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Paper presented to the 16th International Input-output Conference

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Paper presented to the 16th International Input-output Conference

    thPaper presented to the 16 International Input-output Conference

    Istanbul, Turkey, July 2-10, 2007

    1Total Domestic Value Added and Total Imports Induced by Chinas Exports

    Chen Xikang

    Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100080,

    Email: xkchen@iss.ac.cn

    Abstract

    Since 1979 Chinese economy developed very quickly. From 2001 to 2006 the annual average growth rate of GDP is 10.1% and annual average growth rate of total value of imports and exports is 28.1%. According to total value of exports China is the third biggest exports country. High speed growth rate of exports drives Chinas economic growth and employment increase. Hence, it

    is extremely significant to estimate the effects of exports on Chinas domestic value added.

    The U.S.-China bilateral trade balance in 2005 has been estimated by the U.S. Government to be US$201.6 billion, by the Chinese Government to be US$114.2 billion, and by Fung, Lau and Xiong (2006) to be US$172.3 billion. The U.S.-China bilateral trade balance in 2006 is estimated by the U.S. Government to be US$232.5 billion, and by the Chinese Government is US$144.3 billion. However, the domestic value-added generated by exports provides a more accurate measurement of the economic benefits to the exporting country than the gross value of exports.

    One of the important characteristics of contemporary international trade evolution is increasingly cooperation and affiliation among countries, characterized by using large amounts of intermediate inputs imported from other countries/regions in one nations exports production.

    Thus, exports of one nation are practically produced by many countries. A nations total exports

    can be divided into domestic content (Chen, Cheng, Fung and Lau, 2001) and foreign content. One step further, exports can be divided into total domestic value added of exports goods and total foreign value added of exports goods, in other words, total imports.

    Direct imports content is defined as the sum of all directly imported intermediate inputs for producing one unit of products of certain sector.

    Total imports content is defined as the sum of direct imports and all rounds of indirect imports.

    In this paper we proved in mathematics that gross value of exports equal to the sum of total domestic value added and total imports, i.e. foreign value added, or other words, coefficient of total VA is equal to (1 - coefficient of total imports).

    The most important feature of China’s foreign trade is that processing exports holds dominant position in China’s exports. For example, in 2005 the processing exports occupied

     1 The paper was supported by Chinese University of Hong Kong and National Natural Science Foundation of China. The author would express his sincere thanks to Professor Lawrence J. Lau, Leonard K. Cheng, K.C. Fung and Yun-Wing Sung for their important supports and help.

    55% of exports. In 2006 under the support of Chinese University of Hong Kong, we constructed extended input-output tables with assets in non-competitive imports type that captures processing exports of China for 2002 and estimated the effects of China exports on domestic value added and employment, respectively.

    Using the extended IO tables of U.S. and China for 2002 we calculated direct and total domestic value added and direct and total imports induced by per unit of exports for 2002. We found that while in terms of gross value, Chinese exports of commodities to the U.S. in recent years are almost four times U.S. exports to China, in terms of domestic value-added, Chinese exports are less than two times those of U.S.

    As total outputs include plenty of intermediate inputs, usually we take value-added (GDP), not total output value, as an indicator for economic scales of a nation or a department. Nowadays in foreign trade total exports value are often used to measure export scales. With

    the development of international division and foreign trade, the exports of a country often include raw materials and components produced by other countries, therefore it is more important to calculate domestic value-added and foreign value-added induced by exports, which can more accurately reflect a countrys export scale and study the balance of

    international trade.

    2Total Domestic Value Added and Total Imports Induced by Chinas Exports

    Chen Xikang

    Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100080,

    Email: xkchen@iss.ac.cn

    1Introduction

    1. Introduction

    Since 1979 Chinese economy developed very quickly. From 2001 to 2006 the annual average growth rate of GDP is 10.1% and annual average growth rate of total value of imports and exports is 28.1%.. According to total value of exports China is the third biggest exports country. High speed growth rate of exports drives Chinas economic growth and employment increase. Hence, it

    is extremely significant to estimate the effects of exports on Chinas domestic value added.

