- Nagwa Riad, Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Jarkko Turunen
- Published Date:
- January 2012
©2012 International Monetary Fund
Changing patterns of global trade / Nagwa Riad … [et al.]. — Washington, D.C. :
International Monetary Fund, c2011.
p. ; cm.
Includes bibliographical references.
1. International trade. I. Riad, Nagwa. II. International Monetary Fund.
Disclaimer: The views expressed in this book are those of the authors and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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This paper was prepared by a staff team led by Nagwa Riad and comprising Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Jarkko Turunen, assisted by Tushara Ekanayake, Alex Massara, and Nick Young. The work was guided by Richard Harmsen, Ranil Salgado, and Tamim Bayoumi. Sean Culhane of the External Relations Department managed the editing and production of the publication.
The past few decades have seen important shifts that have reshaped the global trade landscape. As a share of global output, trade is now at almost three times the level in the early 1950s, in large part driven by the integration of rapidly growing emerging market economies (EMEs). The expansion in trade is mostly accounted for by growth in noncommodity exports, especially of high-technology products such as computers and electronics. It is also characterized by three important trends: the rise of EMEs as systemically important trading partners; the growing role of global supply chains; and an ongoing shift of technology content toward dynamic EMEs. These developments in global trade have been associated with increased trade interconnectedness and carry important implications for trade patterns, in particular in response to relative price changes. The aim of this paper is to outline the factors underlying these changes and analyze their implications for the outlook for global trade patterns.
Several factors underlie the expansion in global trade and increased interconnectedness. Although trade liberalization since the early 1950s has certainly contributed by lowering trade barriers first in advanced economies and more recently in many developing countries, an equally important factor was the growth in vertical specialization in production and the emergence of global supply chains. Technology-led declines in transportation and communication costs allowed the fragmentation of production processes along vertical trading chains that stretch across several countries. Intermediate goods therefore cross borders multiple times before being transformed into final products, as each country specializes in particular stages of a good’s production sequence. Regional production networks thus emerged whose reach eventually became global. An important implication of this phenomenon is that countries that are part of a global supply chain are expected to have a higher share of imported content in their exports because their exports rely on importing intermediate inputs from other supply chain partners. The extent of imported inputs in a country’s exports is a useful indicator of whether it is “downstream” (i.e., engaging heavily in assembly and processing activities) or “upstream” in the supply chain (i.e., hub).
Advanced countries and EMEs play different roles in global supply chains. Advanced economies tend to be upstream in the supply chain. This position is reflected in relatively small foreign contents in their exports and relatively large contributions toward other downstream countries’ exports. In contrast, EMEs tend to be downstream in the supply chain, with relatively large shares of imported content in their exports. The extent of foreign content in exports of advanced countries and EMEs has important and contrasting implications for the sensitivity of trade patterns to relative price changes.
The Asian supply chain is more dispersed compared to those in North America or Europe. In the Asian supply chain, goods-in-process cross borders several times, including through the hub (Japan), before reaching their final destination. In contrast, in other regions, almost all foreign input is imported directly from the hub—the United States in NAFTA and EU15 in Europe. The greater dispersion of production in the Asian supply chain renders it potentially more vulnerable to disruptions of trade flows, whether policy induced, such as preferential trade agreements, or naturally caused, such as the recent earthquake in Japan.
The emergence of global supply chains has allowed EMEs to enhance the technology content of their exports, including as inputs embedded in high-technology exports of advanced countries. The share of high-technology exports has increased remarkably in China since 1995, boosted by processing trade and with significant imported contributions from Japan and other Asian countries. China is also moving upstream in the value added chain, with imports from China contributing significantly to advanced countries’ high-technology exports. Moreover, with China and other EMEs increasing their presence in sectors traditionally dominated by advanced economies, the similarity in export structures has increased over time and so has competitive pressure. Given ongoing product and quality upgrading, the quality level of exports in several EMEs exceeds that expected based on their GDP per capita. Analysis based on Hausmann, Hwang, and Rodrik (2007) suggests that dynamic EMEs with higher-than-expected income value of exports can expect another growth push in the future.
In addition to rebalancing effects, changes in relative prices result in important adjustments in sectoral trade patterns. A partial equilibrium approach is used to examine the impact of relative price changes on trade structures of four key players in global trade, namely China (downstream country), the euro area, Japan, and the United States (upstream countries). The results suggest the following. First, a downstream (as opposed to upstream) position in a supply chain cushions the impact of a relative price change on both exports and imports. This reflects the higher foreign content in the downstream country’s exports, which mitigates the impact of exchange rate changes because the appreciation also implies that imports become relatively cheaper.
Sectors that respond the most to the exchange rate changes differ across countries. An appreciation induces an increase in the share of high-technology exports in China and (to a lesser extent) the euro area, whereas a depreciation results in an increase in the share of medium-high-technology exports in Japan and the United States, largely driven by changes in the auto sector. This result again reflects the relatively higher proportion of imported inputs in high-technology products compared to medium-high-technology products which have higher domestic content. Finally, adjustment in the trade balance takes place mainly outside of the supply chain, as exports to supply chain partners are more resilient to relative price changes. This likely reflects two interrelated factors. First, the cost of breaking up a trade relationship may be particularly large in a supply chain, which expresses itself in relatively lower substitution elasticities in supply chain countries. Second, the simulation countries are dominant players in their regional supply chains in terms of both volume and value of their exports going to these destinations, which makes substitution for their trading partners more difficult.
The growing role of global supply chains is associated with increased trade interconnectedness. Network-based analysis illustrates several trends taking place over the past decade, most notably the emergence of China, along with the United States, as major systemically important trading hubs. This not only reflects the size of trade but also the increase in the number of its significant trading partners. Importantly, there is almost a perfect overlap between countries hosting both systemically important trade and financial centers. These countries could constitute a natural focus for risk-based surveillance on cross-border spillovers and contagion.