The fragmentation of production processes and the rise of global supply chains (GSC) since the 1980s have become increasingly important factors in linking developing countries to international production networks and markets. Today, a large share of production within GSC takes place in developing countries, especially in East and Southeast Asia.
Strategy 2020 emphasizes the [&] great promise that regional cooperation and integration activities present for accelerating economic growth, raising productivity and employment, reducing economic disparities, and achieving closer policy coordination and collaboration in support of regional and global public goods [&]. This technical assistance (TA) contributes to this strategic priority by shedding light on poorly understood aspects of the regional integration of production and by raising the capacity of Asian Development Bank (ADB) to formulate policy advice on the basis of state-of-the-art data and methods for the analysis of GSC in the region. In cooperation with partner organizations, such as Organisation for Economic Co-operation and Development (OECD), World Trade Organization (WTO), Institute of Developing Economies-Japan External Trade Organization (IDE-JETRO), the Fung Global Institute (FGI), and the Asian Development Bank Institute (ADBI), this TA will facilitate ADB's establishment as a contributing member within the nascent research consortium focusing on these issues.
|Project Rationale and Linkage to Country/Regional Strategy
The international fragmentation of production has created the need for new measures of trade that account for the value that is actually added by a country to the goods or services it exports, net of the imported value of intermediate parts and components (trade in value added). By contrast, traditional trade statistics reflect gross value, thus double-counting the value of intermediates as they cross international borders multiple times. As a result, international trade statistics provide an inaccurate picture of trade involving heavily networked economies. For example, domestic value added is estimated to account for roughly 60 percent of the exports value of People's Republic of China (PRC) while its trade surplus with the United States is thought to be overestimated by about 40 percent . Only by duly accounting for trade in value added (TVA) can ADB research and policy advice be made reflective of the economic and social implications of production networks in the region. Moreover, TVA analysis informs forecasts and estimates on the impact of foreign demand or supply shocks as they propagate through GSC, such as were triggered by recent natural disasters in Japan and Thailand, or such as threats posed to regional growth by the unresolved Euro Area crisis.
Analytical issues in relation to GSC and TVA concern mainly the measurement of global supply chains and vertical specialization (the foreign value added embedded within exports). The main approaches are: (i) input-output analysis, associating inputs with industry outputs and identifying the source of those inputs; (ii) defining product categories using some descriptors like parts and components ; (iii) firm level data on foreign inputs, tracking both foreign input purchases and exports by firms have become available; (iv) processing trade data, available for some countries, notably PRC and Mexico, where trade statistics are reported separately for firms that are officially designated as export processing; (v) multinational firm data, especially datasets that provide information on affiliate sales or intra-firm trade. This TA will compare the strengths and weaknesses of these approaches with special reference to Asia's role in GSC.
A further issue concerns the assessment of the determinants and structure of GSC. Such analysis typically has used measures of vertical specialization, or value added trade, as the dependent variable in regression analysis focused on understanding if trade of this sort behaves differently from other trade, e.g., is more sensitive to trade costs. The literature is still extremely thin on these issues and this TA can do much to shed light on the drivers and impediments to GSC and TVA in Asia.
Finally, there is a key issue concerning offshoring and its effects on firms and labor markets. Such analysis has to rely mainly on firm level data, which is becoming increasingly available. Because these datasets also include firm level characteristics and are in some cases linked to employment databases, analysis can now go much further in understanding why individual firms choose to produce with foreign value added, and how this affects their outcomes, for example in terms of productivity or wages.