Letter IEDI n. 1125—Global value chains: pre-pandemic evolution
The Organization for Economic Co-operation and Development (OECD) updated, at the end of 2021, its database for world trade by value added, incorporating information from 2018 (Trade in Value Added — TiVA), allowing for an examination of the connectivity of global value chains. As it ends in 2018, the new data do not allow us to assess the effects of the pandemic, but indicate the trends that had been taking shape before its emergence.
In the latest edition, the database gathered data from 66 countries and 45 economic activities. Compared to the previous update, two new countries (Laos and Myanmar) and some economic activities were added. The group of OECD countries was also updated, now including Costa Rica (from May'21) and Colombia (from Apr'20).
As a main message, current data show some resumption of productive internationalization up to 2018, after an interruption of this process between 2011 and 2015, as discussed in Letter IEDI n. 922 of April 2019. This, however, may have stopped with the pandemic, given the interruption of trade flows, resulting from restrictive measures and global logistical blockages and the consequent search for productive resilience by companies and governments, as analyzed in Letters IEDI n. 1012, 1036 and 1104, among others.
Thus, what can be said with relative certainty so far is that the evolution of the world economy in the last decade—marked by the unfolding of the global financial crisis of 2008–2009, by the trade tensions between the USA and China, especially in 2019, and then by the COVID-19 crisis—has produced a context of important challenges to global value chains. Not to mention the possibilities opened up by the advancement of digital technologies and the impacts of climate change.
Before the pandemic, the GVC backward linkage indicator—which refers to the imported value added contained in a country's gross exports—had fallen in 2011–2015, but increased again in 2015–2018. Between 2011 and 2015, this indicator for total goods and services traded showed a decline in major economies such as the US, Germany, Japan and China. From 2015 to 2018, however, it increased in most of these countries, except the US.
In the case of Brazil, the backward indicator remained stable at 12.9% between 2015 and 2018, after presenting a favorable performance from 2011 to 2015 (+2.8 percentage points). It is worth remembering the efforts of many companies to expand their exports in the face of our serious economic crisis in 2015–2016 and, later, of our weak recovery. Much of this evolution was thanks to the industry because, as the World Bank argues (Letter IEDI n. 898), it is the main vector for the international integration of countries.
Considering gross exports of manufacturing goods, imported value added increased from 2015 to 2018 in most countries, especially Greece, the United Kingdom and India, among others. In Brazil, the linkage indicator rose from 14.5% in 2011 to 17.2% in 2015 and then to 17.9% in 2018. It should be noted that this measure is higher for the Brazilian industry than for the industries of other relevant countries, such as the US (15.8%).
Another measure used to assess the evolution of GVCs also showed growth in most countries: the forward indicator, which shows the share of domestic value added in gross exports of the rest of the world in terms of exports from the country in question.
Taking this indicator, Brazil—together with the USA, South Korea, Australia, Turkey and others—showed an increase when considering total goods and services. The Brazilian value added incorporated in exports from other countries represented, in 2018, 22% of our total exports, more than the 20.5% of 2015, although lower than the 2011 figure (25.2%).
The industry also contributed to this rise. In particular, the Brazilian industry recorded an increase in this measure from 15.4% in 2015 to 17.1% in 2018, although it did not exceed the 19.9% of 2019. It is worth mentioning that the value of this indicator is higher for our total exports than for manufacturing goods, due to the weight of primary sectors in our export basket, as they act as suppliers of inputs to other countries.
A third widely used indicator, the re-exported intermediates, concerns the share of intermediate imports that are used to produce goods and services for exports as a percentage of total imported intermediate goods. Also in this case there was growth in most countries from 2015 to 2018. However, the share of services in exports fell in most cases.
Regarding the share of services in manufacturing exports, in 2018 versus 2015, there was a drop in most countries, with some exceptions such as Belgium, Peru, Iceland and France. For Brazil, this indicator was practically flat, going from 36.2% in 2015 to 36.0% in 2018.
A more detailed analysis shows that the value added of services in our manufacturing exports, in 2018, was predominantly domestic (27.7%) rather than imported (8.3%). The total indicator reached higher values in high and medium-high technology industries, more prone to the phenomenon of servitization of their businesses, with a larger fraction of imported services in relation to the value of gross exports. These are the cases of computers, electronics and optical products (46.3%), automotive vehicles and bodyworks (41.1%), machinery and equipment (38.5%) and chemicals (38%).
Finally, it is important to emphasize that, in general, GVC indicators vary greatly across countries and sectors, being insufficient to define the quality of a country's insertion in GVCs in terms of the development of the productive fabric.
Larger industrialized economies such as the USA and Japan have lower GVC indexes, while others such as China and Germany have average indicators in relation to the others. Larger economies with medium per capita income and exports focused on commodities—such as Brazil, Russia and Indonesia— generally show low indicators of GVC integration.
On the other hand, the economies with the highest values, in general, are export platforms or “factories” of regional productive and commercial integration schemes, such as Luxembourg, Ireland, Malta, Singapore and Taiwan, in the first case, or Thailand, Malaysia, Vietnam, Slovakia, Hungary, the Czech Republic, Estonia and Mexico in the second.
Therefore, as production internationalization trends are changing even faster with the pandemic, in order to improve the quality of Brazil's participation in GVCs it is necessary to consider in detail the dynamics of the different sectors. This will help us find possibilities to sophisticate the activities performed locally for regional and global chains.