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Chapter 2. The Evolving Structure of Global Trade

Nagwa Riad, Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Jarkko Turunen
Published Date:
January 2012
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A. The Diffusion of Key Players in Global Trade

Emerging market economies have moved from peripheral players to major centers of global trade. Figure 2 shows the evolution of key players in global trade, defined as countries whose trade (exports plus imports) represented at least 2 percent of world trade. In the early 1970s, trade was largely confined to a handful of advanced economies, notably the United States, Germany, and Japan, which together accounted for more than a third of global trade. By 1990, the global trading landscape had become more diversified to include several EMEs, especially in East Asia. By 2010, China became the second largest trading partner after the United States, overtaking Germany and Japan. China’s emergence reflects its rapid industrialization and growing trade openness—trade was 57 percent of GDP in 2008 in China, almost triple the ratio of the United States.

Figure 2.Exports of Key Players in International Trade

(Percent of world trade)

Source: IMF, Direction of Trade Statistics.

Growth in trade was strongest for Europe and Asia. The expansion in global trade took place against growing regional concentration. Figure 3 plots the evolution of intraregional trade measured in terms of exports, as well as interregional trade, which includes trade among countries in the rest of the world. Whereas interregional trade was virtually unchanged at about 12 percent of world GDP between 1980 and 2009, growth in intraregional trade was particularly strong in Europe and Asia.

Figure 3.Inter- vs. Intraregional Connectedness of Major Exporters

(Percent of world GDP)

Sources: IMF, Direction of Trade Statistics, World Economic Outlook database, and staff estimates.

The structure of trade has been characterized by a rising share of higher-technology goods (Figure 4). The contribution of high-technology and medium-high-technology exports such as machinery and transport equipment increased, whereas that of lower-technology products such as textiles declined. Technology-intensive export structures generally offer better prospects for future economic growth. Trade in high-technology products tends to grow faster than average, and has larger spillover effects on skills and knowledge-intensive activities. The process of technological absorption is not passive but rather “capability” driven and depends more on the national ability to harness and adapt technologies rather than on factor endowments.

Figure 4.World Manufacturing Exports and Their Composition

(Percent of total world exports)

Source: UN Comtrade.

In this setting, country-specific policies for technology learning and technology import, including those aimed at attracting foreign direct investment (FDI), can create a comparative advantage between countries with otherwise similar endowments of labor, capital, or skills (Lall, 2000).

The changes in global and regional trade patterns were driven first by trade liberalization, then by vertical specialization and income convergence.

  • Trade liberalization. A key factor has been the multilateral and bilateral trade liberalization since World War II, which resulted in a significant decline in trade barriers (Krugman, 1995). Among major western European and North American countries, average tariffs fell from 15 percent to 4 percent during 1952–2005, with the bulk of this decline occurring during the 1950s and 1960s (World Trade Organization [WTO], 2007). Tariffs increased or remained very high until the 1980s in many major developing countries but have since come down sharply as well.
  • Increase in vertical specialization in production. Along with lower trade barriers, technology-led declines in transportation and communication costs also allowed fragmentation of production processes along vertical trading networks that stretch across several countries. Technological advancement in communications reduces the cost of oversight and coordination, making it easier to separate different stages of production across countries. In addition, lower tariffs and transportation costs facilitate the flow of intermediate goods across countries in the global supply chain, as each country specializes in particular stages of a good’s production sequence. Work by Hummels, Ishii, and Yi (2001) and staff estimates show that the foreign content imbedded in gross exports, also referred to as foreign value added (FVA) exports as opposed to domestic value added (DVA) exports, has almost doubled since 1970, to 33 percent in 2005 (Table 1). Growth in vertical specialization has accelerated more recently, increasing by more than 20 percent in the 10-year period up to 2005.
  • Convergence in income levels. As countries converged in income levels and in the composition of their factor endowments, the volume of trade in relation to GDP increased (Helpman, 1987; Hummels and Levinsohn, 1995), and took the form of intraindustry trade, as firms produced differentiated goods with increasing returns-to-scale technology. As shown in Figure 5A, intraindustry trade as a share of overall trade has increased steadily over time and is highest for products such as machinery, chemicals, and manufactures.3 Countries that experienced higher changes in intraindustry trade between 1985 and 2009 are those integrated in a supply chain, such as China, Thailand, and Mexico (Figure 5B).
Table 1.Share of Foreign Value Added (FVA) in Gross Exports
HIY (2001)1Update2
FVA share of gross exports0.
Growth in FVA share31.321.5
Contribution of FVA exports to growth in
Source: IMF staff estimates using OECD Input-Output Tables.

Hummels, Ishii, and Yi (2001). Twenty-eight countries are included in HIY: Australia, Canada, China, EU15, Hong Kong SAR, Indonesia, Japan, Korea, Mexico, Taiwan Province of China, Malaysia, Singapore, Thailand, and the United States.

The 34 countries included in the update are EU15, Australia, Brazil, Canada, Switzerland, China, Czech Republic, Hungary, Indonesia, India, Israel, Norway, New Zealand, Poland, Russian Federation, Slovak Republic, Taiwan Province of China, Turkey, and the United States.

Source: IMF staff estimates using OECD Input-Output Tables.

Hummels, Ishii, and Yi (2001). Twenty-eight countries are included in HIY: Australia, Canada, China, EU15, Hong Kong SAR, Indonesia, Japan, Korea, Mexico, Taiwan Province of China, Malaysia, Singapore, Thailand, and the United States.

The 34 countries included in the update are EU15, Australia, Brazil, Canada, Switzerland, China, Czech Republic, Hungary, Indonesia, India, Israel, Norway, New Zealand, Poland, Russian Federation, Slovak Republic, Taiwan Province of China, Turkey, and the United States.

Figure 5.Grubel Lloyd Index

Source: IMF staff estimates using UN Comtrade data at the 2-digit HS classification.

Note: The index takes the value zero when no products in the same category are both imported and exported, and 100 if all trade is intraindustry trade. World index is calculated based on a limited sample of 32 countries (including the G7) reporting data for all years.

