Do policy-makers run the risk of underestimating trade?

In a series of three blog posts, Peter Draper, vice-chair of the Global Agenda Council on Trade, examines some of the key trends. 

The importance of global production chains is reflected in the rising trade in intermediate inputs – those goods and services, produced elsewhere or imported, that form an integral part of the production process.

These now represent more than half of OECD imports and close to three-quarters of the imports of large developing economies, such as China and Brazil (Ali and Dadush 2011).

Imported inputs also account for a significant chunk of exports, blurring the line between exports and imports, as well as between domestic products and imports.

Products at different stages of development may be imported and re-exported many times, increasing the size of reported exports and imports relative to their actual value to the economy. In advanced countries, this effect is reinforced by the fact that imports can contain inputs – including intellectual property, brand-development and so on – originally sourced at home. In developing countries, imports of components and machines are crucial vehicles for absorption of technologies.

Policy-makers need better measures of trade flows that exclude intermediate imports, and a better appreciation of how the economy fits into global production chains. Without these measures, policy-makers could reach inaccurate conclusions about bilateral trade imbalances, and underestimate both the cost of protection and the importance of bilateral or regional trading relationships.

Image credit: Anatolii Stepanov / REUTERS