EU-China Global Value Chains Workshop 20 March 2012, Beijing Yang Cuihong Academy of Mathematics and Systems Science, CAS Input-output Model Based on Global Value Chain Research

2 Outline Introduction Current research related to IO model Using IO model to calculate total value-added & imports ---research for China Future work plan

China as an example China’s trade volume: 25-30% annual growth trade volume/GDP: 39% in 1995, 65% in 2006, while Approximately 50% of China’s foreign trade is processing trade Processing trade: importing goods that are used only for producing export goods Introduction

much attention for trade in intermediate goods production process has globalized global value chain or vertical specialization has been a hot topic worldwide production processes are more and more interconnected across many countries each country specializes in particular stages of a good’s production sequence Introduction

Global value chain, an example Electric accumulators Parts and accessories LCD panels Notebooks Consumers Firms Consumers imp exp Korea China US Labour & CapitalFirms Introduction

6 Outline Current research related to IO model Using IO model to calculate total value-added & imports ---research for China Future work

7 Current research related to IO model Three main existing techniques to measure GVC(WTO): Direct measurement at company level; Measurement through standard trade statistics; Indirect measurement through input ‑ output tables.

8 Current research related to IO model Three main existing techniques to measure GVC(WTO): Direct measurement at company level: this technique requires the collection of micro ‑ economic data at company level. Each link of the production chain adds value; Measurement through standard trade statistics: the current framework already allows for the monitoring of trade in components and intermediate goods; Indirect measurement through input ‑ output tables(the focus of this presentation): input ‑ output tables are the only statistical instruments that can properly measure fragmentation. The use of international tables makes it possible to monitor relations between countries and between sectors. They can also be used to calculate the extent to which national sectors rely on other sectors, both national and foreign.

9 Single-country Input-output(IO) model International IO model(multi-country IO model) IO based on Global Value Chain(GVC)

10 Current research related to IO model Single-country Input-output(IO) model GVC by single-country IO model, from two perspectives: Value-added, etc generated by exports; imports content in exports, i.e., vertical specialization Non-competitive IO model ◦ A D X+F D =X, 即： X=(I-A D ) -1 F D ； （ 1 ） Domestic value-added can be obtained ： ◦ v = A V X=A V (I-A D ) -1 F D （ 2 ） Value-added, etc generated by exports: ◦ v E =A V (I-A D ) -1 E D （ 3 ） imports content in exports: ◦ m E =A M (I-A D ) -1 E D （ 4 ）

11 Table 1 A single country non-competitive IO model

12 Current research related to IO model Single-country Input-output(IO) model: a special model for China Value-added, etc generated by exports Chen Xikang et.al.(2001) put forward a non-competitive IO model capturing China’s processing trade (in which China’s production is divided into two parts: processing exports; Non-Processing Sector Domestic intermediate inputs) and the concept to use value added to measure trade difference between different countries, based on which proposed the models to compute value-added, employment, capital returns, energy generated by foreign trade.  Chen X K, Cheng L K, Fung K C and Lau L J. The estimation of domestic value-added and employment induced by exports: an application to Chinese exports to the United States. Working Paper, Department of Economics, Stanford University, Stanford, California 94305, Lau, Chen et. al (2007) further differentiated Non-processing sector domestic intermediate inputs into: production for domestic use only; non-processing trade and others of FIEs since they have quite different input structure, to construct a tripartite IO table for China capturing processing trade. Chen Xikang and his team compiled 2002 and 2007 IO model capturing China’s processing trade. For comparison, they compiled non- competitive IO tables for the U.S(2002, 2007), EU(2007) and Japan(2000). The non-competitive IO table of China for is a joint work by Chen’s team and National Bureau of Statistics of China.  Lau L J, Chen X., Yang C., Cheng L K ， Fung K C, Sung Y W, Zhu K., Pei J., Tang Z., 2007, A Non-Competitive Imports type Input-Occupancy- Output Model Capturing Processing Exports and Its Application, Journal of Chinese Social Science, No. 5, pp