    The U.S.-China bilateral trade balance in 2005 has been estimated by the U.S. Government to be US$201.6 billion, by the Chinese Government to be US$114.2 billion, and by Fung, Lau and Xiong (2006) to be US$172.3 billion. The U.S.-China bilateral trade balance in 2006 is estimated by the U.S. Government to be US$232.5 billion, and by the Chinese Government is US$144.3 billion However, the domestic value-added generated by exports provides a more accurate measurement of the economic benefits to the exporting country than the gross value of exports.

    One of the important characteristics of contemporary international trade evolution is increasingly cooperation and affiliation among countries, characterized by using large amounts of intermediate inputs imported from other countries/regions in one nations exports production.

    Thus, exports of one nation are practically produced by many countries. A nations total exports

    can be divided into domestic content (Chen, Cheng, Fung and Lau, 2001) and foreign content. One step further, exports can be divided into total domestic value added of exports goods and total foreign value added of exports goods, in other words, total imports.

    Direct imports content is defined as the sum of all imported intermediate inputs for producing one unit of products of certain sector.

    Total imports content is defined as the sum of direct imports and all rounds of indirect imports.

    In this paper we proved in mathematics that gross value of exports equal to the sum of total domestic value added and total imports, i.e. foreign value added, or other words, coefficient of total VA is equal to (1 - coefficient of total imports).

    The most important feature of China’s foreign trade is that processing exports holds dominant position in China’s exports. For example, in 2005 the processing exports occupied 55% of exports. In 2006 under the support of Chinese University of Hong Kong, we constructed extended input-output tables with assets in non-competitive imports type that

     2 The paper was supported by Chinese University of Hong Kong and National Natural Science Foundation of China. The author would express his sincere thanks to Professor Lawrence J. Lau, Leonard K. Cheng, K.C. Fung and Yun-Wing Sung for their important supports and help.

    captures processing exports of China for 2002 and estimated the effects of China exports on domestic value added and employment, respectively.

    Under the support of Hong Kong University of Science and Technology Chen, Cheng, Fung and Lau (2001) have developed a methodology to estimate the domestic value-added and employment generated by exports and applied it to Chinese data to obtain an estimate of the direct domestic value-added content of Chinese exports to the U.S. in 1995 of 20%.

    In 2006 under the support of Chinese University of Hong Kong we constructed extended input-output tables of foreign trade of China for 2000 and 2002 and extended input-output table of United States of 2002, and estimated the effects of China exports and US exports on their domestic value added and employment, respectively.

    Using the extended IO tables of U.S. and China for 2002 we calculated direct and total domestic value added and direct and total imports induced by per unit of exports for 2002. We found that while in terms of gross value, Chinese exports of commodities to the U.S. in recent years are almost four times U.S. exports to China, in terms of domestic value-added, Chinese exports are less than two times those of U.S.

    As total outputs include plenty of intermediate inputs, usually we take value-added (GDP), not total output value, as an indicator for economic scales of a nation or a department. Nowadays in foreign trade total exports value are often used to measure export scales. With

    the development of international division and foreign trade, the exports of a country often include raw materials and components produced by other countries, therefore it is more important to calculate domestic value-added and foreign value-added induced by exports, which can more accurately reflect a countrys export scale and study the balance of

    international trade.

2. Total Domestic Value Added and Total Imports

    2.1. Input-Output Table of the Non-Competitive Imports Type

    First, there are two types of input-output (I-O) tables: the competitive-imports type and the non-competitive-imports type. In order to estimate the effects of exports on domestic value added and employment, it is necessary to use the I-O table of non-competitive-imports type. Up to the present the National Bureau of Statistics (NBS) of China only constructed input-output tables of the competitive-imports type, we shall constructed an input-output table of the non-competitive-imports type.

