# Trade Redirection in Global Supply Chains - PDF Document

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3. 1 2 m S S S S S S f f f f f f x x 11 12 1 1 1 1 1 m 1 2 m 21 22 2 2 2 2 2 m (1) 1 2 m S S S f f f x 1 2 m m mm p x m m m m p x p x 1 2 m 1 2 m S indicates the intermediate inputs produced in country r that are used in country s, In this table rf rs sp indicates the sum total of represents final outputs produced in country r and used in country , rx denotes gross output of primary inputs in production and represents values added in countrysand country r. We define input coefficients ( , ) ( , )/ S i j ( ) ( , ) i j ; ( , ) r s ( ) ( )/ ( ) ; . A i j x j N M and v j p j x j j N r M rs rs s r r r and obtain the global Leontief-inverse in partitioned form as 1 1 B B B B B B I A A A A A A A 11 12 1 11 12 A 1 11 A 12 1 m m m A I 21 22 2 21 22 2 21 22 2 m m m (2) B B B A A I A A A 1 2 1 2 1 2 m m mm m m mm m m mm ( , ) B i j denotes the gross output from ( , ) The entry r i that is needed per unit of final output in ( , ). s j rs I A and we abundantly make use of toggles In the sequel we use rrto condense notation for sand zero otherwise. Moreover, we use the hat-symbol to diagonalise a vector ( ˆ z being a matrix with z on its main diagonal and zeroes elsewhere) and for the unit or summation vector. rr such as rswhich is one if r Consider ˆ ( , , ) r X B f M (3) r r ( , ) i j denotes all gross i-output needed from rfor the production of final j -output in X that is r A B B I we can expand (3) as in used in . Because rs s r r s ˆ ˆ ˆ [ ] [ ] ( , , ) r X B f A B I f A B I f X M (4) r r rs s r rs s r s rs s s s ( , ) i j represents all grossi-output that is sent fromrto the direct trading that is used in X in which the component partnersfor the production of final j -output in quadrangular perspective: a trading scheme in which we distinguish the originr, the direct trading partners, the final output producer and the final output user take a look at the supply chain with four actors: the first and second country in the chain, and the last but one and last country in the chain. The longest possible export sequence in our quadrangular rs . We look at trade here from a . Alternatively, we may say that we

6. Z where the subscript p indicates the position of say , in arrays in its role as the last pr Z exporter of intermediate value added. Thus represents intermediate value added exports from pr th r, delivered by end-use j . We derive p position in the chain to final producer in its for final user in industry of ˆ f 1 ˆ v (1 ) Z A B 1 ˆ 1 1 ˆ (1 ) (1 ) Z A A B f 2 r r r rr r r ˆ 1 1 1 ˆ (1 ) (1 ) Z A A A B f 3 r r rr s s rs rs ss s r s and ˆ 1 1 1 1 ˆ (1 ) (1 ) (1 ) Z A A A A B f 4 r r rr s rs rs ss s s s s ss 3 3 s s s 3 3 3 3 3 r s s 3 cp . Thus we obtain factory gate exports as and so on, etc., up to the cut-off position c p Z Z (12) r pr 1 p r Z taken together in a world with three In Figures 1 through 3 we show the structure of all r Z over rows and columns and arrange them countries for total final output use (i.e. we sum each in a 4-dimensional array). Figure 1 Factory gate exports for total final end-use Final user Final producer Last exporter 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 Origin 1 2 3 Shipments from 1: Shipments from 2: Shipments from 3: Figure 1 shows that a) the last exporter does not export own value added to itself as a final producer; b) as a final producer the last exporter does import own value added; this is the value added that was needed abroad to produce the intermediate imports of the final producer; c) the last exporter exports bundles of values added from all sources to foreign final producers. Figure 2 shows how we can derive redirected values added from the factory gate exports. Type I redirection is obtained as the sum