With rising vertical specialization and intraindustry trade, gross exports may not appropriately capture the extent of DVA exports. Official trade statistics are measured in gross terms, which include both intermediate inputs and final goods. Given the rising import content in exports, aggregate trade data are increasingly affected by intermediate goods’ trade flows that cross borders several times. Tracking the extent of FVA in a country’s exports has thus become common in the trade literature to gauge the extent of trade and policy spillovers across countries (Chen, Kondratowicz, and Yi, 2005; Daudin, Rifflant, and Schweisguth, 2009; Johnson and Noguera, 2010; Wang, Powers, and Wei, 2009; Yi, 2003). For instance, for countries that engage heavily in assembly and processing trade, such as Singapore, gross exports can be more than twice as high as DVA exports (Koopman and others, 2010) (Figure 6).

Figure 6.Gross and Value Added Exports to the World: 2004

(Percent of GDP)

B. Growing Trade Interconnectedness

Growth in trade interconnectedness has increased the cross-border transmission of shocks through the trade channel. Table 2 presents countries with systemically important trade sectors identified using network analysis.4 Findings suggest several important trends underlying the global trade network over the past decade. First, there has been a marked shift in the relative rankings of individual jurisdictions, with China moving to first place in 2009 up from ninth in 1999. Second, China has emerged as a major systemically important trading center along with the United States, gaining prominence not only in terms of size but also by increasing the number of its significant trading partners. Third, there has been a marked shift in the roles of China and Japan as strategic export destinations, with China surpassing Japan as a more significant regional and global consumer (Figure 7). Finally, European countries have retained their importance as “central” in the global trade network, owing more to their interconnectedness than size. Box 1 provides details.

Table 2.Jurisdictions with Systemically Important Trade Sectors: 1999–2009






Germany122China: Mainland111
United States216United States213
United Kingdom552Japan548
Canada8612United Kingdom885
China: Mainland998Belgium9911
Belgium10119Korea, Republic of101010
China: Hong Kong SAR11918Canada111213
Korea, Republic of121310China: Hong Kong SAR121020
Malaysia161621Russian Federation161621
Source: IMF staff estimates.

Weighted average of the size and interconnectedness rankings using a 0.7/0.3 weight breakdown, respectively.

Excludes links representing less than 0.1% of each jurisdiction’s GDP.

Source: IMF staff estimates.

Weighted average of the size and interconnectedness rankings using a 0.7/0.3 weight breakdown, respectively.

Excludes links representing less than 0.1% of each jurisdiction’s GDP.

Figure 7.Top Ten Import Origins into China and Japan: 1999 and 2009

Sources: IMF, Direction of Trade Statistics, and staff estimates.

Note: The top ten jurisdictions from which China and Japan imported goods in 1999 and 2009. The size of the nodes represents the relative size of each jurisdiction’s nominal GDP; the width of the lines indicates the volume of exports as a percentage of the exporting jurisdiction’s nominal GDP. This percentage is also indicated on the labels of each line.

There is strong overlap between countries with trade and financial sectors of systemic importance. Comparing the findings on trade interconnectedness with those on financial interconnectedness using the same methodology suggests an almost perfect overlap between the top 25 jurisdictions with systemic financial sectors and the top 25 jurisdictions with systemic trade sectors in 2009 (Figure 8).5 The only exceptions are Luxembourg and Ireland, whose systemic importance is limited only to the financial sector, and Malaysia and Thailand, whose systemic importance is limited only to the trade sector.

Figure 8.Jurisdictions with Systemic Trade and Financial Sectors

Source: IMF staff estimates.

* As identified in IMF (2010a).

Jurisdictions hosting both systemic trade and financial sectors would seem to be the natural focus of risk-based surveillance on cross-border spillovers and contagion.6 The analysis underscores that these jurisdictions display the strongest intersectoral interconnectedness to the global economy. As such, they have the highest potential for transmitting disturbances to other jurisdictions or to systemic stability via either the trade or financial channel or indeed both channels simultaneously. These jurisdictions would thus seem to warrant particular attention and further analysis on the risks associated with their activities, especially when carried out through systemically important financial institutions and nonfinancial corporations.

C. The Growing Role of Global Supply Chains

Vertical specialization has increased since the mid-1990s.7 The increase has been particularly pronounced for China (where the share of imported content increased by 12 percentage points) and for Germany and Japan (7 percentage points), with the emergence of global supply chains contributing significantly to their rise as major exporting countries (Figure 9). In comparison, the increase in imported content has been smaller for the United States. Among the group of advanced economies, the share of foreign content in gross exports is lowest for the United States, even if foreign content in Germany’s exports from the euro area is treated as part of DVA.8

Figure 9.Foreign Contents in Gross Exports

Source: IMF staff estimates using OECD Input-Output Tables, UN Comtrade, and OECD STAN data.

Box 1.Assessing Systemic Trade Interconnectedness

A methodology leveraging the IMF’s Direction of Trade Statistics (DOTS) database is used to identify jurisdictions of systemic importance to global trade.1 Sorting through data for the entire IMF membership, 169 jurisdictions representing almost 100 percent of total world trade in both 1999 and 2009 have been considered for a two-stage process. First, separate ordinal rankings for size and interconnectedness were created using four indicators for each ranking. Then, the indicators were combined into a single size indicator and a single interconnectedness indicator for each jurisdiction.2 Second, a composite index was developed by combining the single size and interconnectedness indicators using a 0.7/0.3 weight split to reflect the greater relative importance of size.3Appendix 1 provides details on the methodology.

The findings are illustrated in Box Figure 1.1 showing the global trade network based on the 2009 rankings of the top 10 jurisdictions.4 Straight lines between jurisdictions reflect the connections (links) between the trade centers of two jurisdictions (nodes). The interconnectedness of each jurisdiction is reflected by each node’s distance from the center of the network; the size of each node reflects the size ranking of each jurisdiction. The findings reveal several underlying trends:

Box Figure 1.1.The Global Trade Network, 2009

Sources: IMF, Direction of Trade Statistics, and staff estimates.

