Networks of Value‐added Trade

• Date: 01 July 2017
• Published date: 01 July 2017
• DOI: http://doi.org/10.1111/twec.12469
• Author: Sónia Cabral,João Amador

Networks of Value-added Trade

Jo~

ao Amador

1,2

and S

onia Cabral

1

1

Economics and Research Department, Banco de Portugal, Lisboa, Portugal and

2

Nova School of

Business and Economics, Lisboa, Portugal

1. INTRODUCTION

INTERNATIONAL production sharing has always been part of international trade as coun-

tries import goods to be incorporated in their exports. However, the acceleration of tech-

nological progress, the reduction in transport and communication costs and the removal of

political and economic barriers to trade greatly increased the opportunities for the interna-

tional fragmentation of production, that is, a set-up where firms in different countries spe-

cialise in particular stages of the production chain (see Amador and Cabral, 2016 for a

review). Such international fragmentation of production, which has led to the emergence of

global value chains (GVCs), has contributed to deepen the structural interdependence of the

world economy and challenges traditional policymaking.

The empirical analysis of GVCs has been focusing on the computation of indicators that

break down gross trade flows along sources and destinations of value added, taking advantage

of the recent availability of global input–output (I-O) matrices. One of the simplest measures

of participation in GVCs is the use of imported inputs to produce goods that are afterwards

exported, that is, the foreign value-added content of exports (FVAiX). This I-O based measure

of fragmentation focuses on the (direct and indirect) import content of exports and was ini-

tially formulated by Hummels et al. (2001), who labelled it ‘vertical specialisation.’ In the last

decade, several studies have applied this methodology, in some cases with variations from the

original formulation, and found a rise of vertical specialisation over time.

Since exports increasingly embody a sizeable share of foreign value added, the interdepen-

dence among economies becomes even more relevant than in the past, notably in terms of the

impact and propagation of shocks and the co-movement of business cycles. The recent financial

and economic crisis has shown that GVCs affect the magnitude and international transmission

of macroeconomic shocks. During this period, the collapse in global trade was severe, synchro-

nised across the world and particularly pronounced for trade in capital and intermediate goods.

Although several mechanisms were at play, GVCs seem to have had a central role in the trans-

mission of what was initially a demand shock in some markets affected by a sharp credit short-

age.

1

In fact, the important role of some countries in the functioning of GVCs raises questions

regarding the resilience of the world trade system in case they are hit by large shocks.

The structure of the connections between firms (Gabaix, 2011) or sectors (Acemoglu et al.,

2012) in a given country plays a fundamental role in the transmission of shocks from individ-

ual agents to the whole economy, notably through cascade effects. Networks offer a way to

express how idiosyncratic shocks can be propagated and amplified. In a recent contribution,

Acemoglu et al. (2016) provide empirical evidence on how a shock to a specific sector can be

The authors thank the editor and an anonymous referee for their helpful comments and suggestions. Any

errors and omissions are the sole responsibility of the authors. The opinions expressed in the paper are

those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

1

Baldwin (2009) provides a general discussion of the causesand consequences of the great trade collapse.

©2016 John Wiley & Sons Ltd 1291

The World Economy (2017)

doi: 10.1111/twec.12469

The World Economy

transmitted and substantially amplified through the I-O chain of the economy. In this vein,

Carvalho (2014) discusses the extension of the analysis of production networks to an open

economy set-up in order to account for the role of GVCs and other cross-border sectoral inter-

connections on systemic vulnerability.

In a growingly interconnected world, network analysis is a powerful tool to examine the

international flows of value added and countries’ positions in GVCs. Such analysis allows for

the I-O relationship between any two countries to be studied in a structural way and not in

isolation, that is, taking into account the interdependence of all other participants in GVCs.

The main goal of this paper is to provide a general picture of the nature and dynamics of

GVCs from a complex network perspective, offering an economic interpretation of the results.

We base on the World Input-Output Database (WIOD) for the period 1995–2011 and use

tools of network analysis to examine analytically and graphically the international flows of

value added. In each year, the GVC is represented as a directed network of nodes (countries)

and edges (value-added flows). The paper goes beyond total trade in order to assess the speci-

fic role played by goods and services as both inputs and outputs in GVCs.

We find that the networks of foreign value added in exports became denser, more complex

and intensively connected over time, which is consistent with the expansion and deepening of

GVCs. Value-added trade networks are very centralised and asymmetric, with a hierarchical struc-

ture dominated by a few central countries that act as hubs. Complex networks with these topolog-

ical characteristics are more exposed to the propagation of shocks targeted at their most central

nodes. The networks of value-added trade have a strong regional dimension but, with the entrance

of new players, these features were moderated and production networks became more global.

Value-added networks are more developed and integrated in the production of exports of

goods than of services. However, foreign value added of services is important for the produc-

tion of exports of goods and there are some purely services-based GVCs. At country level,

Germany and the US maintained a central participation in GVCs from 1995 to 2011. How-

ever, Germany supplies more goods value added, while the US is a major supplier of services

inputs. The rise of China as a foreign supplier of value added is striking and is mostly centred

in the supply of goods inputs. Russia is also a relevant player, mainly related with its role as

a source of energy goods.

Although our analysis does not directly draw results on specific macroeconomic develop-

ments or trade policy issues, a complex network perspective is very important to understand

developments in these dimensions. One example concerns the interpretation of gross and

value-added bilateral trade balances. Nagengast and Stehrer (2016) show that a sizeable and

increasing share of intra-European gross bilateral trade balances is due to demand in countries

other than the two trading partners. Another example relates to the negotiations of trade

agreements, which are affected by the entire network of trade relations. In this context, a

promising application is the use of network formation models to study trade policy and ascer-

tain if the proliferation of bilateral agreements can lead to global trade liberalisation, as in

Daisaka and Furusawa (2014) and Lake (2016).

The paper is organised as follows. Section 2 discusses relevant literature on the network

analysis of international trade flows. Section 3 briefly presents the methodology for the mea-

surement of value added in trade, the definition of the networks of foreign value added in

exports and the database used. In Section 4, the evolution of the networks of value-added

trade is examined using network metrics and visualisation tools. A special focus is put on the

differences between goods and services as inputs and outputs in GVCs. Finally, Section 5 pre-

sents some concluding remarks.

©2016 John Wiley & Sons Ltd

1292 J. AMADOR AND S. CABRAL