7. total of value added imports over all sources and last exporters into the final producer producing for foreign users. To determine Type 1 redirection we also need Figure 3 which shows the factory gate exports that are not redirected because they were sent by the last exporter directly to the final producer producing output for own use. Figure 2 Redirection for total final end-use Final user Final producer Last exporter 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 Origin 1 2 3 Redirected by 1 Redirected by 2 Redirected by 3 of which type II Type II redirection is obtained as the sum total of value added exports by the last exporter over all sources and over all final producers producing for domestic use, except the exports that were sent directly to the final producer. Figure 3 Factory gate exports that are not redirected Final user Final producer First and last exporter 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 1 2 3 Origin 1 2 3

8. 3 Hub and spokes indicators based on factory gate exports Using type I redirection Lejour et al. proposed two pairs of indicators for the measurement of hub and spoke relationships. The first pair of indicators measures the intensity and market share of outgoing redirection. We redefine these in terms of Z as (1 ) Z r r r I ( ) j SFRV Z r r (13) (1 ) Z r r r I ( ) j , GSFRV M j N (1 ) Z r r r The second pair of indicators measures type I redirection intensity and market share of value added exports from the source: (1 ) Z r r I ( ) j SDRV r Z r (14) (1 ) Z r r I ( ) j , GSDRV M j N r (1 ) Z s s s c p Z Z , we can in Restricting factory gate exports to redirected factor gate exports with r pr 2 p essentially the same way define these pairs of indicators for type II redirection: (1 ) Z r r II ( ) j r SFRV (1 ) Z r r r (15) (1 ) Z r r II ( ) j , r GSFRV M j N (1 ) Z r rs r s and (1 ) Z r r II ( ) j SDRV r (1 ) Z r r (16) (1 ) Z r r II ( ) j , GSDRV M j N r (1 ) Z s s s

9. Finally we note that we can use the concept of factory gate exports to define the value added composition of gross exports as in 1ˆ ss (1 ) (1 ) vcx Z Z v f (17) rs rs s r s rs s s s 4 Empirical results The global input-output tables that we derived from the GTAP datasets for 2001, 2004 and 2007 show input-output linkages for 57 industries and 84 countries or regions common to all years. Because of the computational burden of calculating factory gate exports we aggregated them into a classification with 12 regions and 12 aggregate industries (see Annex C for their description). The rate of decay in the chain turned out to be around 6.7. We chose the fourth position in the chain as the cut-off after which only 0.1 percent of the input in the chain was on average still travelling in the chain. Figure 4 Redirection as a % of value added exports, 2001-2007 30 30 Type I redirection Type II redirection % % 25 25 20 20 15 15 10 10 5 5 0 0 ele mvh otn ome crp mlm Industries of end-use ltm tra eng ago obs ocs osr tot ele mvh otn ome crp mlm Industries of end-use ltm tra eng ago obs ocs osr tot 2001 2004 2007 2001 2004 2007 Table 1 shows that type I plus type redirection amounts to almost one fifth of global value addd exports. Thus the addition of type II redirection brings relative redirection quite close to the VS- measure. Table 1 Composition of global value added exports 2001 2004 2007 Own value added in own final output exports Factory gate exports Direct for own final output use Direct for final output exports (type I) Redirected for own final output use (type II) Redirected for final output exports (type I) Total redirection Total 38 62 36 64 33 67 45 7 9 2 17 45 7 10 2 19 48 7 11 2 19 100 100 100

