The proliferation of global production networks introduced an additional degree of complexity into economic analysis, since the outsourcing of production diminishes the domestic component of exports (see e.g. Linden et al. 2009, which was among the first empirical examples of this phenomenon). Thus, data on gross export flows do not represent a country's role in the world market adequately nowadays. Consequently, there is a need to modify traditional measures of competitiveness (see Koopman et al. 2014 for revealed comparative advantages; or Bems and Johnson 2012, and Bayoumi et al. 2013 for real effective exchange rates).
In recent research (Benkovskis and Wörz 2015), we claim that the evolution of global market shares is no longer an adequate indicator of a country’s competitiveness unless the position in international production chains is thoroughly taken into consideration. Although shifting the focus from traditional gross exports to value added in export market shares does not alter the overall picture much, the underlying story about the driving forces behind global market share gains or losses differs strongly between the two views.
Our analysis combines data from two sources. We use highly disaggregated bilateral trade flows from the UN Comtrade database (more than 5,000 products for each possible pair of trading partners) and international supply and use tables from the WIOD database (see Timmer et al. 2015). The detailed trade data disentangles price and non-price drivers of export market share changes, since we can interpret unit values as prices of cross-border transactions. Information on international production fragmentation – although available for a considerably smaller set of countries at a lower level of disaggregation and with a time lag – allows inference on the share of domestic value added in a country's exports.
Measuring global market shares
To capture the ongoing fragmentation process, we correct gross exports for the origin of value added and we further focus on final products in order to avoid double-counting. Hence, we look at market shares of value-added in exports of final products, which is defined as the (direct and indirect) value-added of a specific country in total world exports of final products, divided by total world exports of final products.
Our measure is based on the concept of ‘value added in gross exports’ (Koopman et al. 2010) and traces gross exports by producer countries. An obvious drawback of using value added in gross exports (rather than value added per se) is double-counting, which occurs when a country provides value added in exports of intermediate goods that are further contained in exports of final goods. We argue that this problem can be largely eliminated by analysing final use products only. By combining the information on the country structure of value added from WIOD with detailed UN Comtrade trade data we can calculate the share of country A in the production of country B’s exports of good C.1
The old story: Changes in global market shares
Introducing the value added dimension into the analysis of market shares does not alter the general assessment – BRIC countries are gaining market shares at the expense of G7 countries. Moreover, in most cases changes in global market shares are similar for gross exports and value added concepts (see Figure 1).
Figure 1. Changes in global market shares of G7 and BRIC countries (between 1996 and 2011)
Notes: Results denote log-changes of global market shares.
Source: WIOD, UN Comtrade, authors' calculations.
The only notable difference is observed for Russia, obviously due to exports of mineral products that are embedded into the world consumption of final products. Some smaller differences can also be seen for Canada and Brazil, but that is all. So, was it worth calculating the domestic content of gross exports? The answer is yes!
The new story: Decomposition of changes in global market shares
Besides looking at changes in overall market shares, we dig deeper into their components. Using the detailed information on prices and volumes of trade flows at a highly disaggregated level, we decompose changes in global market shares according to the methodology developed in Benkovskis and Wӧrz (2015). Solving the consumer utility maximisation problem, we split the market share changes into the following components (see Benkovskis and Wӧrz 2015 for technical details):
- Contribution of shifts in production chains
An increase in a country's value-added contribution in export activities positively affects value-added in exports of final products market shares. This can be achieved either by a higher domestic content in a country's own gross exports of final products or by more active involvement in global value chains leading to a higher value-added share in other countries' exports of final use products.
- Contribution of price factors
This component is analogous to changes in the real effective exchange rate (although with opposite sign) based on unit values and using value-added weights. Unfortunately, we only observe export prices of final products, thus we are forced to assume that price changes of the final product are equally distributed at all stages of production.
- Contribution of residual non-price factors
This component can be loosely related to factors such as the relative quality of the product or consumers' taste. Despite the fact that these characteristics are statistically unobservable, the contribution of the abovementioned non-price factors can be calculated as a residual at the disaggregated level.
- Contribution of other factors.