  • Although the composition of the top jurisdictions as a group has remained virtually unchanged, relative rankings of individual jurisdictions have moved markedly, with dynamic EMEs rising in importance. With the exception of Canada, the composition of the top 10 jurisdictions in 2009 mirrored that of 1999; only two countries appear on the 2009 list that did not appear in 1999 (Russia and Turkey). At the same time, China and India rose by eight and seven positions, respectively.
  • Europe and Asia have maintained their dominance at the top of the list. Europe has maintained its position mainly on account of its interconnectedness, whereas size was a more important factor in Asia. This suggests that although Asian countries are of importance to the absolute size of global trade, they are not (yet) “as central” in the global trade network as European jurisdictions.
  • China has become more central, along with the United States, whereas Japan appears to be losing ground. Over a decade, China has increased its prominence in the global trade network not only in terms of size, by substantially raising its share in total world exports and imports, but also in terms of interconnectedness, by almost doubling the number of its significant trading partners, whereas Japan’s rank has declined on both counts.
  • The roles of China and Japan as strategic export destinations have changed considerably over the past 10 years. In 1999, Japan was of greater strategic importance to its largest trading partners as an importer of their products. Since then, Chinese real household consumption has more than doubled and gross fixed capital formation has increased nearly fivefold. Such rapid growth has led to a reversal in their roles as import jurisdictions. China has surpassed Japan not only as the more significant regional importer, but as a global importer as well. In addition, China’s growing use of raw materials has enabled it to become a major destination for emerging market and developing economies’ exports over the past decade.
1 As defined in DOTS, trade refers to merchandise flows only.2 A materiality threshold focused the interconnectedness analysis on economically meaningful bilateral trade relationships (either exports or imports), defined as trade relationships representing 0.1 percent or more of a jurisdiction’s GDP.3 The same 0.7/0.3 weight split was used in assessing financial sector interconnectedness (see IMF, 2010a). Sensitivity analysis carried out on various weight combinations suggests the results are robust to different weightings.4 The global trade network captures all active trade relationships, either exports or imports, across the top 10 jurisdictions representing 0.1 percent or more of a jurisdiction’s GDP.

Vertical specialization has been associated with regional concentration of trade. The significant increase in FVA content of exports between 1995 and 2005 suggests that both China and Germany’s exports have gained from integration within their regional supply chains. Both countries play very different roles though—the former as a downstream assembly center and the latter as an upstream hub. China’s exports have high content of FVA that is from Asia: more than half of FVA is from the region, including other east Asian (OEA) economies.9 In Germany, most of the FVA is coming from other EU countries, including EU accession countries. About 70 percent of FVA in exports of EU accession countries is from the advanced euro area countries, Russia, or European Free Trade Association (EFTA) countries.

Advanced economies tend to be upstream in the global supply chain, whereas EMEs tend to be further downstream. Estimates from Koopman and others (2010) provide a comprehensive picture of global supply chains at the aggregate level and highlight two interesting features.10 First, compared to advanced economies, EMEs have relatively large imported contents in their exports (Table 3). Second, EMEs tend to have a smaller share of indirect exports that are sent to third countries. The ratio of these two measures provides a useful summary of a country’s position in the global supply chain, confirming the downstream position of EMEs in supply chains.

Table 3.Measures of Vertical Specialization across Borders: 2004
(1) Country(2) Imported


embodied in

gross exports
(3) Indirect

exports sent to

third countries1
(4) Upstream

or downstream

position, (3)/(2)
Advanced economies
United States12.926.92.1
Asian newly industrialized countries
China: Hong Kong SAR27.519.50.7
Taiwan Province of China41.127.20.7
China: Mainland35.712.50.4
EU accession countries30.811.30.4
Source: Koopman and others (2010).

Includes indirect exports that return to home country.

Source: Koopman and others (2010).

Includes indirect exports that return to home country.

The relative downstream position of some EMEs, including China, reflects an important role of processing trade. Exports of many EMEs stem from lower value added production processes that largely use imported intermediates to assemble final goods for exports. Such processing trade accounts for a significant share of exports from China, which, together with many other Asian EMEs, serves as a downstream hub in the Asian supply chain (see Box 2). Mexico has a somewhat similar role, owing to specialized duty free assembly plants that use imported intermediates and re-export final goods back to the United States. The accession of Eastern European countries with lower production costs in the European Union has also resulted in increased outsourcing of production away from the advanced EU countries.

Regional supply chains in Asia, NAFTA, and Europe can be distinguished along two key features. The first is the extent of dependence on a regional power house. The Asian supply chain extends across several countries, with goods-in-process crossing borders several times, including through the hub (Japan), before reaching their final destination (Table 4). For instance, about 15 percent of Japanese value added embodied in Chinese products goes through other countries in Asia before reaching China.11 In contrast, almost all the FVA in other regions is imported directly from the hub—the United States in NAFTA and EU15 in Europe. The second feature relates to the extent of processed value added flowing back to the hub. A significant amount of U.S. value-added (and EU15 value added to a lesser extent) returns home after further processing abroad, which is not necessarily the case for Japan. Processing trade in Asia therefore relies heavily on the region as a whole. This finding is consistent with unique features outlined in Box 2 on Asian regional integration.

Table 4.Hubs’ Value Added Contained in Gross Exports
TotalIn imports from

the hub1
In imports from

the neighbors2
EU accession17.517.30.2
Source: IMF staff estimates using Koopman and others (2010).

For China, Mexico, and EU accession countries, hubs are Japan, the United States, and the EU, respectively.

For China, Australia, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and the rest of east Asia are included; for Mexico, Canada, Brazil, and Latin America are included; and for EU accession countries, EFTA and Russia are included.

Source: IMF staff estimates using Koopman and others (2010).

For China, Mexico, and EU accession countries, hubs are Japan, the United States, and the EU, respectively.

For China, Australia, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and the rest of east Asia are included; for Mexico, Canada, Brazil, and Latin America are included; and for EU accession countries, EFTA and Russia are included.

Sectoral evidence of global supply chains

The role of global supply chains for trade in high-technology goods has increased over time, especially in China. As Figure 10 illustrates, the share of imported content in exports of high-technology goods has increased for China, Japan, the United States, and the European advanced economies since the mid-1990s (see Box 3 on OECD technology classification). The increase is particularly pronounced for China—imported content of Chinese high-technology exports increased by close to 30 percentage points from the mid-1990s to the mid-2000s.12 This result confirms that the emergence of China as a major exporter of high-technology goods has been boosted by processing trade, with significant imported contributions from Japan and other countries in the Asian supply chain. By the mid-2000s, China had by far the largest imported content in its high technology exports. Japan and the United States make significantly less use of imported intermediates in their production of high-technology exports.13 In Germany, if imports from euro area countries are considered part of DVA, the share of FVA in high-technology exports becomes comparable to that of Japan and the United States (about 19 percent).