13 Non-competitive IO table capturing processing trade

14 Current research related to IO model Single-country Input-output(IO) model: a special model for China Value-added, etc generated by exports Koopman et al. (2008) and Dean et al. (2011) have constructed similar (yet bipartite) IO tables. They have split the ‘ordinary’ IO table into two parts as Chen (2001) did.  Koopman, R., Wang, Z. and Wei, S.-J. (2008) How much of Chinese exports is really made in China? Assessing domestic value-added when processing trade is pervasive, NBER Working Paper 14109,  Dean, J.M., Fung, K.C. and Wang, Z. (2007) Measuring the vertical specialization in Chinese trade, USITC working paper EC A.

15 Current research related to IO model Single-country Input-output(IO) model Vertical specialization Hummels, Ishii & Yi(1998,2001) proposed a concept of vertical specialization in a country’s trade, defined as "the imported input content of exports, or equivalently, foreign value added embodied in exports," and provided a formula to compute vertical specialization share based exclusively on a country’s input-output table. The formula of Hummels et al method(HIY method), vertical specialization share: VS= A M (I-A D)-1 E D （ 5 ）  Hummels D, Rapoport D, and Yi K M. Vertical specialization and the changing nature of world trade. Federal Reserve Bank of New York Economic Policy Review, 1998, 4(2):79–99.  Hummels D, Ishii J and Yi K. The nature and growth of vertical specialization in world trade. Journal of International Economics, 2001,54:75–96. Lau, Chen et al (2007) proved that the sum of total domestic value-added generated by a unit export and VS is equal to 1. Follow-up research after Hummels et al. on Vertical specialization: Ping Xinqiao et al(2006), Bergoing(2004) ， Chen H(2005), De Backer & Yamon(2007), Chen H(2006) Cadarso- Vecina(2007) ， Breda & Zizza(2008), Amador & Cabral(2008)

16 Current research related to IO model International IO models Table 3 An international input output table(multi-country IO table) output input Intermediate useFinal Total output Country 1 Country 2 … Country n Country 1 Country 2 … Country n Inter- mediate inputs Country 1 X 11 X 12 …X 1n F 11 F 12 …F 1n X1X1 Country 2 X 21 X 22 …X 2n F 21 F 22 …F 2n X2X2 … ……………………… Country n X n1 X n2 …X nn F n1 F n2 …F nn XnXn Primary inputsV1V1 V2V2 …VnVn Total inputsX1X1 X2X2 XnXn

17 Current research related to IO model An international IO table can clearly reflect the production flow and consumption between different countries & sectors. The table can help to locate the position of industries of a certain country in global production chain. By a set of models, one can compute, for example, value-added, labor compensations, capital returns of a country in international fragmentation. The current literature addressed the three main issues under this framework: Intercountry/interregional trade in intermediate goods; Vertical specialization based on extended HIY method; Value-added generated by exports

18 Current research related to IO model Main International IO tables Asian International IO tables(AIO) by the Institute of Developing. Economies, Japan External Trade Organization (IDE-JETRO) 10 countries in the Asia-Pacific region, i.e., China, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, and the United States. 75 industries/commodities (78 for 1995), including he Import Matrix of the above regions from Hong-Kong, EU and rest of the world For three years, 1990, 1995, 2000 (Inomata, 2008) GTAP Database GTAP database of world production and trade is coordinated at Purdue University since 1993 Single country IO tables and bilateral trade statistics 10 countries in the Asia-Pacific region, i.e., China, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, and the United States. Version 5(1997): 66 countries/regions, 55industries; Version 6(2001): 113 countries/regions, 55industries; Version 5(2004): 113 countries/regions, 57 industries; （ Daudin et al, 2009 ） For three years, 1990, 1995, 2000 (Inomata, 2008)

