MADE IN THE WORLD
Value added trade statistics provides new insights on role of imports, exports, services and more
Mr. Henrik Isakson, Senior Advisor, Trade Economist, National Board of Trade, Sweden
In recent decades the world’s production structure has become increasingly fragmented, i.e. production in one geographic location has been split into different tasks and spread across the globe. Affiliates and independent subcontractors process and refine products, turning them into finished consumer products in long complicated supply chains. This has led to trade with input goods (components, raw materials, semi-finished goods, etc.) and input services (business services) becoming increasingly important.
This reality for businesses is mostly not reflected in official trade statistics yet. Several attempts are however under way now to try to better estimate trade in value added. In a recent report the Swedish National Board of Trade have contributed to this work. Below I would like to highlight our five main findings, relevant not only for Sweden but for all countries at a similar stage of development and level of integration with the international supply chains. The calculations are based on Statistics Sweden’s input-output tables for 1995 and 2005 and on the UN’s BEC-classification (Broad Economic Categories) for 1995-2009.
First, imports accounted for 30 per cent of Sweden’s exports value in 1995. Ten years later the imports proportion of exports had increased to 33.5 per cent. Swedish firms are increasingly dependent on the import of raw materials as well as input goods and services which can not be produced in Sweden in a cost efficient way. Almost all Swedish sectors have become more dependent on imports during this period. Exceptions to this trend are the textile industry and the IT sector where structural changes as well as increased profitability have decreased the relative share of imports in the production value.
Secondly, since one third of all Swedish exports consists of imports that means that only two thirds of exports are actually Swedish value added. The national value added of exports is the value added to the Swedish economy in the form of wages and profits to Swedish workers and investors, i.e. exports less the imported content of the exports. The importance of exports for the economy is often reported as the exports’ share of the GDP. In Sweden that share increased from 39 per cent in 1995 to 49 per cent in 2005. However, the Swedish value added is only two thirds of that, i.e. 31 per cent of GDP.
Between 1995 and 2005 the national value added of exports as a share of the GDP increased from 27 to 31 per cent. This occurred at the same time as the imports proportion of exports increased. Thus there are no contradiction between an increased import share in exports and an increased significance of exports for the national economy, even if Sweden’s exports have become “less Swedish”. In value terms, the Swedish value added of exports increased in all sectors except for the agricultural sector.
Third, the share of services in Swedish exports is underestimated. Manufacturing companies have, in general, a higher import content in their exports than service companies. Seven out of eight service sectors compared with just one of 16 goods sectors had an imports proportion of less than 20 per cent in 1995. The service sector does not need as many inputs, the major part of the costs of service companies consists of wages. The largest percentage increase in import dependency between 1995 and 2005 has, however, occurred within the service sectors.
The importance of the service sectors increase when their share of exports is measured in value added. Using traditional trade statistics service exports account for 29 per cent of Sweden’s total exports. Measured in value added the service exports account for 36 per cent of Sweden’s total value added of exports. Sweden is therefore more dependent on service exports than what is shown by trade statistics. Taking revenue from tourism into account, i.e. not only measuring cross border trade but also consumption abroad in GATS-terminology, the figure comes close to 40 per cent.
Leaving services aside and concentrating only on goods trade, our fourth conclusion is that Swedish companies are overwhelmingly dependent on input goods from suppliers who are located in high-cost countries within Europe. These figures are based on BEC and thus a bit shakier but nevertheless provides an indication. More than 80 per cent of all Sweden’s imports of processed input goods stem from other high-cost countries, primarily from the western EU countries and Norway. Imports from low-cost countries both from inside the EU as well as the rest of the world have, however, increased markedly over the last fifteen years. Nonetheless, this accounts for less than a fifth of all imports of processed input goods. This can probably to a great degree be explained by the fact that low-cost countries have low costs, and imports therefore only amount to a small part of company costs. If we had been able to measure in quantity instead the share of inputs goods coming from low cost countries would likely have increased significantly.
Finally, our fifth conclusion regards the effect of tariffs on imports of input goods. We conducted an analysis showing that almost half the duties on Swedish imports are levied on goods used in production, i.e. input goods necessary for companies. In addition, our calculations show that almost 60 per cent of tariff costs for input goods are levied on goods that are exported. This implies that the remaining EU tariffs creates problems not only for importers but also for exporters to third country markets – a very undesired consequence of the tariffs.
Knowledge of the world’s fragmented production and the need for input goods and services is necessary in order to formulate a modern trade policy. The policy should allow for companies to find, according to their own prerequisites, the production structure that best suits them. Having a large or small proportion of imports within production or exports is not an end in itself, what is important is that companies can develop their competitiveness.
National Board of Trade (2011) Made in Sweden? A new perspective on the relationship between Swedens exports and imports. Stockholm, Sweden