1. Measures of Participation in Global Value Chains and Global Business Cycles
Zhi Wang
University of International Business and Economics
& George Mason University
Shang-Jin Wei
Asian Development Bank & Columbia University
Xinding Yu and Kunfu Zhu
AEA ANNUAL MEETING
Philadelphia, January 5-7, 2018

2. Motivations
To better understand what type production and trade are GVC activities, what are not, thus lay out the economic accounting foundation for GVC measurement;
Constructing various GVC indexes based on consistent decomposition and accounting exercises, will allow follow-up econometric studies of determinants and consequences of cross country production sharing that are guided by economic theory.

3. Decompose Production Activities：Identify and Measure GVCs
Production of
Value-added（Forward）or
Final products(backward）
Pure Domestic
No border crossing
Traditional Trade
Cross border for consumption
GVCs
Cross border for production
Simple GVCs
（Cross border once for production ）
Chinese Steel in US building
Complex GVCs
（cross border at least twice）
i-phone，Auto
GVC：
Production sharing between two or more countries
Portugal Wine in
Exchange England Cloth
Hair cut
Intermediate trade

4. Preliminary: Inter-Country Input-Output Table
Outputs
Inputs
Intermediate Uses
Final Uses
Total Outputs
Country 1
Country 2
Country G 1 2 G
Intermediate Inputs
Z11
Z12
Z1G
Y11
Y12
Y1G X1
Z21
Z22
Z2G
Y21
Y22
Y2G X2
ZG1
ZG2
ZGG
YG1
YG2
YGG XG
Value Added
VA1
VA2
VAG
Total Inputs

5. (1)
(2)
r, j
GN×GN
s, i
(3)
Value added from a source country-sector i,s used in the production of final goods and services in country-sector r, j

6. Local Leontief Inverse Matrices: an analytical tool to isolate pure domestic production
(4)
superscript “D” represents diagonals, “F” represents off diagonals

7. Decomposition of value added and final goods production by country/industries: Major results
(5)
(6)
(7)

8. Forward linkage-based: Producer perspective Backward linkage-based:
User perspective
Summing up each GN by GN matrix along the row direction: Decompose value-added generated from each country-sector pair in terms of where it goes.
Summing up each GN by GN matrix along the column direction: Decompose country-sector final goods production in terms of where the value added comes from.

9. Complex GVCs were effected the most during economic shocks
Pure domestic production
Traditional trade production
Simple GVCs
Complex GVCs
Source：UIBE GVC Index，Based on WIOD

10. Trends in production activities as a share of
global GDP, by type of value-added creation activity, 1995–2014
Simple global value chain production activities as a share of total global value chain production activities, 1995–2014
Asia crisis
Dotcom bust
Stylize facts:
Pure domestic activities still account for the largest portion of production activities, but its relative importance is decreasing over time ;
among the 3 parts related to international trade, the relative importance of traditional Ricardian type trade is increased more slowly than GVC related activities

11. Structure changes of different type value-added creation activities Share in 2015 minus share in 2011  
Global level
Sector level-backward linkage
Sector level-forward linkage

12. New pattern of global production structure in recent slow economic recovery since 2012
Contradict to the rapid production globalization driven by the growth of complex GVC activities in previous periods, current economic recovery presents de-production globalization character with the shrinking complex GVC cross country production sharing activities;
The economic recovery is mainly driven by production of traditional trade for foreign demand, also contradicting with the pattern of production structure changes in previous period of economic growth;
Participation in simple GVC was mixed, increased in some developed economies, but decline in emerging Asian economies.

13. % Difference between average annual growth rate of different type value added production activities: rate in minus rate in
Horizontal axis is the change of GDP growth rate; Vertical axis is the change of growth rate by types of GDP creation activities

14. What we learned from the data
The new GDP decomposition method can help us understand the role of cross country production sharing activities in global macro-economic cycle. GVC activities, especially complex GVCs are one of the major driving forces during the 3 economic growth periods during last 20 years;
The global production presents a different trend of structure change in recent slow economic recovery since Comparing to previous 3 economic growth periods, GVC activities, especially complex GVCs significantly slow down. It remains to be seen whether this will become a permeant trend in the future. It largely depend on whether the global community has the ability to solve the core distribution issues have brought by the rapid development of production globalization and GVCs during last 20 years.

