
Asia 7
0
60,973
84,736
149,558
31,451
−35,476
64,456
China
29,522
0
44,904
72,547
−31,451
10,437
53,201
Japan
120,212
34,467
0
134,868
35,476
−10,437
68,766
US
85,102
19,345
66,101
0
−64,456
−53,201
−68,766
(3) 2005
Asia 7
0
175,258
116,858
173,316
79,363
−42,187
55,348
China
95,895
0
109,799
194,369
−79,363
13,639
151,848
Japan
159,046
96,160
0
136,159
42,187
−13,639
65,031
US
117,968
42,522
71,128
0
−55,348
−151,848
−65,031
Table 2 decomposes gross exports of the four regions by geographical source of value added using Eq. 5. The diagonal elements of the table give domestically produced value added contained in gross exports, while the off-diagonal elements represent foreign value added embodied in gross exports.
Table 2
Value-added content shares in gross exports of four regions
Export of
VA of
Asia 7 (mil. US dollars)
China (mil. US dollars)
Japan (mil. US dollars)
US (mil. US dollars)
Asia 7 (%)
China (%)
Japan (%)
US (%)
(1) 1995
Asia 7
160,500
2066
4499
2720
81.6
2.8
1.6
1.6
China
2648
68,611
1327
449
1.3
92.4
0.5
0.3
Japan
20,667
2432
266,410
3546
10.5
3.3
96.1
2.1
US
12,760
1170
4945
160,848
6.5
1.6
1.8
96.0
Total
196,574
74,279
277,181
167,562
100.0
100.0
100.0
100.0
(2) 2000
Asia 7
230,640
7719
6722
3251
81.2
5.5
2.4
1.9
China
6005
126,123
1856
844
2.1
89.1
0.7
0.5
Japan
28,097
4957
271,747
3097
9.9
3.5
95.2
1.8
US
19,327
2739
5157
162,586
6.8
1.9
1.8
95.8
Total
284,069
141,538
285,482
169,777
100.0
100.0
100.0
100.0
(3) 2005
Asia 7
373,539
27,143
12,874
2794
81.9
6.9
3.3
1.2
China
20,109
339,043
6612
2374
4.4
86.4
1.7
1.0
Japan
34,501
17,168
359,587
2422
7.6
4.4
93.0
1.0
US
27,737
8954
7614
223,235
6.1
2.3
2.0
96.7
Total
455,887
392,309
386,687
230,825
100.0
100.0
100.0
100.0
Domestic value added occupied more than 80 % of gross exports of all regions for all years. The share of domestic value added was relatively low for Asia 7 and remained stable. Japan lost its share slightly in Asia 7’s value-added content, while China raised its share. Both China and Japan lost about 3 percentage points in their domestic value-added shares during the 10-year period, with the losses being covered by the other Asian trading partners. There were no significant changes in the value-added composition of gross exports of the US. This is probably because cross-border transactions of the US in North America are not dealt with in this analysis.
Table 3 shows trade in value added between the four regions, derived by zeroing the diagonal elements of Eq. 3. The signs of bilateral trade balances of value added are the same as those in Table 1 for gross exports. Surpluses and deficits in bilateral trade balance in value-added terms are generally lower than those in gross terms in absolute values, significantly so in some cases; Asia 7’s surplus with China and Japan’s surplus with Asia 7 were markedly lower in value-added terms than in gross terms. However, Japan’s surplus with the US was larger in value-added terms in all years, and this also applies to Asia 7’s surplus with the US in 2005. This implies that Japan and Asia 7, presumably NIES in particular, exported their value added in significant amount to the US through indirect trade via third parties.
Table 3
Trade in value added and balance between four regions
Trade in value added (mil. US dollars)
Trade balance (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
(1) 1995
Asia 7
18,193
56,207
81,886
4045
−44,799
16,043
China
14,147
28,943
24,924
−4045
2615
10,171
Japan
101,006
26,328
125,825
44,799
−2615
60,154
US
65,843
14,753
65,672
−16,043
−10,171
−60,154
(2) 2000
Asia 7
37,303
64,170
119,879
18,717
−10,522
64,239
China
18,586
39,160
65,993
−18,717
9019
47,734
Japan
74,692
30,141
145,631
10,522
−9019
83,576
US
55,640
18,258
62,055
−64,239
−47,734
−83,576
(3) 2005
Asia 7
105,293
91,286
158,405
44,866
77,053
China
60,427
92,449
175,149
−44,866
−13,893
133,049
Japan
105,180
79,442
150,925
13,893
−13,007
13,007
83,498
US
81,351
42,101
67,427
−77,053
−133,049
−83,49
Johnson and Noguera [11] find, using GTAP data for 2004, the US–China deficit was approximately 30–40 % lower on a value-added basis than on gross trade basis, while the US–Japan deficit was about 33 % larger. The findings in this study are qualitatively consistent with those, but the differences between the two concepts are much smaller. Koopman et al. [9] report that China’s trade balance with Japan switches from a surplus in gross terms to a deficit in value-added terms. In this study, however, the balance is found to have been in deficits in both terms.