19 Current research related to IO model Main International IO tables World Input-output Database(WIOT) EU 7th Framework Programme, Coordinated by University of Groningen, 11 international institutes inside EU, including OECD participate. WIOT: 40 countries, 35 industries, 59 commodities, time-series ； Major sources is supply and use tables(SUT, hopefully annual) of involved countries/regions, not symmetric IO tables For years without SUT tables, estimate based on national accounting statistics and by RAS to balance (Erumban et al, 2010, 2011) 。 The database will be open in May, 2012, Sino-Japan International IO table A joint research project by National Bureau of Statistics of China and Ministry of Economics, Trade and Industry of Japan, financially support by Japan International Compile Sino-Japan International IO table for 2007 with 77 sectors Press release in Beijing on March for the table and related applications

20 Current research related to IO model Main International IO tables OECD international IO database(ongoing) Develops macro(sector) based estimates of TVA across approximately 50countries. Using inter-linked set of IO tables. Develops TEC(Trade by Enterprise Characteristics) database, linking customs data and business statistics at the level of the firm and covers virtually the entire population of a country’s business and (internationally) trading population. Further refine the quality of the import data used in the input-output tables but also to create sub-categories of industry groups that discriminate firms by: size; foreign/domestically 7 owned; export intensity, import intensity, import/export intensity etc; allowing for a more detailed understanding of international production networks(Ahmad & Araujo, 2011).

21 Outline Introduction Current research related to IO model Using IO model to calculate total value- added & imports ---research for China Future work

22 China IO tables capturing processing trade : Our CAS team led by prof. Chen Xikang, Prof. Lawrence Lau (then Chinese University of Hongkong ) and other colleagues from Hong Kong and U.S Proposing a methodology to estimate DVA and employment induced by exports. Constructing extended IO table of foreign trade in China for Estimating the total DVA contained in China’s exports. A joint work with Lawrence J. Lau (Stanford University), Leonard K. Cheng (Hong Kong University of Science and Technology), K.C. Fung (University of California, Santa Cruz), supporting by Hong Kong University of Science and Technology. (Chen, Cheng, Fung and Lau, 2001, 2004)

23 China IO tables capturing processing trade : CAS team led by Prof. Chen Xikang Constructing extended IO tables capturing processing trade of China for 2000, 2002 and The difference between this stage and that during is the further differentiation of the production non-processing exports and domestic use, as mentioned already in the previous slides Constructing non-competitive IO tables of the US (from SUT tables) for 2002 and 2007, and EU15 IO table for Estimating the effects of China’s exports on domestic value added(DVA) and employment. Estimating the effects of US and EU exports on their domestic value added(DVA) and employment.

24 Using IO Technique to Calculate Total DVA Using IO Technique to Calculate Total DVA

25 Concept of total DVA induced by exports Total DVA induced by exports of steel, an example

26 Direct DVA and total DVA For product j Where means direct DVA generated by per unit of product j ; means total DVA generated by per unit of product j; means direct domestic input coefficient. By matrix Where means the identity matrix ；

27 Using IO Technique to Calculate Total Imports

28 Concept of total imports induced by exports Total imports induced by exports of steel

29 Direct imports and total imports Direct imports are defined as the sum of all imported intermediate inputs to produce the products of a certain sector. Direct imports coefficient equals to the sum of all imported intermediate input coefficients. E.g. is direct import content per unit output of jth sector. Total imports are defined as the sum of direct imports and all rounds of indirect imports. Where is row vector of direct imports coefficients.

30 Using Non-competitive IO Tables Capturing Processing trade to Calculate Total DVA

31 Processing exports and non-processing exports China’s exports can be divided into two categories: Processing exports Its value is US$ billion in 2010, about 46.9% in total exports. Including two types: Processing and Assembling (P&A) Processing with Imported Materials (PIM) Non-processing exports (US$ billion, 52.1% in 2010) The input structure and effect on economy of these two kinds of exports is very different. E.g. In 2007, per unit of processing export needs units of import input directly, while that for non-processing export, only units of import input is needed. (per unit of products for domestic demands needs only units of import input directly).