This component accounts for changes in the set of competitors in final product markets, contributions from the extensive margin of trade (i.e. the exploration of entirely new markets by exports) and shifts in global demand structure.
‘Quality’ improvements in BRIC export goods largely result from outsourcing activities by G7
Below we provide the decomposition of the changes in market shares of value-added in exports of final products market shares for G7 and BRIC countries (see Figure 2a). In order to show further how the focus on global value chains changes our conclusions concerning the drivers of global market shares, we also report the decomposition of the gross exports market share changes (see Figure 2b).
Figure 2. Decomposition of changes in global market shares between 1996 and 2011 for G7 and BRIC countries
Notes: Results denote cumulative log-changes of global market shares. The sum of contributions is not equal to the total changes in export market shares due to log linearisation and missing unit values data.
Source: WIOD, UN Comtrade, authors' calculations.
The results in Figure 2a show that the global production stages have shifted towards developing countries, thus outsourcing as such contributes positively to market shares of emerging countries (i.e. the BRIC countries here) when looking at their value added in global trade. At the same time, outsourcing erodes market shares of the outsourcing G7 countries. In particular in radio, television and communication equipment, office machinery and computers, other machinery and equipment we observe significant shifts in value added market shares from developed countries to China (also Brazil and India).
Putting the focus on value added in gross exports of final products market shares instead of traditional gross exports market shares also reduces the contribution of residual non-price factors. This unexplained component can be associated with changes in quality or taste. A simple comparison of the decomposition in Figures 2a and 2b shows that losses in relative ‘quality’ (proxied by residual non-price factors) by developed countries are in fact lower than calculations based on gross exports suggest. G7 countries remain important suppliers of high-quality intermediates in fragmented production lines, yet these high-quality components show up in gross exports of emerging economies that engage in assembly stages of global production networks. In particular, Canada, Germany, the UK and the US have been able to maintain the relative quality of their produced goods. After controlling for shifts in production chains one can observe that the stable or rising ‘quality’ of Brazil's, Russia's and India's exports arises almost entirely from the insourcing of higher-quality intermediates rather than from improvements in the quality of their domestic production. Yet, China's gains in relative quality of their production are significant regardless which view is chosen.
Finally, we observe that increased price competitiveness plays a considerably more important role in shaping market share gains of BRIC countries than suggested by gross exports. This implies that global production networks ensure an efficient use of locally available resources which is not always reflected in traditional real effective exchange rate and unit labour cost measures.
The ‘Made in China’ phenomenon plays an important role. While we overestimate possible gains in quality and taste when we restrict attention to gross exports, we also underestimate price competitiveness in general and especially so for China. In addition, outsourcing affects markets shares directly by shifting production from developed to developing countries.
Bayoumi, T, M Saito and J Turunen (2013), "Measuring Competitiveness: Trade in Goods or Tasks?", IMF Working Paper 13/100.
Bems, R and R C Johnson (2012), "Value-Added Exchange Rates", NBER Working Paper, 18498.
Benkovskis, K and J. Wörz (2015), "”Made in China": How Does it Affect Our Understanding of Global Market Shares?", ECB Working Paper, 1787.
Koopman, R, W Powers, Z Wang and S-J Wei (2010), "Give Credit where Credit is Due: Tracing Value Added in Global Production Chains", NBER Working Paper, 16426.
Koopman, R, Z Wang and S-J Wei (2014), "Tracing Value-Added and Double Counting in Gross Exports", American Economic Review 104: 459–494.
Linden, G, K L Kraemer and J Dedrick (2009), "Who Captures Value in a Global Innovation Network? The Case of Apple's iPod", Communications of the ACM 52: 140–144.
Timmer, M P, E Dietzenbacher, B Los, R Stehrer and G J de Vries (2015), "An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production", Review of International Economics 23(3): 575–605.
1 Since we obtain trade data at a very detailed level of disaggregation, we can exclude exports of intermediate products and focus on products for final use (according to the BEC classification). The lower level of disaggregation in WIOD compared with UN Comtrade imposes some approximations, as we need to assume an equal structure of value added for all products within a broad CPA category.