15. Limitations
Our production decomposition method may underestimate GVC production activities:
Current residence-based national account rules treat all firms within national borders as domestic firms, thus the value-added creation of foreign affiliates are treated as part of domestic GDP production. While it may also be a type of GVC activity, especially in services
Since the supply of services through commercial presence abroad is an important way of conducting international transactions in services (mode 3 – commercial presence), the distinction between foreign and domestic owned firms is particularly relevant for services.
No inter-country input–output (ICIO) table currently exists to separate production activities between domestic firms and foreign affiliates. but initiatives in this direction are being taken in the international statistical community

16. GVC Participation Index, 2011
（ICT Products）
CHN：China as a whole
CHN-PRO：China processing
CHN-NPR：China normal
World average: 33.0%
World average 36.1%
Upstream
Downstream

17. Intensity of GVC participation by US industries 2000, 2007 and 2014
GVC participation is continue increasing by most US industries, both forward and backward participation rate increased more than1.3 percentage point on average during past 15 years;
There is significant cross sector variation in GVC participation, Mining and Agricultural sectors located in the left up corner , services is much lower than manufacture

18. Intensity of GVC participation by US manufacturing industries, 2000, 2007 and 2014
US manufacturing industries continue increase their GVC participation intensity, already exceed the peak before the global financial crisis (both vertical and horizontal scale are enlarging overtime)
Upstream: computer, electronic and optical products (opt); basic metals (bmet); chemicals (che); pharmaceuticals (pha) …;
Downsteam: motor vehicles (veh); machinery(equ); textile (tex); furniture (fur)

19. Source structure of GVC participation: Bilateral GVC linkage between US and its major partner manufacturing average,
The global competitiveness of US manufacturing industries, especially MNE depends on their ability to use imported intermediate inputs from other countries. The interdependence and production sharing between US and China are deepening in both directions
Backward Linkage
Forward Linkage

20. Source structure of GVC participation: Bilateral GVC linkage between US and its major partner Machinery and Equipment,
The interdependence and production sharing between US and China are deepening in both directions
Forward Linkage
Backward Linkage

21. Source structure of GVC participation: Bilateral GVC linkage between US and its major partner Motor Vehicles,
The interdependence and production sharing between US and China are deepening, but mainly in backward industrial linkage, China as auto parts suppliers for US auto production.
Forward Linkage
Backward Linkage

22. GVC Participation Index for US by sectors, 2014
Advantages of the new “GVC Participation Index”
Correcting a bias in traditional indexes
Traditional VS1 ratio use gross exports as the denominator may lead to an upward bias at the bilateral/sectoral level.
GVC Participation Index for US by sectors, 2014
WIOD 2016 Sector label
GVCPt_f
VS1
Repair and installation
1.7%
1334.0%
Electricity and gas supply
3.6%
330.9%
Water supply
322.7%
Construction
0.6%
1748.0%
Wholesale and retail trade
1.3%
248.1%
Real estate
1.2%
439.6%
Legal and accounting activities
9.4%
107.0%

23. Electricity, Gas and Water
The upward bias is more pronounced for utility and service sectors, as a large proportion of their value added is exported indirectly
Electricity, Gas and Water
Retail Trade
Leather and Footwear
VS1
GVCPt_f
AUS
630.2%
14.4%
635.6%
11.9%
21.5%
32.8%
BRA
3521.6%
6.3%
1131.2%
4.0%
21.6%
8.6%
CAN
101.9%
19.5%
15.6%
18.0%
5.5%
37.5%
CHN
396.2%
12.0% -
5.0%
12.3%
DEU
101.8%
18.6%
77.1%
15.9%
10.9%
42.4%
ESP
306.4%
15.0%
29.8%
7.8%
7.1%
22.3%
FRA
148.6%
14.6%
46.9%
7.2%
5.7%
25.2%
GBR
273.1%
62.0%
13.7%
16.7%
20.8%
IND %
8.5%
73.2%
6.5%
11.4%
ITA
250.2%
14.9%
58.6%
11.0%
30.0%
JPN
1082.2%
9.2%
3263.9%
9.7%
31.8%
23.2%
KOR
363.7%
19.8%
45.3%
23.7%
17.2%
43.3%
MEX
411.8%
8.8%
33.4%
8.2%
3.7%
11.8%
RUS
562.1%
26.9%
146.2%
20.6%
4.6%
USA
330.6%
3.6%
248.1%
1.3%

24. Differentiating “simple” and “complex” GVC participation
Forward Linkage based
Sector
GVCPt_f
Simple GVC
Complex GVC
2000
2014
Over
over
Agriculture
9.2%
10.7%
1.5%
6.8%
7.5%
0.7%
2.4%
3.3%
0.9%
Mining
50.3%
48.1%
-2.2%
35.2%
30.1%
-5.1%
15.1%
18.0%
2.9%
Manufacturing
20.4%
24.1%
3.7%
11.9%
14.0%
2.1%
8.5%
10.1%
1.7%
Service
6.7%
8.7%
2.0%
4.3%
5.4%
1.1%
2.3%
Backward Linkage based
Sector
GVCPt_b
Simple GVC
Complex GVC
Agriculture
9.5%
10.0%
0.6%
6.9%
6.7%
-0.3%
2.6%
3.4%
0.8%
Mining
10.9%
11.3%
0.4%
8.2%
1.5%
4.3%
3.1%
-1.2%
Manufacturing
20.6%
24.6%
4.0%
10.7%
1.2%
11.1%
13.9%
2.8%
Service
7.5%
10.3%
5.7%
7.4%
1.7%

25. ΔVAict = β0 + β1×V-Shareict + β2×Wct + β3× Zit + γt + δc + uict
ΔVAict: The annual percentage change of sectoral GDP in industry i of Country c;
V-Shareict: The share of different types of value added creation activities (D, RT, Simple GVC and Complex GVC) in sectoral GDP;
Wct and Zit: Country and sectoral level control variables;
γt and δc: Year and country fixed effects.