Comparison of gross exports and value-added exports can also be made for exports of individual sectors of each region. Fig. 1 shows gross exports and value-added exports of 22 sectors of the four regions in 2005. The charts for 1995 and 2000 offer essentially the same picture as for 2005, hence are omitted.
Fig. 1
Gross exports and value-added exports by region and by sector in 2005
×
Asia 7 and China reveal very similar patterns. Compared with large gross exports of computers and electronic equipment (sector 14), value-added exports of the sector were rather limited. Trade and transport (21) and other services (22) accounted for the largest shares in value-added exports of Asia 7 and China, but not to the extent of exports of Japan and the US. Crude petroleum and natural gas (2) of Asia 7 and metal and metal products (12) of China had relatively large value-added exports.
In the case of Japan, the largest contributor was trade and transport (21) both in gross and value-added terms. It was followed by other services (22) in value-added terms. Its gross exports, however, were negligibly small. In contrast, the US’s other services sector accounted for the largest share in both gross and value-added terms. Japan’s material and machinery manufacturing sectors (chemical products (8), metal and metal products (12), industrial machinery (13), computers and electronic equipment (14), motor vehicles (16)) generally contributed larger shares both in gross and value-added terms than their US counterparts. It may be said that, while Japan’s manufacturing sector played a central role in the production chains in the West Pacific, the US contributed to the region by providing services, in value-added terms in particular. Dean et al. [12] suggest the same role of Japan’s manufacturing sector using China’s customs statistics.
Japan was running larger trade surpluses with Asia 7 in gross terms than in value-added terms, while opposite relations are observed in its trade surpluses with the US. In order to investigate into this difference, bilateral trade balance of Japan by sector in 2005 with the two regions is shown in Fig. 2. Japan had large gross deficits and even larger value-added deficits with Asia 7 in crude petroleum and natural gas (2). It also had significant value-added deficits with Asia 7 in agriculture, forestry and fishery (1), petroleum and petroleum products (9), and computer and electronic equipment (14), while having surpluses in industrial machinery (13), trade and transport (21), and other services (22). Deficits in energy-related sectors contributed to lower overall value-added surpluses of Japan with Asia 7.
Fig. 2
Trade balance of Japan with Asia 7 and US in 2005
×
With respect to trade balance between Japan and the US, Japan’s surpluses in two service sectors contributed to higher value-added surpluses than gross surpluses. Value-added surpluses in trade and transport (21) were significantly larger than gross surpluses. Moreover, the balance in other services (22) was positive in value-added terms while it was negative in gross terms. This reversal was due to indirect exports of other services through exports of manufactured goods. Six Japanese manufacturing sectors had larger value-added surpluses than gross ones. They were pulp, paper and printing (7), chemical products (8), petroleum and petroleum products (9), rubber products (10), non-metallic mineral products (11), and metals and metal products (12). Their surpluses were not large but not negligible either. Value added of these sectors, together with that of the service sectors, was embodied in Japan’s major export products such as industrial machinery (13), computer and electronic equipment (14), and motor vehicles (16).
3.2 Changes in trade in value added during the 1995–2005 decade
Table 4 presents the results of the inter-temporal decomposition of changes in trade in value added between the four regions based on Eq. 6. The decomposition was conducted for the decade of this analysis and the two 5-year sub-periods.