Figure 10.Foreign Contents in Gross Exports: High-Technology Sectors

Source: IMF staff estimates using OECD Input-Output Tables, UN Comtrade, and OECD STAN data.

Box 2.“Factory Asia”

Prior to the mid-1980s, east Asian trade was suppressed by the widely adopted “dual track” development strategies that blocked the imports of manufactured goods to protect infant industries while simultaneously fostering export-oriented industries (Ando and Kimura, 2005; Baldwin, 2008). Starting in the mid-1980s, however, rapid trade liberalization and a surge in intraregional trade emerged in east Asia. In response to the strong appreciation of the yen in the mid-1980s, Japanese firms first shifted labor-intensive assembly operations to newly industrialized economies (NIEs). As their own currencies started to appreciate (Korean won, Singaporean dollar, etc.), NIEs relocated lower-end, labor-intensive assembly processes to countries such as China and the ASEAN countries (Thorbecke, 2011). The off-shoring trend led to competition for investments and jobs in east Asia. This competition resulted in unilateral tariff cutting in the region and ultimately the development of what is known as “Factory Asia.”

These successive relocations have allowed NIEs and then China and the ASEAN countries to develop a comparative advantage in manufacturing exports and progressively upgrade their industrial capacity, thus contributing to a “recycling of comparative advantage” that is characteristic of the Asian supply chain (Gaulier, Lemoine, and Ünal-Kesenci, 2005). In the 1990s, China’s emergence heightened the competition among east Asian countries for jobs and investment linked to the ever growing “Factory Asia.” As a result, unilateral liberalization accelerated in the region. Regionalism (i.e., preferential or discriminatory trade liberalization), on the other hand, was delayed. The ASEAN FTA (AFTA) and the Asian-Pacific Economic Cooperation (APEC) were established, but neither created much discrimination nor had much effect on trade flows.

In sum, Factory Asia was established without “real” regionalism. In fact, regionalism in east Asia only began in 2000 when China expressed interest in an FTA with ASEAN. It is argued that the ASEAN-Japan FTA, the Korea-ASEAN FTA, and the Japan-Korea FTA were all direct reactions to the ASEAN-China FTA (ACFTA) (Baldwin, 2008). This development of regionalism in east Asia can be a potential source of tension in the region, especially since there is neither WTO discipline locking in the unilateral tariff cutting that created “Factory Asia” nor “top-level management” to substitute for WTO discipline in east Asia.

Box 3.OECD Measure of Trade by Technology Intensity

Using the OECD methodology to classify countries’ industrial sectors and manufactures by level of technology, Hatzichronoglou (1997) provides four categories of technological intensity: high, medium-high, medium-low, and low technology. The technological intensity reflects to some degree a “technology-producer” aspect, measured by the ratio of research and development (R&D) expenditure to value added, and a “technology-user” aspect, measured by purchases of intermediate and capital goods.

To analyze international trade flows by technological intensity requires attributing each product to a specific industry. However, products that belong to a high-technology industry do not necessarily have only high-technology content. Likewise, some products in industries of lower technological intensity may incorporate a high degree of technological sophistication. The mapping of technological intensity from industries to trade sectors may therefore in some instances be imperfect.

Box Table 3.1.Manufacturing Industries Classified According to Their Global Technological Intensity

Revision 3
1. Aerospace353
2. Pharmaceuticals2423
3. Computers, office machinery30
4. Electronics-communications32
5. Precision instruments33
6. Electrical machinery31
7. Motor vehicles34
8. Chemicals24 excl. 2423
(except pharmaceuticals)
9. Other transport equipment352, 359
10. Machinery and equipment29
11. Petroleum refining23
12. Rubber and plastics25
13. Non-metallic mineral products26
14. Shipbuilding351
15. Basic metals27
16. Fabricated metal products28
(except machinery and equipment)
17. Other manufacturing industry36, 37
18. Wood and furniture20
19. Paper and printing21, 22
20. Textile, clothing, leather17, 18, 19
Sources: Hatzichronoglou (1997); OECD (2005).Note: List updated in 2001.
Sources: Hatzichronoglou (1997); OECD (2005).Note: List updated in 2001.

Notwithstanding China’s downstream position in the supply chain, its exports of intermediate products in the high-technology sector are increasingly contributing to advanced countries’ high-technology exports. Together with other Asian countries, China increasingly plays a dual role in the global supply chain for high-technology products, as an assembly country and exporter of intermediate inputs to other countries’ high-technology exports. Figure 11 decomposes the contribution of domestic and foreign value added by sector to the export growth of Germany, Japan, and the United States and underscores three interesting results: (i) overall, the increase in FVA contributed about 37 percent to the growth in advanced countries’ gross manufacturing exports between 1995 and 2005; (ii) growth in high-technology exports was almost entirely driven by growth in FVA; and (iii) China’s contribution to advanced countries’ growth in manufacturing exports is significant and concentrated in high- and medium-high-technology sectors. This suggests that China may be rapidly catching up in terms of contribution to advanced countries’ exports of high-technology goods.

Figure 11.Source of Change in Exports of Advanced Countries: 1995–2005

Source: IMF staff estimates using OECD Input-Output Tables, UN Comtrade, and OECD STAN data.

Note: LT = low technology, MLT = medium-low technology, MHT = medium-high technology, and HT = high technology. Percentages indicate the change in foreign value added exports in the overall change in exports.

Imports of services also contribute to advanced countries’ growth in exports. Though the focus of this paper has been on trade in manufactured goods, it is worth noting that trade in services has become an important contributor to advanced countries’ growth in exports. Services imports are not decomposed by country of origin due to lack of data on bilateral trade in services. Evidence on service imports by advanced countries shows that they contribute about 12 percent of the contribution of FVA in advanced countries’ manufacturing exports in 2005.

The greater regional dispersion in the Asian supply chain has important policy implications. Any disruption of trade flows, particularly in intraregional trade flows in Asia, could have large negative spillover effects on domestic production in partner countries. Protecting the free flow of inputs and outputs should therefore be a top priority. This could be done by binding the region’s unilateral tariff cuts under the Doha Round or including all the key players in regional FTAs such as the Trans-Pacific Partnership (TPP). An exclusion of a key player such as China in regional FTAs could create bilateral tensions that could prove potentially disruptive to supply chain trade flows.

