New Industry-level Analysis on Value Chains and Competitiveness in Asia and Europe: Introduction*

Kiyotaka Sato and Robert Stehrer Keywords: Asia, Europe, economic integration, export competitiveness, global value chains, offshoring.

JEL classification codes: F14, F15, F31, D57.

doi: 10.1111/asej.12055

The papers in this special issue conduct industry-level analyses of Asian and European integration, focusing on the dynamics of value chains and export competitiveness.1

Recent developments in the empirical research on vertical specialization and value-added trade have led to increasing application of input–output (IO) tables. Previous studies often relied on a single-country IO table, because it is hard to integrate a number of single-country IO tables into a global framework by dis- tinguishing between imports/exports of intermediate goods and those of finished goods both by trading partner countries and by industry.2 In addition, an analysis of the recent dynamic changes of the production and trade structure in Asia and Europe, particularly during the recent crisis period, cannot be based on IO data for a single year.3

The World Input Output Database (WIOD), which was made publically avail- able in April 2012, has marked a significant breakthrough in the IO analysis literature.4 Specifically, the WIOD integrates 40 endogenous countries with 35 industries into a world IO table, and the annual world IO tables are provided for 17 years, from 1995 to 2011. The WIOD covers European countries and several

* Sato (corresponding author): Department of Economics, Yokohama National University, 79-3 Tokiwadai, Hodogaya-ku, Yokohama 240-8501, Japan. Email: sato@ynu.ac.jp. Stehrer: The Vienna Institute for International Economic Studies (wiiw), Rahlgasse 3, A-1060 Vienna, Austria. 1 The papers were originally presented at the joint workshop on ‘New Industry-level Analysis in Asia and Europe: Integration, Value Chains and Competitiveness’ held by the Center for Economic and Social Studies in Asia (CESSA) at Yokohama National University (YNU) and the Vienna Institute for International Economic Studies (wiiw) in June 2013. The workshop was financially supported by The Vienna Institute for International Economic Studies, Yokohama National Univer- sity, and the JSPS (Japan Society for the Promotion of Science) Grant-in-Aid for Scientific Research (B) No. 24330101. 2 See, for instance, Hummels et al. (2001). 3 For instance, Johnson and Noguera (2012) use a single-year (year 2004) IO table for their empirical analysis. 4 See the website of the WIOD (http://www.wiod.org/index.htm).

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Asian countries, which enables us to investigate the regional integration process and value chains in each region and also to analyze how interregional dependence has evolved over time.5,6

Industry-level analysis is becoming increasingly important in the international finance literature as well. After the collapse of Lehman Brothers in Septem- ber 2008, the Japanese yen appreciated sharply against all currencies, while the Korean won depreciated dramatically. Such an asymmetric movement of the currencies affected the export price competitiveness of these countries, but the question is whether the effect of exchange rate changes on export competitiveness differs across industries. In addition, non-price export competitiveness has rarely been considered in previous studies. Non-price export competitiveness can be studied using detailed trade data and is highly relevant for a complete view of internationalization processes.

The papers in this special issue are grouped into two categories. The first three papers utilize the WIOD and conduct a comparative analysis of Asia and Europe, focusing on regional integration and value chains. The last two papers empirically investigate the price and non-price export competitiveness at industry level.

I. Global Value Chains and the Effect of Offshoring

The first paper, by Amador et al., examines the main characteristics of production integration, value-added trade and global value chains (GVC) between the euro area and other large world trade players like the USA, China and Japan. In addition, a special focus on intra-euro area linkages across the individual euro area countries is considered. Conceptually, the analysis is primarily based on the concept of foreign value added in exports (close to the approach suggested in Hummels et al. 2001) and draws on the just described WIOD. The paper also gives some information on the sectoral dimension of production linkages. The general conclusion of the paper is that production integration has been important and even further increased for the euro area as a whole over the past few decades, with a strong role for Germany and Central and Eastern European countries in particular. Furthermore, the paper argues that there has been stronger integration following the trade collapse in 2009. Concerning the euro area integration with other world regions, the paper shows little evidence of integration with other economic blocks except for China, with whom integration has strongly increased (a pattern which has partly been reverted following the crisis). For 2011, China shows a stronger participation in GVC than the euro area, while Japan and the USA present lower levels of integration to the euro area. Evidence also points

5 See Dietzenbacher et al. (2013) and Timmer et al. (2014) for research using the WIOD. 6 The Center for Economic and Social Studies in Asia (CESSA) at Yokohama National University began publishing the new Global Input–Output Table (YNU-GIO Table) at the end of March 2015, which covers 29 endogenous countries (including 11 Asian economies) and 60 exogenous economies from 1997 to 2012. See the website of CESSA (http://www.recessa.ynu.ac.jp/en/) to download the data.

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towards a stronger positioning of the euro area in the upstream stages of the production chain, when compared with China and, in particular, Japan. The indicators presented in the paper support the notion that from 2000 to 2011 China experienced a progressive ‘upstreamness’ of its exports.

