How much foreign stuff do we use in our exports?

In my post this morning, I mentioned the way that, for many countries, exports now contain a larger share of imported inputs than they did in earlier decades, as the cross-border trade in componentry has grown (facilitated by, inter alia, reduction in regulatory barriers).  Each imported input represents value-added (returns to labour, land, and capital) in the country where those inputs were produced.

Here is the OECD-WTO data on the estimated percentage shares of foreign value-added in each country’s gross exports in 2011.  They have data for 60 countries, which makes for a long chart.  Keep going and you will eventually find New Zealand.  59 per cent of Luxembourg’s gross exports actually reflected value-added generated in other countries, but for New Zealand the comparable number was just under 17 per cent.

foreign value added

Only 10 countries had a lower foreign value-added share than New Zealand.  And of the bottom thirteen countries, eleven would be considered as primarily commodity exporters (whether raw or processed).  Commodity production doesn’t lend itself to cross-border trade in componentry.    The exceptions are the United States and Japan.    The US number probably shouldn’t be too surprising – there is after all an enormous domestic supplier base. On a smaller scale, I guess the same goes for Japan, but the Japanese number was a bit of a surprise.  At the other end of the scale is a mix of Asian and EU countries.

Occasionally, it is suggested that the low share of imported inputs in our exports is itself a sign of New Zealand’s underperformance.  Perhaps, but China and Mexico stand out as large countries with a large foreign value-added share of their exports, and rather low levels of per capita incomes.  Assembly businesses are presumably economic if labour is relatively cheap.

The first snapshot of these data are for 1995.  Back then, 18 countries has a smaller foreign value-added share of exports than New Zealand did.  And only a handful of countries had more than 40 per cent of their gross exports accounted for by foreign value-added.  From 1995 to 2011 the median country’s share rose from 21.5 to 26.5 per cent, but the median wasn’t very representative: lots of countries saw little change, or the foreign share even shrank (for both China and New Zealand that share fell slightly), while for a large group of countries that foreign value-added share of their exports rose by 10 percentage points or more.

On their own, these numbers are interesting, but don’t necessarily lead anywhere.  They tell us more  about economic geography and the type of goods that are exported than anything about performance.  But, of course, Denmark was once largely an agricultural exporter as well (two thirds of all Denmark’s exports were agricultural in the 1930s), and had it stayed that way it would (a) be poorer today than it is, and (b) would probably have a much lower foreign value-added share of its exports.  What would the export mix of a New Zealand that generated top tier OECD incomes gain look like?  I don’t know, and nor does anyone else.  If we got there by uncovering and utilising huge mineral resources, we’d probably stay towards the bottom of the chart (like much richer Australia).  But there might be other paths –  a swathe of home-grown high tech industries – that might push our foreign share of exports further up.  But our geography –  last bus stop before Antarctica  – means that we are never likely to be found near the top of this particular chart.  Israel, small and with a large high-tech sector caught my eye as one possible comparison.

Once were international traders

J.B Condliffe was one of the greater New Zealand economists of the first half (or so) of the 20th century. One evening earlier in the week I was dipping into his New Zealand in the Making, an economic history of New Zealand, the second edition of which was published in 1959. On the first page, I noted this line

“Today New Zealand claims the largest overseas trade per head of any country in the world”

Those were the days when the story was often told about about how exposed to foreign trade New Zealand was.  Protectionists wanted to reduce that exposure.  In the 1950s, global trade as a share of GDP was much lower than it is today.  Even New Zealand’s trade share  was a little lower than it is now (services exports were not material in those days, and merchandise exports were around 27 per cent of GDP).  Our export share of GDP was about that high even though New Zealand had very heavy industry protection in place,  promoting domestic manufacturing.  That acted as a tax on exports, reducing both exports and imports below what they would otherwise have been.

The late 1950s were also the days when New Zealand still had among the highest per capita incomes in the world.  In the mid- late 1950s, Maddison estimates that New Zealand incomes were behind only those in the United States and Switzerland.  Whatever the “true” number, we were still in the top tier of material living standards

How do things compare today on foreign trade?

I dug out the OECD data for total exports per capita (for 2013) and converted them into a common currency.  Here is the chart.

gross exports pc

New Zealand is in the bottom half of this chart.

Big countries tend to export less than small countries –  fewer firms need to tap the wider world when there is already a large market at home – and distant countries tend to export less than countries that are close to lots of other markets.  Firms in the United States, for example, export a lot less per capita than firms in (similarly well-off) Switzerland does.

Whatever the situation in the 1950s, it would have been a little surprising if we had been in the top tier of the 2013 chart.  One of the big changes in international trade since the 1950s has been the rise, particularly in manufacturing, of “global value chains”, where different stages of production occur in different countries.  In other words, a car finished in Germany and exported to France might include a substantial proportion of components produced in (and exported from) a range of Eastern European countries.    And some other products exported from, say, Slovakia will use lots of components imported from Germany.  The value of a country’s gross exports rises with this (typically mutually beneficial) activity, but the share of a country’s total value-added (which GDP is capturing) resulting from exports might not have risen much at all.  For New Zealand, a long way away, this sort of trade doesn’t happen in the way that it might between say Austria and the Czech Republic.

The OECD and WTO have recently done the work of trying to trace what proportion of each country’s exports are domestic value-added.   The latest data are for 2011, but the domestic value-added shares don’t fluctuate much from year to year (production patterns don’t change that fast).  Applying the 2011 data on the share of exports that reflect domestic value-added to the 2013 exports data, we get a chart of per capita exports of domestic value-added.
gross value-added exports

Here, New Zealand shows up just above the middle of the pack, but with a level of exports per capita (near the peak of a terms of trade boom) that was only a third to a quarter of the exports of domestic value-added from the Netherlands and Switzerland.

It is a far cry from the 1950s position of the largest overseas trade per head.  And, of course, today we languish in the bottom third of OECD countries for GDP per capita.

There is always a danger of seeming to come across as suggesting that exports are either good for their own sake, or are the only possible route to prosperity.  We export (or sell anything) to support present and future consumption, and for an individual or a firm it makes no particular difference whether goods or services are sold to domestic or foreign purchasers.  But at a whole economy level, the export underperformance nonetheless remains a disconcerting indicator.  We can’t remedy New Zealand’s underperformance just by exporting more –  Mao was exporting grain during the great famine, and we’ve had export subsidies in the past ourselves –  but successful economies tend to be those with increasing numbers of the products that the wider world wants to buy more of, at prices that encourage further innovation and investment.  Many individual firms have done well, but in aggregate New Zealand doesn’t seem to have been in that position.

What has gone wrong?  I’ve argued that our real exchange rate has been out of line with the productivity fundamentals for decades.  Excess domestic demand has driven up the price of non-tradables relative to tradables, skewing investment and activity away from the tradables and export sector.  Part of that story –  a significant part in my view – has been the active large scale inward migration programme, which has diverted resources away from global markets to (what successive governments have instead made) their most profitable use; meeting the physical capital (houses, road, factories, shops, offices etc) needs of a population that has continued to grow quite rapidly.  The only time since World War Two when our governments pulled back from actively pushing up the population was from the mid 1970s to the late 1980s, and in that period we messed things up in other ways – the Think Big debacle, a post-deregulation credit and property boom and bust, and of course a very weak terms of trade.

I’ve commented previously on the government’s peculiar exports target.  There is no chance of meeting that target  on any sort of sustainable basis, without changing the factors that give rise to the persistently higher real interest rates and the high real exchange rate.