D. The Diffusion of High-Technology Exporters

Changes in the technology composition of exports confirm the rise of emerging markets in global trade in high-technology products. Between 1995 and 2008, the contribution of high-technology exports to overall export growth was more than 30 percent for China, compared with 26 percent for the United States, 17 percent for Germany, and only 11 percent for Japan (Figure 12, top panel). Adjusting exports, however, to exclude foreign content and show more clearly the domestic content of exports yields a somewhat different picture: the contribution of high-technology exports to overall export growth is now much lower in China (24 percent), whereas that of the United States rises to 29 percent and Germany to 20 percent (Figure 12, lower panel). Of note is the increase in Mexico’s contribution of high-technology exports when only DVA is considered, suggesting a more broad-based upgrading of the technology content of its export basket.

Figure 12.High-Technology Export Growth1

(Percent of growth)

Source: UN Comtrade.

1The charts reflect the contribution of high-technology exports to the change in overall exports between 1995 and 2008 across countries.

FDI has an important role in the diffusion of technology, especially across global supply chains. Evidence suggests that, whereas U.S. FDI is generally driven by market access considerations, FDI by Japanese multinationals is motivated by factor-price differentials across borders arising from relative abundance of unskilled labor in Asia (Tanaka, 2009; Wakasugi, Ito, and Tomiura, 2008). In this setting, labor-intensive stages of production such as final assembly are moved to a host country with lower cost of unskilled labor, whereas activities that are relatively intensive in skilled labor, such as marketing, patenting, and innovation, are retained in headquarters. Even though the share of Japan’s high-technology exports has declined due to outsourcing to other countries, it has retained those aspects of production with the highest value added (see Box 4).

Several factors have allowed EMEs to upgrade the technology content of their exports. These include geographical proximity to advanced countries, the existence of an educated workforce, and a favorable business environment. Indeed, countries that gained most in exports of high-technology products over the last decade were those whose initial conditions in 1995 featured an intermediate level of development and some presence in high-technology exports (Figure 13). These include countries such as China, Malaysia, and Thailand in Asia, and the Czech Republic, Poland, and Turkey in Europe.

Figure 13.Technology Content of Exports

Sources: UN Comtrade; and IMF staff estimates.

Box 4.Why Has the Share of High-Technology Sectors in Japanese Exports Fallen since the 1990s?

The share of Japanese exports that are attributed to high-technology sectors has fallen from 34 percent in 1995 to 23 percent in 2005. There are three potential explanations.

A rise in exports of other sectors. The share of exports of high-technology sectors has fallen because those exports have been stagnant since the mid-1990s, whereas those of other sectors have increased rapidly (Box Figures 4.1 and 4.2). Both the medium-high- and medium-low-technology sectors have increased by about 10 percentage points between 1995 and 2010, driven by a rapid increase in exports of motor vehicles, machinery and equipment, and basic metals. The rapid expansion of these exports may reflect the progressive liberalization of global trade in motor vehicles since the 1990s and strong demand growth in emerging Asia, including China, more recently.

Box Figure 4.1.Japanese Exports in Millions of U.S. Dollars

Source: World Bank, World Integrated Trade Solution (WITS).

Box Figure 4.2.Japanese Exports in Percent of Total Exports

Source: World Bank, World Integrated Trade Solution (WITS).

A rise in outsourcing. As part of “Factory Asia” (see Box 2), Japanese firms in high-technology sectors have transferred production sites to countries in the region. Although R&D still takes place in headquarters, trade flows have shifted from Japan to other Asian countries. Data on R&D expenditures and on royalties and license fees seem to support this explanation (Box Figures 4.3 and 4.4). R&D expenditures have been rising since the mid-1990s and are high by international standards. Inflows of royalties and license fees in the balance of payments have also been rising steadily during the same period.

Box Figure 4.3.R&D Spending on the High-Technology Sector

Sources: IMF, World Economic Outlook database; OECD, STAN R&D expenditure in industry.

Box Figure 4.4.Royalties and License Fees

Source: IMF, International Financial Statistics.

Detailed trade data also show that outsourcing is indeed part of the explanation (Box Figures 4.5 and 4.6). For instance, the decline in exports of the computers and office equipment sector is driven by a decline in exports of final products, whereas those of parts and accessories continue to increase. Outsourcing, however, does not fully explain why exports of high-technology sectors have fallen relative to those of other sectors, where incentives for outsourcing may have been equally strong.

Box Figure 4.5.Japanese Exports: High-Technology Sector

Source: World Bank, World Integrated Trade Solution (WITS).

Box Figure 4.6.ISIC-30: Computers and Office Equipment

Source: World Bank, World Integrated Trade Solution (WITS).

Information lost in sectoral aggregation. Products that belong to a high-technology industry do not necessarily have only high-technology content; the relative fall in high-technology exports may have been concentrated in products with a lower-technology content. Trade data on the electronics and communication sector seem to confirm this hypothesis: exports of relatively simple products such as telephones have declined, whereas products with a high-technology content such as integrated circuits have risen (Box Figure 4.7).

Box Figure 4.7.ISIC-32: Electronics and Communication

Source: World Bank, World Integrated Trade Solution (WITS).

Although many low-income countries (LICs) have not yet fulfilled these conditions, there has been some upgrade in the technology content of their exports as well. As shown in Box 5, exports of medium-high- and high-technology products have increased for LICs in all major regions, albeit from a very low level. Increased trade with dynamic EMEs such as China has provided an important impetus, although traditional partners such as the United States and Japan remain important destinations for higher-technology exports. This suggests that LICs in Asia and the Western Hemisphere could be benefiting from greater integration in global supply chains.

