Trade Surplus with China Smaller When Measured by Value Added and Income Criteria
[Asia Economy Reporter Seo So-jung] Traditional trade balance statistics, which simply aggregate all exports and imports crossing borders regardless of the production process of goods, have been criticized for their limitations in closely evaluating the benefits of trade. As global production networks become more advanced and multinational corporations grow rapidly, there is an analysis emphasizing the need to compile trade statistics based on real added value or to measure trade benefits by reflecting the internationalization of production factors such as the increase of foreign workers.
On the 30th, the Bank of Korea stated in its report "Attribution Analysis of Trade Balance: Focusing on Added Value and Attributed Income," published in the 'Monthly Survey and Statistics,' that "when trade benefits are judged solely on a gross basis, there can be significant differences from the actual benefits in terms of added value or income."
Recently, international organizations have emphasized value-added-based trade balances, which regard the added value obtained by subtracting the value of intermediate goods imported from other countries from the export value of final goods exported by a specific country as that country's exports. Furthermore, academia is discussing the use of income-based trade balances, which decompose income distributed to production factors of various nationalities involved in producing traded goods by nationality and then aggregate them by country.
As a result of the Bank of Korea's multifaceted comparison and analysis of trade balances in 2014 and 2020 using the traditional gross basis, value-added basis, and income basis, the proportion of export-transmitting countries for South Korea shrank from 32% in 2014 to 20% in 2020, while the proportion of value-added generating countries expanded from 29% to 44%. During the same period, the proportion of income-generating countries decreased from 39% to 37%.
By country, South Korea's trade surplus with China was larger when measured on a gross basis than when calculated on value-added or income bases. Although the 2020 trade surplus with China decreased compared to 2014 across all bases, the ratio of value-added and income-based trade balances to the gross basis remained roughly half consistently.
Lee Young-jae, head of the model research team at the Bank of Korea's Research Department, explained, "South Korea and China form a global production network to meet the final goods demand of countries like the United States, and South Korea mainly supplies intermediate goods to China, which explains this trade structure."
South Korea's value-added and income-based trade surpluses with the United States were similar to the gross basis in 2014 but were larger than the gross basis in 2020. The Bank of Korea explained that this suggests that the global import demand of the United States is increasingly met not only through direct trade with South Korea but also through third-country global production networks such as Vietnam and Mexico, contributing to South Korea's added value and production factor income.
China's value-added and income creation effects in trade with the United States expanded from 2014 to 2020. The United States showed signs of transitioning from merely being an export-transmitting country that passes on China's exports to becoming a country generating added value and income, without significantly generating China's added value or income. This is interpreted as a result of China's improved external competitiveness of intermediate goods amid its push for domestic demand-driven growth.
Lee emphasized, "Since the COVID-19 pandemic, the trade environment has rapidly changed due to industrial structural changes, the US-China trade conflict, and the Ukraine-Russia war. It is necessary to evaluate the real benefits of trade from multiple perspectives using various trade balance concepts and utilize this in formulating trade policies."
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