Accounting for intermediates: Production sharing and trade in value added

• Published in: Journal of international economics Vol. 86; no. 2; pp. 224 - 236
• Main Authors: Johnson, Robert C., Noguera, Guillermo
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.03.2012; Elsevier Sequoia S.A
• Subjects: Bilateral relations; Domestic content; Exports; Input output analysis; Input-output tables; International trade; Manufacturing; Production functions; Production management; Production sharing; Ratios; Service industry; Studies; Trade; Value added; Vertical specialization; United States > US; China; Domestic content; C67; D57; R15; Vertical specialization; Value added; F1; Input–output tables; Production sharing
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2011.10.003

We combine input–output and bilateral trade data to compute the value added content of bilateral trade. The ratio of value added to gross exports (VAX ratio) is a measure of the intensity of production sharing. Across countries, export composition drives VAX ratios, with exporters of Manufactures having lower ratios. Across sectors, the VAX ratio for Manufactures is low relative to Services, primarily because Services are used as an intermediate to produce manufacturing exports. Across bilateral partners, VAX ratios vary widely and contain information on both bilateral and triangular production chains. We document specifically that bilateral production linkages, not variation in the composition of exports, drive variation in bilateral VAX ratios. Finally, bilateral imbalances measured in value added differ from gross trade imbalances. Most prominently, the U.S.–China imbalance in 2004 is 30–40% smaller when measured in value added. ► We estimate the value added content of trade using a global input–output framework. ► The aggregate value added to export ratio for the median country is roughly 70%. ► Bilateral ratios vary due to production sharing patterns, not export composition. ► Bilateral value added trade imbalances differ from gross trade imbalances. ► The U.S.–China value added imbalance is 30–40% smaller than the gross imbalance.