E. Rising Export Similarity

Export structures of EMEs are becoming increasingly similar to those of advanced economies, in part reflecting the growth of global supply chains. With China and other EMEs increasing their presence in sectors traditionally dominated by advanced countries, the similarity in export structures has increased and so has competitive pressure. A common indicator to gauge export competitiveness is the export similarity index (ESI), which takes higher values for country pairs with similar shares of each product (six-digit) category in overall exports.14 As shown in Table 5, Japan competes most with Korea, the United States, and European countries, whereas the U.S. export structure continues to be similar to other advanced economies. China has traditionally competed with other Asian countries, and although large differences still remain, its export structure has been converging with that of advanced economies such as Germany and the United States.15

Table 5.Overall Export Similarity Index: 1995 and 2008
1Hong Kong SAR0.5101Hong Kong SAR0.5101Germany0.5321Germany0.544
2Thailand0.3552Malaysia0.3912United States0.5152Korea0.510
3Philippines0.3123Thailand0.3883Korea0.4683United States0.487
4Korea0.3114Italy0.3834United Kingdom0.4514United Kingdom0.430
5Italy0.3065Czech Republic0.3775France0.4345France0.421
8Portugal0.2918Hungary0.3558Sweden0.3718Czech Republic0.392
12India0.27213United States0.33312Hong Kong SAR0.36214China0.356
20United States0.24817Spain0.31315Thailand0.31520Hong Kong SAR0.327
Euro AreaUnited States
1United Kingdom0.6191United States0.6401United Kingdom0.5841Germany0.587
2United States0.5852United Kingdom0.6212Germany0.5532United Kingdom0.586
5Switzerland0.4485Czech Republic0.4835Netherlands0.4675Japan0.487
6Czech Republic0.4336Denmark0.4776Italy0.4246Italy0.467
12Hong Kong SAR0.31113Turkey0.37913Korea0.34916Singapore0.379
13Poland0.31113China0.37716Hong Kong SAR0.33720Mexico0.359
16China0.28121Hong Kong SAR0.30229China0.24828Hong Kong SAR0.312
Sources: UN Comtrade; and IMF staff estimates.
Sources: UN Comtrade; and IMF staff estimates.

Box 5.Structure of Export Baskets in LICs

Many LICs have seen an upgrade in their export baskets in recent years, albeit from a low level. Although still lagging behind strong performing EMEs, the incidence of medium-high- and high-technology products in LIC non-oil exports has increased notably.1Box Figure 5.1 shows that for LICs in all major regions the share of these products in non-oil exports increased from about 3 to 4 percent in 1995 to about 7 percent in African LICs, and 12 to 16 percent for LICs in Asia and the Middle East and Central Asia in 2008.

Box Figure 5.1.LICs: High- and Medium-High-Technology Exports

(Share in Total Exports, Non-Oil)

Source: UN Comtrade.

Decomposition of LIC exports by technology intensity and destination reveals several interesting trends (Box Figures 5.2 and 5.3). First, a significant share of trade in medium-high- and high-technology exports took place between African LICs in 2008, as opposed to other destinations. Second, EMEs are important destinations for LIC exports of medium-high- and high-technology exports. These include China, Singapore, and Thailand for Asian LICs, South Africa for African LICs, and Mexico for LICs in the Western Hemisphere.

Box Figure 5.2.LICs: High- and Medium-High-Technology Exports by Destination


Source: UN Comtrade.

Box Figure 5.3.LICs: Low- and Medium-Low-Technology Exports by Destination


Source: UN Comtrade.

Finally, advanced economies are important destinations for LIC exports, albeit more for lower-technology than for higher-technology products. Nonetheless, the increase in exports of medium-high- and high-technology products to Japan for Asian LICs and to the United States for LICs in the Western Hemisphere could be indicative of greater integration in the respective regional supply chains.

1 In 2008, the share of non-oil exports in overall exports was 28 percent for LICs in Africa, 35 percent in the Middle East and Central Asia, 81 percent in the Western Hemisphere, and 83 percent in Asia.

Rising export similarity between advanced countries and EMEs could reflect increased complementarity, as well as competition. The observed shift in technology content and corresponding convergence in export structures may reflect higher complementarity arising from the increased outsourcing of labor-intensive production to low-wage countries in the region. For instance, whereas transport equipment exports go directly to advanced countries and have held their share over time, a growing proportion of Japanese machinery exports are now assembled in China, showing up as increased Japanese exports to Asia (and, in turn, higher exports from China to the United States). This has more to do with Japan’s upstream role in the Asian production chain rather than a sign of growing competitive pressure. Similarly, in Europe, technological intensity of exports has shifted from western to eastern Europe and particularly the Czech Republic, Hungary, and Poland. In North America, the United States has outsourced some high-technology activities to its NAFTA partners, especially Mexico, and to Central America.

Gross exports data would not adequately capture quality differences within the same product category. Whereas EMEs could be exporting products in categories similar to those of advanced countries, these can still be differentiated along quality and price dimensions.16 In the particular case of China, the important role of processing trade in high-technology exports may affect aggregate indicators of export similarity. To take this into account, we further modify the ESI to distinguish products by destination market, assuming that high-income countries are likely to demand higher quality varieties of the same product.17 The increase in overlap in export structures of emerging market economies, notably China, Indonesia, and Vietnam in Asia, and Poland and Turkey in Europe and those of advanced countries persists (Figure 14), albeit to a lesser extent compared to the unadjusted ESI presented in Table 5.

Figure 14.Export Similarity Index (ESI) by Destination in 1995 and 2008: China, Euro Area, Japan, and the United States

Source: UN Comtrade.

Advanced countries’ exports are still differentiated by price and quality characteristics. An alternative indicator due to Hausmann, Hwang, and Rodrik (2007) measuring the income level embodied in a country’s exports (EXPY) is useful in gauging the extent of export sophistication. The EXPY assigns to each six-digit product category a (weighted) average income level of those countries producing the same product. Thus, a product exclusively produced by industrialized countries, and likely embodying high quality/value added, would be assigned a higher value. Based on this indicator, Japan has consistently outperformed the G-7 countries in increasing the value of its exports (Figure 15). Despite their substantial catch-up, the income level embodied in EMEs’ exports still remains below those for advanced countries. In other words, EMEs’ exports are still skewed toward lower-income product categories. This is true even for China which has strongly outperformed other large emerging markets according to this metric.

Figure 15.Income Level of Exports (EXPY)

Sources: UN Comtrade; and IMF staff estimates.

