M-RCBG Associate Working Paper No. 15

The Comparative Advantage of Nations: How Global Supply Chains Change Our Understanding of Comparative Advantage

Lauren Dai

2013

Abstract

As global supply chains proliferate and countries use more intermediate imports to produce exports, gross export statistics paint an increasingly misleading picture of comparative advantage. This paper uses the newly available World Input Output Database to decompose gross exports into domestic value-added and imported intermediate components in order to demonstrate that value-added measures of trade provide a better understanding of comparative advantage from the perspective of trade in tasks and by industry. Focusing on the United States, Japan, South Korea, Taiwan, China, and Mexico, this paper makes three main contributions. First, it finds that while the advanced economies continue to dominate tasks at the upstream of supply chains and the emerging economies remain prominent in downstream tasks like assembly, participation in global supply chains has been dynamic over time. In particular, from 1995-2009, Taiwan experienced a dramatic shift from contributing value-added in final goods to focusing on value-added in intermediates, taking on an important role in the middle of supply chains. China and Mexico are also beginning to transition upstream within global production chains as they contribute more value-added in intermediates. Second, focusing on the electronics industry, this paper finds that long-term trends in comparative advantage can diverge significantly when trade is understood in terms of domestic value-added in exports instead of gross exports. Notably, while gross trade statistics tell a sobering story of the decline of US competitiveness in the electronics industry, value-added trade statistics reveal the continued robustness of the United States’ comparative advantage in electronics manufacturing. Third, using the value-added approach, this paper finds that contrary to popular fears, rather than losing comparative advantage in advanced manufacturing, the United States’ comparative advantage is growing most robustly in the highest technology manufacturing industries.

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