No island is an ‘island’ in the age of GVCs



Tommaso Aquilante, Marco Garofalo and Enrico Longoni | Bank Underground

Over the past few decades production processes have become increasingly complex and integrated across national boundaries through so-called Global Value Chains (GVCs). With increasing trade tensions and uncertainty regarding future economic integration, the 400-year old words of the English poet John Donne captured in ‘No man is an island’ seem more topical than ever. In this BU we explore the UK’s position in GVCs showing that also no island is really an island! Using a sophisticated yet intuitive decomposition of UK’s trade flows we will show how GVCs matter for the UK economy, and in particular how they seem to matter more for what we export than imports.

Beyond gross trade flows: the importance of trade in value added

Looking at trade from a GVCs perspective reveals how different economies can be linked in terms of the value-added flows they generate. This alternative perspective also shows that looking at the gross value of trade, as opposed to trade in value-added, might be misleading. Standard gross trade statistics show the entire value of a good or a service that is traded internationally. This includes the value of intermediate inputs that might have been added abroad rather than in the trading country and/or inputs provided by other domestic industries which in turn use imports as inputs in their production processes.

In our integrated world this can result in double-counting of trade flows if intermediate inputs cross borders multiple times, potentially overstating the importance of exports in GDP. For example, using the OECD TiVA dataset, one discovers that the UK’s top five export destinations are not necessarily the same when one looks at gross rather than trade in value-added flows.

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