Export structures suggest that dynamic EMEs can expect another growth push. In a given year a country’s EXPY can deviate considerably from the value that may be predicted based on its income level. Given ongoing product and quality upgrading, the quality level of exports in several EMEs is higher than expected based on GDP per capita. As shown in Figure 16, countries with higher-than-expected EXPYs tend to grow more in subsequent years (see also Hausmann, Hwang, and Rodrik, 2007). The growth push is expected to be most pronounced for some Asian countries such as China, India, and Thailand, and somewhat less pronounced but still positive for most eastern European countries (Figure 17).18

Figure 16.Income Level of Exports 2008 vs. GDP per Capita 2008

Sources: IMF, World Economic Outlook database, and staff estimates.

Figure 17.Growth in GDP per Capita 1995–2008

Sources: IMF, World Economic Outlook database, and staff estimates.

F. Past Trends and Implications for Trade Outlook

The integration of rapidly growing EMEs is likely to induce a gradual shift in the sources of global demand away from advanced economies. With China overtaking Japan as the second largest economy in the world in 2010, East Asian countries are likely to emerge as the largest trading bloc by 2015, surpassing NAFTA and the euro area (Figure 18). Global supply chains have been an important factor in this trend and a country’s position along the supply chain could have important implications for trading patterns in the future.

Figure 18.Three Trading Blocks and Top Export Markets by 2015

(Share of world nominal GDP)

Source: IMF, World Economic Outlook database.

Note: East Asia = ASEAN + Taiwan Province of China + Hong Kong SAR.

The emergence of global supply chains may have also changed the way trade responds to relative price changes. Higher imported content in exports is likely to lower the sensitivity of trade to changes in the exchange rate. For instance an appreciation of the domestic currency against all trading partners implies that while exports become more expensive, imported intermediates also become cheaper, mitigating the impact of relative price changes on trade flows (Koopman, Wang, and Wei, 2008).19 Advanced countries whose exports tend to be concentrated in medium-high-technology goods are therefore likely to be more sensitive to relative price changes because of higher DVA, whereas those of EMEs are likely to be less sensitive given higher FVA in their exports.20 The simulation results in the next chapter are consistent with these predictions.

Global supply chains may also result in closer relationships between producers in different countries and higher adjustment costs. Although this may further dampen the impact of (small) relative price changes on trade flows, it may also represent a source of vulnerability. The recent earthquake in Japan provides for a real life test of the resilience of supply chains to disruptions in production, especially in an upstream country (see Box 6 for details). And although the disruption is likely to prove temporary, it may nonetheless lead to a rethink of the “just-in-time” production framework underlying global supply chains, especially the Asian one.

Box 6.Supply Chain Implications of the Pacific Earthquake in Japan1

Although the implications of the disruptions are likely to be temporary, the March 11, 2011, Pacific earthquake in Japan is likely to test the resilience of the Asian supply chain. This box elaborates on the relevant factors that are important in analyzing the possible spillover implications of a disruption in Japanese production. The analysis focuses on the semiconductor and automobile industries, which seem to be most vulnerable to a supply chain disruption.

Although its weight in global trade has been declining, Japan continues to play an important role in Asian regional trade. Asian intraregional trade has expanded rapidly since 1990, largely driven by dynamic economies such as China (Box Figure 6.1). Nonetheless, Japan’s intraregional exports as a share of global GDP has remained remarkably stable—even during the crisis—and accounts for more than two-thirds of industrial countries’ intraregional trade. Japanese exports to the region accounted for almost 60 percent of overall exports in 2010, mostly concentrated in machinery, chemicals, and transport equipment. Japan’s deepening regional integration was in large part driven by increased outsourcing of production processes by Japanese firms to neighboring countries.

Box Figure 6.1.Intraregional Trade

(Exports in percent of world GDP)

Sources: IMF, Direction of Trade Statistics, and World Economic Outlook database.

Note: Industrial Asia: Australia and New Zealand; NIEs: Hong Kong SAR, Korea, Singapore, and Taiwan Province of China; Emerging Asia: Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

Japan’s trade structure is shifting from export of high-technology final products toward export of sophisticated intermediate inputs. Whereas exports of high-technology final goods may have declined, those of sophisticated intermediate inputs have been rising (see Box 4). Japan has thus established itself as an important supplier of sophisticated manufacturing inputs at the global and regional levels, particularly in the transport and electrical machinery sectors. Even though they may not constitute an important share in its overall exports, Japan accounts for a significant share of global exports in the semiconductor and auto subsectors, and is an important source of these intermediates not only for countries in Asia but also for the United States and the European Union (Box Table 6.1).

Box Table 6.1.Japan’s Share in Global Export Markets and Partner Imports, 2010
Japan exports (percent of world exports; reporting)34.310.015.017.1
Imports from Japan (percent 4-digit imports):
China: Mainland35.737.119.623.5
China: Hong Kong SAR23.27.615.230.6
South Korea40.634.625.318.7
United States53.220.217.827.7
European Union27.225.26.433.3
Source: Global Trade Atlas.Note: 8486, boilers and reactors: machines and apparatus for manufacture of semiconductors; 8408, boilers and reactors: compression-ignition for combustion engines; 8541, electrical machinery: semiconductor devices; 8703, vehicles excluding railways: autos.
Source: Global Trade Atlas.Note: 8486, boilers and reactors: machines and apparatus for manufacture of semiconductors; 8408, boilers and reactors: compression-ignition for combustion engines; 8541, electrical machinery: semiconductor devices; 8703, vehicles excluding railways: autos.

Japan is an important source of FVA in gross exports of other Asian countries. Japan is clearly upstream in the Asian supply chain and its share of FVA in gross exports is particularly high for Asian countries engaged in assembly or processing activities (Box Figure 6.2). The chart illustrates two important points: (i) foreign content in gross exports of these products of most Asian countries is relatively high (more than 80 percent in electronic equipment in Singapore); and (ii) a significant proportion of FVA comes from Japan, especially for Hong Kong SAR and China (electronic equipment), and Thailand and Taiwan (motor vehicles). A disruption in the production of key intermediate inputs in Japan due to the earthquake, therefore, has the potential to spill over to production in other countries in the supply chain.