Table 4
Inter-temporal decomposition of changes in trade in value added
Total changes (mil. US dollars)
Final dem and factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
(1) 1995–2005
Asia 7
87,100
35,080
76,518
62,132
−3040
69,082
China
46,279
63,506
150,226
22,674
36,575
109,145
Japan
4174
53,114
25,100
15,244
53,745
53,584
US
15,508
27,348
1755
9302
26,406
−12,972
Input coefficient factor (mil. US dollars)
Value-added ratio factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
Asia 7
34,956
47,953
26,004
−9987
−9833
−18,568
China
29,680
36,114
59,870
−6074
−9182
−18,789
Japan
−1309
4675
−13,950
−9761
−5306
−14,534
US
9602
2283
17,955
−3396
−1341
−3228
Total changes (mil. US dollars)
Final dem and factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
(2) 1995–2000
Asia 7
19,110
7963
37,992
8400
−2311
33,153
China
4439
10,217
41,069
680
6760
32,716
Japan
−26,314
3812
19,806
−17,792
4186
35,381
US
−10,203
3506
−3617
−7831
4054
−5408
Input coefficient factor (mil. US dollars)
Value-added ratio factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
Asia 7
13,034
15,094
15,410
−2324
−4820
−10,571
China
5165
5968
13,067
−1406
−2511
−4713
Japan
−7326
42
−13,338
−1196
−416
−2237
US
−2453
−631
1231
81
82
560
Total changes (mil. US dollars)
Final dem and factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
(3) 2000–2005
Asia 7
67,990
27,116
38,526
60,176
1109
37,832
China
41,841
53,290
109,157
23,481
30,658
70,489
Japan
30,488
49,302
5294
31,244
49,611
17,849
US
25,712
23,842
5372
16,670
22,945
−6627
Input coefficient factor (mil. US dollars)
Value-added ratio factor (mil. US dollars)
From/to
Asia 7
China
Japan
US
Asia 7
China
Japan
US
Asia 7
12,065
29,790
7919
−4250
−3783
−7225
China
21,305
27,574
48,968
−2945
−4943
−10,301
Japan
6363
4274
519
−7119
−4583
−13,075
US
12,506
2377
15,549
−3464
−1480
−3550
As the first panel of Table 4 shows, Asia 7 and China increased their total value-added exports tremendously in the West Pacific during the 1995–2005 decade. Increases in trade between Asia 7, China, and the US are particularly notable. While increases in final demand were the driving force of the export generation (the final demand factor), intensified input-output relations between the regions also contributed to increases in trade in value added (the input coefficient factor). Increases in inter-regional input coefficients translated into lower value-added ratios, which worked negatively on value-added transaction (the value-added ratio factor). Note should be taken, however, that the sum of the input coefficient factor and the value-added ratio factor was generally positive.
Japan’s value-added trade with the other regions behaved somewhat differently. Changes in Japan’s final demand reduced imports from Asia 7 and the US, and, judging from the input coefficient factor, Japan’s industrial linkages with Asia 7 and the US rather weakened. During the decade, intermediate inputs from Japan’s computer and electronic equipment (14) and motor vehicles (16) sectors to their counterparts in Asia 7 and the US were replaced by domestic supplies, reflecting the increasing localization of production overseas by Japanese multinationals.
The second and third panels of Table 4 split the changes in the decade into those in two 5-year periods: 1995 to 2000 and 2000 to 2005. Excepting for the value-added ratio factor subpanels, all entries in the second period are positive with one exception, while about one third of entries in the first period are negative.
During the first period, many of the Asia 7 economies were undergoing financial and currency crises. Their currencies depreciated drastically, which promoted exports to the US through the final demand factor and to China, Japan, and the US through the input coefficient factor. China, which had devalued its currency beforehand, increased its value-added exports steadily during the first period. Exports of Japan and the US to Asia 7 were reduced significantly through both the final demand and input coefficient factors.
During the second period, trade in value added was enhanced steadily between the four regions. China’s value-added exports to the US increased more than 109 billion dollars during the period. Exchanges of value added between Asia 7 and China and between China and Japan increased considerably. After experiencing the economic turmoil and recovery during the first period, the second period saw a comeback to the process of deepening economic and industrial linkages in the West Pacific.
4 Conclusions
In this study, the evolution of trade between the four regions in both gross and value-added terms is analyzed. Among the major findings are that value-added exports of computers and electronic equipment of Asia 7 and China were very limited in comparison with their gross exports and that the largest shares of value-added exports were accounted for by the services sectors in every region, particularly so in Japan and the US.
Surpluses and deficits in bilateral trade balance in value-added terms were generally lower than those in gross terms in absolute values. However, Japan’s surpluses with the US were larger in value-added terms than in gross terms, reflecting the fact that value added of the material-related manufacturing sectors, together with that of the service sectors, was embodied in Japan’s major export products (e.g., steel in motor vehicles) to the US. Overall, it can be said that Japan’s manufacturing sector played a central role in the production chains in the West Pacific, and the US contributed to the region by providing services, particularly in value-added terms.
The inter-temporal factor decomposition of trade in value added reveals that increases in final demand in the regions and deepening input-output linkages between the regions played an important role in promoting trade in value added in the West Pacific. But the process was by no means smooth and stable. After experiencing partial but substantial retreats towards the end of the twentieth century, the process of deepening economic and industrial linkages in the West Pacific resumed in the twenty-first century.
Major findings of this study seem to suggest an increasingly important role played by the service sectors in enhancing trade in value added. Our future agenda should include the analysis of the contribution of the service sectors, in more detail, to the development of cross-border industrial linkages in the West Pacific.
Acknowledgements
The author is grateful to two anonymous reviewers for helpful comments.
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Competing interests
The author declares that he has no competing interests.