32 Non-competitive IO table capturing processing trade

33 Tables and data sources Tables compiled by our CAS team and collaborators: Non-competitive IO tables capturing processing trade for China of 1995, 2000, 2002 and Non-competitive IO tables for U.S. of 2002 and (On the basis of Make table and Use table of 2002 and 2007, released by BEA ， U.S. Department of Commerce.) Constructing non-competitive IO tables for EU 15 of 2002 and (On the basis of data released by Euro stat, European Commission) Date sources ： National Bureau of Statistics of China; (annual statistics, special survey, etc.) China’s General Administration of Customs (CGAC); (trade statistics) Census & Statistics Department of Hong Kong Customs; U.S. Census Bureau; People's Bank of China.

34 China’s total exports China’s total exports YearTypes of final demand DVA per US$1,000 final demand Imports per US$1,000 final demand DirectIndirectTotalDirectIndirectTotal 2002 Domestic final demand Aggregate exports Processing exports Non-processing exports Domestic final demand Aggregate exports Processing exports Non-processing exports DVA and imports generated by China’s exports and domestic final demand (US$) Note: Besides the estimates, we also have calculated: effects on DVA and Employment of exports by sector; effects on DVA and Employment of exports at FOB prices by sector; effects of exports of HS 98commodity group on DVA and Employment;

China’s total exports 35 DVA induced by per US$ 1000 of China’s exports or final demand (US$)

Comparison A comparison between non-competitive IO table capturing processing trade (New table) with general non-competitive IO table (General table). Empirical analysis in Total DVA and total imports induced by China’s exports in Note: including both good exports and service exports. 36 Total DVA (Per US$1000) (unit: US$) Total imports (Per US$1000) (unit: US$) Total DVA (All exports ) (unit: Billion US$) Total imports (All exports) (unit: Billion US$) New table General table Difference (General-new) Rate of difference (Difference/New) 16.4%-23.7%16.4%-23.7%

Major Findings In per unit of China’s exports, the total DVA content is only about 40%-60% (46.6% in 2002, 59.1% in 2007). Processing exports generate much less total DVA in China, less than half of that of non-processing exports. If processing exports and non-processing exports are not separated from other products in the model, the total DVA induced by exports is greatly overvalued (by about 16.4%). Over time, there is a trend of convergence in the total DVAs of exports and domestic final demand. DVA induced by per unit of exports has increased, while that of domestic final demand has decreased. 37

38 China-US trade Effects of US$ 1000 China ’ s exports on DVA in 2002 (US$)

39 Effects of US$1000 U.S. exports on U.S. DVA in 2002 (US$) China-US trade

China-EU trade Effects of US$ 1000 of China’s exports on DVA of China (Unit: US$) 40 Note: EU means EU of 15 countries in this report

China-EU trade Effects of US$1000 of EU’s exports on DVA of EU (Unit: US$) 41

42 Major Findings In 2002, US$ 1000 of China’s exports to the U.S. would generate China’s DVA or GDP US$177 directly and US$191 indirectly, resulting in a total DVA of US$ 368, approximately. In 2002, US$1,000 of U.S. exports to China would generate U.S. DVA or GDP approximately US$ 865 in total. For per unit of export, the DVA content of the U.S. exports to China is more than twice than that of China’s exports to the U.S. In 2007, US$1000 of China’s exports to the EU would generate China’s DVA or GDP US$615 in total, while that of EU’s exports to China is US$730 in total, about 1.2 times of China’s exports to the EU. Over time, DVA induced by per unit of China’s exports to EU has increased ( =186), while that for the EU exports to China has decreased ( =-54).

43 Outline Introduction Current research related to IO model Using IO model to calculate total value-added & imports ---research for China Future work plan

44 Future work plan Non-competitive IO model of China, divide China’s total export into major different destinations, to estimate value-added generation by exports to those destinations The method to compute value-added by trade based on international IO model.

45 Thanks! Your comments and questions please. Academy of Mathematics and Systems Science, CAS Beijing , P. R. China