11. Figure 6 Total redirection for electronics end-use Final destinations of redirected foreign value added for electronics end-use 40 40 % of globally redirected value added 35 35 China 30 30 25 25 GSFRV 20 20 SEA 15 EAS 15 10 Average 10 5 USA EU12 EU15 0 ONA 5 Japan eu15 eu12 owe oee chh ind Redirector eas sea jpn usa ona row India OWE ROW 0 OEE 10 0 20 30 40 SFRV 50 60 70 80 90 Value added to: eu15 eu12 owe oee chh ind eas sea jpn usa ona row 20 Origins of redirected foreign value added for electronics end-use 40 % of globally redirected value added 35 EU15 Japan 30 15 USA 25 EAS China GSDRV ROW 20 10 SEA 15 Average 10 5 5 OEE ONA 0 eu15 eu12 owe oee chh ind Redirector eas sea jpn usa ona row India EU12 OWE 0 0 10 20 30 40 50 60 70 Value added from: SDRV eu15 eu12 owe oee chh ind eas sea jpn usa ona row Japan, China) are global hubs. On the other hand, India and Other Eastern Europe (OEE; mainly Russia) are not integrated into the global supply chain of OME, but Rest of World (ROW) does show up as an important supply spoke for intermediate inputs. The USA is important both as a supply spoke and as a final destination. The major differences in results from this paper and from Lejour et al. (2012) are in the services industries. In other business services (OBS) for instance, Lejour et al (2012) identified India and SEA as the most important hubs. However, if we add type II redirection most regions gain in importance relative to India (Figure 8). The reason for this is that India is not an important provider of type II redirection here. This redirection presumably involves mainly the supply of manufactured goods to the domestic OBS sector and India is not an importer exporter of manufactured goods. In Figure 9 we use the composition of factory gate exports to identify the relative up- or downstream- ness of these exports. The figure shows that total factory gate exports are relatively upstream for China, Japan, EU15, EU12 and the USA and relatively downstream for OEE and ROW. Finally, in Figure 10 we present the value added composition of gross exports (according to equation (17)). The dominance of the share of domestic value added is striking for all regions. In particular, OEE and India show up again as being almost unconnected.

12. Figure 7 Total redirection for other machinery equipment end-use Final destinations of redirected foreign value added for other machinery end-use 25 25 % of globally redirected value added 20 20 EU15 China 15 15 GSFRV EAS 10 10 average SEA Japan EU12 USA 5 ONA OWE 5 ROW 0 India eu15 eu12 owe oee chh ind Redirector eas sea jpn usa ona row OEE 0 0 10 20 30 40 50 60 70 80 Value added to: SFRV eu15 eu12 owe oee chh ind eas sea jpn usa ona row 25 Origins of redirected foreign value added for other machinery end-use 25 % of globally redirected value added EU15 20 20 ROW 15 15 GSDRV USA 10 10 China Japan 5 average EAS SEA 5 ONA OEE OWE 0 eu15 eu12 owe oee chh ind Redirector eas sea jpn usa ona row India EU12 0 0 10 20 30 40 50 Value added from: SDRV eu15 eu12 owe oee chh ind eas sea jpn usa ona row Figure 8 Type I and type I+II redirection for other business services 25 25 Type I redirection Type I + II redirection 20 20 15 15 EU15 GSFRV GSFRV China SEA USA USA EU15 OWE SEA India EU12 EU12 ROW China 10 10 OWE EAS ROW Average Average India 5 5 ONA Japan EAS OEE OEE ONA Japan 0 0 0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70 80 SFRV SFRV

13. Figure 9 Downstream and upstream decomposition of factory gate exports, 2007 100 90 80 70 60 50 % 40 30 20 10 0 eu15 eu12 owe oee chh ind eas sea jpn usa ona row wld Type II plus direct exports for final use at home Type I

14. Figure 10 Value added composition of exports 25 20 15 % 10 5 0 eu15 eu12 owe oee chh ind eas sea jpn usa ona row eu15 eu12 owe oee chh ind eas sea jpn usa ona row

15. 5 Conclusions This paper extends the analysis of Lejour at al. (2012) by also covering trade redirection by the last but one country in the chain to final producers producing for the home market (type II redirection). This addition more than doubles redirected exports as a percentage of value added exports and brings the sum total close to 20%. The results on hubs and spokes relationships are not very different though: it is the volume that increases rather than the relationships. The introduction of type II redirection improves the hubs and spokes relationships for the services sectors, and especially for these sectors the changes compared to Lejour et al (2012) are largest. In order to measure type II redirection we introduced the concept of factory gate exports. We conclude that this turns out to be useful concept a) to characterize the structure of international production networks (as revealed by their hubs and spokes relationships), b) to assess whether a country’s trade is relatively upstream or downstream and c) to measure the value added content of trade.