The second paper, by Kwon and Ryou, investigates how the patterns of inter- regional trade and production sharing in East Asia changed between 1995 and 2009, and the particular role of China. Conceptually, it considers: (i) the ratio of value added generated through exports of the intermediate goods with respect to value-added induced by total exports; and (ii) the ratio of domestic value added due to final demand of the trading partner relative to total exports to that region. The results highlight that the increasing importance of China in the global pro- duction network has further spurred production integration in East Asia. None- theless, despite its strong dynamics, China’s role is still less significant than that of Japan or Korea. From a bilateral perspective, the ratio of domestic value added created due to the final demand of the trading partners in terms of overall gross exports has fallen for all three countries, even after considering the bilateral trade with one another. The paper highlights that the change took place much faster than in interregional trade with other regions, suggesting that production integra- tion in East Asia has been more dynamic. This vertical specialization has mostly progressed in the major exporting industries of electrical and optical equipment in China, Japan and Korea. This empirical result confirms the rapid deepening of vertical specialization, which has mainly been concentrated in East Asian coun- tries. This leads to the conclusion that vertical specialization is deepening more rapidly in East Asian countries as compared to other countries.

The third paper, by Foster-McGregor and Pöschl, draws on sectoral data from the WIOD and considers the impact of offshoring and inshoring on the volatility of employment and wage growth. The results indicate that inshoring tends to increase sectoral employment volatility, while offshoring tends to decrease vola- tility. The results are less clear for volatility in wage growth; however, they point to an insignificant or negative impact on volatility in wage growth. Inshoring does not appear to have any statistically significant impact upon the volatility of employment by education levels. Splitting the sample by regions, the results indicate that much of the positive effect of inshoring on volatility occurs in East Asia and the Central and Eastern European countries, regions that are important destinations for offshoring activities. Conversely, the negative volatility effect of offshoring is found to occur mainly in Western European economies and other countries that are relatively intensive offshorers. These results suggest that for inshoring countries, employment growth volatility is increased, while we observe the opposite effects for offshoring regions.

II. Export Price and Non-price Competitiveness by Industry

The fourth paper, by Benkovskis and Wörz, analyzes the effects of price and non-price factors on the competitiveness of 9 Asian countries from 2000 to 2011.

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While the existing literature tends to focus only on price competitiveness, this paper accounts for the non-price aspects of competitiveness. Specifically, by using the highly disaggregated trade data at the detailed 6-digit HS level, Benkovskis and Wörz derive a new export competitiveness index correcting for entry and exit of competitors in narrowly defined goods markets and for changes in non-price factors (e.g. physical product quality or consumer tastes) of exported goods over time. The paper shows how non-price export competitiveness evolved over the sample period, and highlights the marked difference from the conven- tional real effective exchange rate. The paper demonstrates that non-price factors have strongly contributed contributed to both China’s gains and Japan’s losses in international competitiveness. China and Vietnam (and to a lesser extent Thailand and Korea) exhibit large gains in international competitiveness due to the improvement of non-price factors, while the competitiveness of Japan, Singapore, Malaysia and the Philippines declines as a result of deterioration in non-price factors.

The fifth paper, by Ito and Shimizu, investigates industry-level export price competitiveness based on unit labor costs (ULC) and nominal effective exchange rates for Japan, China and Korea for the period 2001–2009. First, the export price competitiveness of the three countries is compared by using the industry-specific nominal and real effective exchange rates.7 Second, ULC indexes at the 12 two-digit manufacturing industry level for the three countries are constructed and compared. The results of the paper indicate that Japan’s ULC increased rapidly during the yen appreciation period, suggesting that Japan’s cost reduction efforts were more than offset by the appreciation of the yen. In contrast, Korea’s ULC in the electrical and optical equipment industry show a remarkable decline, which is consistent with the strong competitiveness of the Korean electronics products in global markets. China’s ULC are declining in most industries. Ito and Shimizu also empirically confirm that, as predicted by theory, both ULC and nominal effective exchange rates affect export competitiveness, but the effects greatly differ across coun- tries and industries. In particular, the effects for China and Japan are notably different and indicate that for China cost reductions are important for main- taining competitiveness, while exchange rate management is important for Japan.

References

Dietzenbacher, E., B. Los, R. Stehrer, M. Timmer and G. J. de Vries, 2013, The construction of world input–output tables in the WIOD project. Economic Systems Research, 25, pp. 71–98.

Hummels, D., J. Ishii and K-M. Yi, 2001, The nature and growth of vertical specialization in world trade. Journal of International Economics, 54, pp. 75–96.

7 Industry-specific real effective exchange rates of the 9 Asian economies were first published on the website of the Research Institute of Economy, Trade and Industry (RIETI) in March 2015. See also Sato et al. (2013, 2015).

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Johnson, R. C. and G. Noguera, 2012, Accounting for intermediates: Production sharing and trade in value added. Journal of International Economics, 86, pp. 224–36.

Sato, K., J. Shimizu, N. Shrestha and S. Zhang, 2013, Industry-specific real effective exchange rates and export price competitiveness: The cases of Japan, China and Korea. Asian Economic Policy Review, 8, pp. 298–321.

Sato, K., J. Shimizu, N. Shrestha and S. Zhang, 2015, Industry-specific real effective exchange rates in Asia. RIETI Discussion Paper Series, 15-E-036.

Timmer, M. P., A. A. Erumban, B. Los, R. Stehrer and G. J. de Vries, 2014, Slicing up global value chains. Journal of Economic Perspectives, 28, pp. 99–118.

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