Box Figure 6.2.Japanese Contribution to FVA in Countries’ Gross Exports, 2004


The extent of disruption from the earthquake is gradually manifesting in the high frequency Japanese trade data. Exports plunged in April and, for the first time in 31 years, Japan recorded a trade deficit for the month (Box Figure 6.3). Part of this decline, however, is a correction from the sharp increase in growth rates as Japanese exports bounced back from the crisis; a similar correction in growth rates was observed after the dot-com bubble burst in 2001. Nonetheless, there is significant variation in impact across sectors, with exports of vehicles being hit particularly hard compared to those of machinery, and between upstream and downstream countries, as exports to the United States are harder hit compared to China. This differential impact is partly attributed to the relative weights of final versus intermediate goods exported to each country. Within the vehicles sector, the decline was most pronounced for exports of the final goods (cars subsector) compared to those of intermediates (parts and accessories for vehicles subsector), possibly reflecting an inventory effect. The overall impact on the United States reflects the predominance of exports of cars (final product) under the vehicles sector compared to car accessories (intermediate product) for China.

Box Figure 6.3.Japanese Exports by Sector and Partner

Source: Global Trade Atlas.

Overall, so far, equity prices and supply projections by industry analysts suggest that the overall impact of the disruption along the supply chain is likely to be short-lived. However, many of the affected Japanese firms’ returns remain significantly below expectations.2 Staff micro analysis of firms’ equity returns data in the semiconductor industry for key upstream (input suppliers), midstream (memory makers), and downstream companies (PC and handset makers) suggests an initial impact on the market’s outlook, especially during the immediate period of elevated concern regarding a potential nuclear meltdown. However, these effects did not persist for all firms in the ensuing month; in part this reflects a previous buildup in global semiconductor inventory, which may provide some cushion possibly until 2011:Q3. In the automobile sector, concerns have focused on disruptions to the supply of microcontroller units (MCUs), which are small, high-value components used in a variety of automotive applications and parts. Equity returns for Japanese MCU manufacturers have experienced significantly negative abnormal returns (ARs) since March, coinciding with weak returns for Japanese auto manufacturers, suggesting markets expect them to bear the brunt of any parts bottlenecks. Indeed, these manufacturers have scaled back their production across the globe. Equity markets also suggest that some of their competitors are expected to substitute for lost production.

The supply chain implications of the Pacific earthquake are likely to be transitory, although downside risks remain. In the short term, substitution may be harder in subsectors in which Japanese exporters have a high market share. Firms may be initially willing to endure some losses as Japanese production recovers, either through inventory adjustment or temporary shutdown of facilities. Moreover, exports of sophisticated subproducts may be protected by patent rights, making substitution of Japanese suppliers difficult in the short term.3 However, if the supply of key products from Japan is disrupted for a prolonged period and inventories run out, firms may be forced to replace Japanese exports from other sources.

1 With contributions from Phil de Imus of the Strategy, Policy, and Review Department.2 A firm’s performance is measured against its expected return derived from a standard capital asset pricing model (CAPM) to calculate AR. Returns on the MSCI World Free index represent the market return and the 3-month U.S. Treasury bills the risk free rate. ARs are summed up since March 2011 to derive a cumulative abnormal return.3 As suggested by the analysis on R&D spending and royalties in Box 4.
3Intraindustry trade is defined as two-way exchange of goods within the same product category and can take the form of: (i) horizontal trade in similar products with differentiated varieties; (ii) trade in vertically differentiated products; or (iii) vertical specialization of production that gives rise to trade in similar goods at different stages of production (Organization for Economic Cooperation and Development [OECD], 2002).
4See Appendix 1 for details on the methodology to assess systemic trade interconnectedness.
5The top 25 jurisdictions with systemic financial sectors as identified in IMF (2010a).
6As shown in Figure 8, these would include all countries listed in Table 2 for 2009 except for Malaysia and Thailand hosting systemic trade but not financial sectors.
7Vertical specialization is one measure to characterize global supply chains. See Appendix 2 for details.
8If foreign content from the euro area is considered part of DVA, overall foreign content in Germany’s exports declines to 19.6 percent in 2005 and to about 13.5 percent in 1995.
9OEA includes Hong Kong SAR, India, Indonesia, Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam.
10The description of global supply chains in this part draws on estimates in Table 3 in Koopman and others (2010), who rely on different classifications of Europe since they use GTAP data to generate global input-output tables. Input-output tables are typically not available on an annual basis, with most recent data from GTAP referring to 2004.
11There are two ways in which Japanese value added is built into Chinese exports: one is through direct imports of intermediate inputs from Japan (6.8 percent) and the second is by importing inputs from the region that contain Japanese value added (1.2 percent).
12These results are consistent with those in Koopman, Wang, and Wei (2008), who also find that sectors that produce relatively sophisticated goods, such as electronics, tend to have a higher foreign content than other sectors and with case studies that show that some high-technology goods exported from China include very little domestic value added (e.g., the study on iPods and portable computers by Dedrick, Kreamer, and Linden, 2010).
13Exports of low-technology sectors have the lowest imported content in all countries. However, for countries other than China, the share of imported contents is also high in exports of medium-technology sectors (see Tables A2.2 and A2.3 in Appendix 2).
14An ESI value of 1 corresponds to identical export structures and zero to completely dissimilar structures. See Appendix 3 for details.
15This is consistent with findings suggesting that China is gaining similarity with advanced economies along the extensive margin, by penetrating product markets traditionally dominated by advanced economies (Wang and Wei, 2008), as well as the intensive margin, through rising exports in product categories that China was exporting all along (Amiti and Freund, 2008).
16Analysis of U.S. customs micro level data suggests that a shirt imported from Japan costs on average 30 times as much as a shirt imported from the Philippines (Schott, 2004). Thus, although it may be the case that export baskets of many EMEs now look similar to advanced economies, the quality or sophistication level of their products may still be different.
17The ESI is recalculated by distinguishing products based on five destination markets using the standard World Bank income classification: high-income OECD, high-income non-OECD, upper middle income, lower middle, and low-income. In this analysis, product “A” exported to a low-income country would be considered a different product from the same product “A” exported to a high-income country.
18In terms of Figure 17, this growth push would move these countries to the right, thus aligning their income level with the sophistication level of their exports. For countries that are closer to the regression line, the EXPY-induced growth push would be smaller.
19However, this impact is lower if the currencies of partner countries that provide imported intermediates also appreciate (see Ahmed, 2009; Thorbecke and Smith, 2010).
20Appendix 4 provides a brief description of the export structure of the four simulation countries.

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