From exports to value added to income: Accounting for bilateral income transfers

Timon Bohn,Steven Brakman,Erik Dietzenbacher

doi:10.1016/j.jinteco.2021.103496

Timon Bohn, Steven Brakman + Show 1 more

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https://doi.org/10.1016/j.jinteco.2021.103496

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Abstract

The existence of multinational firms and the rise of global value chains raise the question how international trade contributes to a country's income. Ownership relations between, for example, headquarters and subsidiaries result in international income transfers. These transfers are ignored in standard trade data. Taking them into account in a global input-output analysis allows us to assess how much income is generated in one country due to the consumption of final products in another country. This provides a new perspective compared to the concept of value-added exports introduced by Johnson and Noguera (2012). For the US, we find that the income generated by foreign consumption is 51% higher than the value added in the US that is generated by foreign consumption. Similar findings hold for other countries as well, but to a lesser extent. The implication is that the current account deficit of the US almost disappears from the income perspective.

Highlights

About four-fifths of world trade is coordinated by multinational firms (MNEs) (UNCTAD, 2013)
While the activities of multinational firms and their subsidiaries have been instrumental in increasing worldwide trade and investment, they raise new questions with respect to the implications for income
What part of a country's earnings is income of other countries due to foreign ownership of production factors? Second, what share of GNI does a country receive from earnings on its own production vis-à-vis production in different foreign countries? Third and how much income in a country is 'exported' and how does this effect the bilateral imbalances between countries?

Summary

Introduction

About four-fifths of world trade is coordinated by multinational firms (MNEs) (UNCTAD, 2013). The consequence is that the value added generated within a country does not necessarily result in income for that country. A large share of the value added is absorbed by the host country's residents in the form of wages and profits, a substantial share of MNEs' earnings is repatriated as income to owners in the home country of the MNE. Exports of iPhones from China to the US involve the value added in many countries through trade in intermediate products. International suppliers of intermediates all take part in the generation of value added that ends up in various countries. In a seminal article, Johnson and Noguera (2012) provide new insights with respect to value-added trade

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