Electronics lead concerns over the EU’s declining share in global manufacturing value chains

The seminal work of Timmer et al. (2013) introduced the concept of Global Value Chain (GVC) income and measured the value added generated throughout the value chain of manufacturing final products, using the 2013 release of the World Input-Output Database (WIOD). In this column, we present results from a novel decomposition analysis that extends the time coverage of Timmer et al. (2013) by using the 2016 release of WIOD,1 and, more importantly, quantifies the contributions of the different drivers to the observed decline of the EU’s share in manufacturing GVC income.

Figure 1 Country shares of value added for manufacturing value chains

Note: In real terms using chain-linked volumes, reference year 2010

Source: Own elaboration based on WIOD

Participation losses on top of EU´s weak demand momentum

In the year 2000, the EU accounted for 30% of worldwide value added in manufacturing value chains – over 60% together with the US and Japan – and well above China’s 5% (Figure 1). The picture in 2014 was rather different, with China showing the largest individual country share (20%) and the EU´s contribution reduced by almost a third to 22%. This positive trend for China (and other emerging economies like India) and the corresponding negative evolution for developed countries was already in place before the Great Recession and does not seem to level afterwards. As a result, the EU-US-Japan bloc represented less than half of worldwide value added in manufacturing value chains in 2014.

Following the methodology explained in Marschinski and Martínez-Turégano (2019, 2020), we decompose these changes in the country shares of GVC income into a complete set of contributions grouped into two broad categories: demand effects and participation effects. The latter captures changes in the distribution across sectors and countries of the value added generated by one unit of final demand of a given product. Thus, these effects can broadly be associated with competitiveness.

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In Table 1, we observe that the largest part of the redistribution in global value added for manufacturing value chains is due to demand effects – close to 75% in the case of the EU. Mainly, this is due to changes in the geographical composition of worldwide final demand (country demand effects), to the benefit of China and other emerging economies like India. The EU´s global share also diminished due to sectoral demand effects, i.e. an overall structural shift in the composition of final demand away from manufacturing goods, which was reinforced by the lasting impact of the crises. In contrast, positive contributions from this effect are observed in China, driven by income effects and fast-growing investment.

In addition to negative demand effects, we find that participation losses also significantly contributed to the decline of the EU´s share in global manufacturing value chains, again to the benefit of new competitors, and China in particular. Country participation effects, i.e. impacts due to changes in the location of suppliers at all stages of the value chain, are negative across most sectors in developed countries. In the EU, this might not be unexpected for the global textile value chain in face of competition by low-wage emerging economies. However, the similarly observed negative trend for electronics calls for closer attention as it could eventually harm EU innovation capacities and erode productivity growth.

Table 1 Percentage point contribution to the 2000–14 change of country shares in value added for manufacturing value chains

Note: In real terms using chain-linked volumes, reference year 2010

Source: Own elaboration based on WIOD

EU concerns on electronics spread along the whole value chain

The overall share of electronics in worldwide demand – both as a final and intermediate product – has steadily increased over time, as a result of income and technological developments shifting consumer and producer preferences. EU electronics’ manufacturers have benefited from this trend, but at the same time they have been subject to increasing competition from non-EU economies, which has limited the positive impact of the sector’s favourable evolution. In fact, the global redistribution of value added for the electronics value chain is similar but even stronger than that observed for total manufacturing final demand (Figure 2). This is particularly true for the increase of China´s share – from 5% to more than 25% – as well as for the decline of the EU, which lost more than ten percentage points in worldwide value added and showed a relatively worse performance than the US over the sample period.

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Figure 2 Country shares of value added for electronics value chain

Note: In real terms using chain-linked volumes, reference year 2010

Source: Own elaboration based on WIOD

The increasing share of imported electronics and the simultaneous decline of EU exports in non-EU demand, have resulted in strong negative country participation effects for the EU. At this point we find it crucial to assess to which extent these losses in electronics production were softened by participation gains in the non-electronics segments of this value chain, in particular intermediate inputs from services with high technological content, such as scientific R&D, software development, or IT services.

For this purpose, in Table 2 we disaggregate the country participation effects in electronics value chain by different sectors of value added generation, including activity groups for manufacturing and services based on technological content.2 First, we observe that the total country participation effects in electronics value chain are notably more negative than those for the aggregate of manufacturing shown in Table 1. Second, the redistribution of value added triggered by the relocation of electronics supply has gone beyond the manufacturing activity itself and reached the associated upstream stages, including business services with high technological content. The EU’s situation is very similar to the one of the US and Japan and mirrors the significant increase of China.

Table 2 Percentage points contribution of participation effects to the 2000–14 change of country shares in value added for electronics value chain

Note: In real terms using chain-linked volumes, reference year 2010

Source: Own elaboration based on WIOD

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References

Galindo-Rueda, F and F Verger (2016), “OECD taxonomy of economic activities based on R&D intensity”, OECD Science, Technology and Industry Working Papers.

Marschinski, R and D Martínez-Turégano (2019), “Reassessing the Decline of EU Manufacturing: A Global Value Chain Analysis”, JRC Technical Report EUR 29999 EN.

Marschinski, R and D Martínez-Turégano (2020), “The EU´s shrinking share in global manufacturing: a value chain decomposition analysis”, National Institute Economic Review 252, R19-R32.

Timmer, M P, B Los, R Stehrer and G J De Vries (2013), “Fragmentation, incomes and jobs: an analysis of European competitiveness”, Economic Policy 28(76): 613–61.

Timmer, M P, B Los, R Stehrer and G J De Vries (2016), “An anatomy of the global trade slowdown based on the WIOD 2016 release”, Groningen Growth and Development Centre (No. GD-162), University of Groningen.

Endnotes

1 Timmer et al. (2016). Data and methodology available at http://www.wiod.org/release16. We use the input-output tables in previous year prices released in 2019 and present the results in real terms using chain-linked volumes, reference year 2010. Some minor adjustments have been made to the original dataset, mainly to correct methodological breaks stemming from the use of different national account systems over the sample period.

2 We follow the OECD taxonomy of economic activities based on technological intensity, updated by Galindo-Rueda and Verger (2016). High-tech business services are broadly defined and include NACE sections ‘J – Information and Communication’ and ‘M – Professional, Scientific and Technical activities’.

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