Lucian Cernat Chief Economist DG Trade EU-China Global Value Chains Workshop EU-China Trade Project (II) 20 March 2012 Some facts and open- ended questions

Trade in value added: why all this fuss? Primarily an accounting/statistical issue –Eliminating “Double counting” - traditional trade statistics record the gross value of goods and services exchanged, rather than the value added contribution of each country along the supply chain. Policy linkages and questions –Trade stats do not tell who really does what –This “silence” from the data creates many noises –Fears about competitiveness loss, manufacturing “hollowing” out and “Made in” myopia and national champions –Protectionist feelings fuelled by job concerns, bilateral “trade balancers”, tensions over exchange rates,…etc.

Analysis is needed and welcome: some important results are emerging Trade policy overall orientation and priorities won’t change in light of trade in value added. But some policy fine-tuning still desirable. Openness is key! The bulk of our exported VA stays in the first country destination. Big = strategic. Few FTAs really important. But for 1/6 of our value-added exports we need WTO and other countries’ open trade policies among themselves: – Around 14% of EU exported value added eventually end up in a different country than the original export destination –16% of foreign value added comes indirectly via third countries before it is imported by the EU itself.

EU-China: towards a common global trade agenda Bilateral trade gaps: –the magnitude (and political perception) of a bilateral deficit/surplus is likely to change. Identifying the value-added different countries add to global value chains produces new perspectives on specialisation and comparative advantages. Rules of origin: –To what extent does the complexity of rules of origin in bilateral trade agreements thwart the development of production supply chains? Can we devise better RoO as part of the current reflection on the future of the WTO? Trade volatility: –Do global supply chains lead to trade collapse during economic shocks? Or do the fixed costs of establishing production linkages and the existence of long-term contracts associated with supply chains act as built-in stabilizers for the global economy? Trade frictions: –Do increasingly complex global supply chains (and the increase in vertical trade) deter protectionism? What lessons could be drawn from the great recession of 2009? Are we all more vulnerable to unexpected events in any part of the globe (e.g. floods in Thailand, earthquake in Japan).

Bilateral investment : lots of untapped potential When looking at FDI/GDP ratio, China is lagging behind. Why? FDI/GDP ratios (EU stock in China) Source: Eurostat FDI/GDP ratios (China stock in EU)

Intellectual Property Rights: what role in GVCs? Intellectual property rights play an important role in stimulating economic growth –Increase domestic innovation –Promote technology transfers –Boosting growth and job creation IPRs are not only priority for foreign companies, but also for Chinese companies. Chinese companies are getting more involved in registering their intellectual property rights, both at home and abroad: –Annual average increase of Chinese patent applications: 28.4% in China, 29.6% in Europe But implementation issues still remain Source: European Patent Office Growth of patent applications at European Patent Office (2001 = 100)

Scope for trade policy fine-tuning: sectoral value-added analysis is key Multilateral front: WTO negotiations on sectoral plurilaterals –EU “value added hubs” even more important for “critical mass” than based on traditional statistics –ITA negotiations is a good example Bilateral cooperation: GVCs are key for specific sectors: –Examples: electronic equipment, machinery and equipment, motor vehicles and chemicals. –A common interest in fine-tuning bilateral trade policy in line with global value chains

“Made in…” China, EU or the world?

Made in China…? -30 are American -28 Japanese -17 German The rest: -France -South Korea -Canada -Sweden And China? Top 100 car part suppliers in the world in % Autoliv? Bosch? BASF? Valeo?