26. GVCs and Economic Growth
If a country-sector choose to engage more in GVC production activities, especially the complex production sharing activities, then its economic growth will be relatively faster compare to country-sectors that are less involved in GVCs
Correlation, not causality

27. GVCs and Economic Growth
Complex GVC was the most important driving force for globalization and co-moves strongly with the growth of global GDP, both in booms and in recessions.
Correlation, not causality

28. GVCs and Economic Growth
Correlation, not causality

29. The online data file structure of UIBE GVC index 1
UIBE GVC index database:
Folder Name: PROD. This folder contains 4 group data files related to GDP and final goods production decomposition and GVC participation indexes
Country/sector level indexes:
(1) Forward_{ICIOname}.csv: contains decomposition results of sector GDP based on forward industrial linkage, including 15 indexes;
Sum
First level decomposition
Second level decomposition
Description
V_D
DVA for Pure domestic production
V_RT
DVA for Production of traditional trade
V_GVC
V_GVC_S
DVA for Simple GVC production
V_GVC_C1(D)
Type 1 Complex GVC:DVA return and consumed in home
V_GVC_C2(F)
Type 2 Complex GVC: DVA re-exported to third countries

30. The online data file structure of UIBE GVC index 1
UIBE GVC index database:
Country/sector level indexes:
(2) Backward_{ICIOname}.csv contains decomposition results of sector final goods production based on backward industrial linkage, including 14 indexes:
Sum
First level decomposition
Second level decomposition
Description
Y_D
Domestic VA used directly in domestic produced and consumed final products
Y_RT
Domestic VA used directly in final product exports
Y_GVC
Y_GVC_S
Partner VA directly used in production of domestically consumed products
Y_GVC_C1(D)
Type 1 Complex GVC: DVA return and consumed in home
Y_GVC_C2(F)
Type 2 Complex GVC:
Foreign value-added used in production of final goods (except Y_GVC_S)

31. The online data file structure of UIBE GVC index 1
UIBE GVC index database:
(3) Decompose production activities with source structures:
There are 6 GN by GN data files each year (corresponding to the five components of production plus GVC total) can be used to compute the GVC participation by country and sector sources, the row sum decompose GDP, the column sum decompose final goods production. For the country at interest, only need its row for forward linkage based decomposition, while its column for backward linkage based decomposition. All files are in the same structure: Column label givers the place of production, row label gives the year and source of value-added. i.e value added from a source country-sector (s,i) (row label) used in the production of final goods and services in country-sector (r,j) (column label).
(4) Decompose final goods production into domestic and foreign value-added: 2 GN by GN data files each year
Domestic value-added in final products;
Foreign value-added in final products.

32. Conclusion Remarks
In this paper we propose a production activity accounting framework based on whether factor content crosses national borders for production or not.
We show that a set of GVC participation indexes built on such framework have more desirable properties than the existing ones in the literature.
Complex GVC was the most important driving force for globalization and co-moves strongly with the growth of global GDP, both in booms and in recessions.
By estimating these indexes according to real world data, we produce a large set of indicators and put them on our website for public access. We hope these indexes could be widely used by both theoretical and empirical economists in advancing studies for economics of global supply chains.

33. Major Reference
Leontief, W. (1936). Quantitative input and output relations in the economic system of the United States. The Review of Economic and Statistics, 18,
Wang Z, Wei S J, Yu X, Zhu K (2017a). Measures of Participation in Global Value Chain and Global Business Cycles, National Bureau of Economic Research Working Paper
Wang Z, Wei S J, Yu X, Zhu K (2017b). Characterizing Global Value Chains: Production Length and Upstreamness, National Bureau of Economic Research Working Paper
Timmer, M.P., Erumban, A.A., Los, B., Stehrer, R., De Vries, G.J Slicing Up Global Value Chains. Journal of Economic Perspectives, 28(2):

34. Thank you for your attention!
Zhi Wang, Professor and Dean, Research Institute of Global Value Chain, University of International Business Economics
Research Professor and Senior Policy Research Fellow, Schar School of Policy and Government, George Mason University
Website:
UIBE GVC indictor database:
When use this database, please make a Reference to: UIBE GVC Index Team, “Data files structure of the UIBE GVC index system”
Any questions and suggestions about UIBE GVC Index, please contact GVC index team at UIBE.
Contact: team leader, Professor Fei Wang;
The 2017 GVC development report:
and-analyzing-the-impact-of-gvcs-on-economic-development
The discussion of the 2017 GVC development report at Brookings