    Table 1: An Input-Output Table of the Non-Competitive Imports Type

    Intermediate Use Final Use Output Gross Gross Output Input Production Sectors ConsuCapital or Total Exports Others Total 1,2,…, n mption FormatImports ion

    Domestic-all1 y DDDDCDIDE ? X F FF FijX Inter-mediate n Inputs Interme

    diate Intermediate 1

    MMMCMIInputs Inputs from ? X M F F Fij

    Imports n

    Total Intermediate Inputs

    Depreciation of Fixed

    Capital

    Compensation of

    Employees Primary V

    Inputs Net Taxes on

    Production

    Operating Surplus

     Total Value Added

    TTotal inputs X

    The equilibrium conditions for an economy with an input-output table of the non-competitive-imports type are given by:

    ndd (2.1) (1,2,,)inWFX;?ijiij1

    nmm (2.2) WFM;?(1,2,,)inijiii1

    dwhere the superscript d denotes domestic goods and superscript m denotes imported goods. Wij

    ddenotes domestic intermediate inputs from the ith sector to the jth sector, denotes final Fi

    demands for domestic products supplied by the ith sector. The two variables with the superscript

    m similarly denotes imported intermediate inputs and final demand for imports.

    dddLet be the matrix of direct domestic input coefficients; Aa?,[][/]WXijjij

    mmm be the matrix of direct imported input coefficients; AaWX?,[][/]ijijj

    dF be the column vector of quantities of final demands for domestic products;

    mF be the column vector of quantities of final demands for imported products; M be the column vector of quantities of imported products. With these definitions, equations

(2.1) and (2.2) can be written compactly as:

    dd (2.3) AXFX;?

    mm. (2.4) AXFM;?

    If represents row vector of direct value added and represents Bbbb(,,,)AVVVVVn12

    row vector of total value added, then

    d1 (2.5) BAIA?;()VV

    and we have.

    dddd1 (2.6) XIAFBF?;?()

    dd1where is total requirement coefficient matrix for the input-output table of the BIA?;()

    dnon-competitive imports type. The element of matrix indicates the total gross output required B

    to yield one unit of final demands for domestic products.

    We use following formulae to estimate the effects of exports on gross outputs, value

    added and employment:

    d1 (2.7) ??;?XIAE()

    d1 (2.8) ????;???vAXAIAEBE()VVV

    d1 (2.9) ????;???lAXAIAEBE()LLL

    where Xis increment of gross output column vector; E is increment of exports column vector; is increment of value added; is increment of employees. vl

    From (2.8) we see that total domestic value added induced by one unit of exports, , is v

    equal to the product of the row vector of total value added and the column vector of BV

    increment of exports. From (2.9) we see that total employment induced by one unit of exports,

    , is equal to the product of the row vector of total employment and the column vector of BlL

    d1increment of exports, where . . BAIA?;()LL

    2.2. Direct Imports Coefficient and Total Imports Coefficient.

    mm Direct imports coefficient is defined as the ratio of the ith imported aWX/ijijj

    intermediate input to the gross output of the jth sector. We could use following equation to

calculate the total imports coefficient

    nmmmd (i, j = 1,2,, n) (2.10) baba?;ijijikijk1

    It can be written in matrix form:

    mmmdBABA?; (2.11) 1mmdmd()BAIAAB?;?

    mmwhere . Aa[]ij

    2.3. Concepts and Definitions of Direct Imports Content and Total Imports

    Suppose in producing textiles for exports, both imported intermediate inputs and domestically produced intermediate inputs (e.g., steel) are used. Moreover, in producing steel, other imported intermediate inputs are necessary. Thus, the imported inputs required for the production of textiles include not only direct imports, but also indirect imports that are used in the production of rounds of domestically produced intermediate inputs. Analogous to the description of the generation of value-added under Figure 1, there are infinitely many rounds of indirect imports (see Figure 1).

    Figure 1: Total Imports Induced by Exports of Steel

    Direct imports content is defined as the sum of all imported intermediate inputs for producing one unit of products of certain sector. Let be defined as imports content of the aMj

    output in jth sector, i.e., the sum of all imported intermediate input coefficients.

    nm (1,2,,)jn (2.12) aaMjiji1

    or

    m (2.13) AiAM

where is a row vector and stands for a row vector of 1s, i.e., AAAA(,,,)iMMMMn12

    . i(1,1,,1)

    Total imports are defined as the sum of direct imports and all rounds of indirect imports. We define as the coefficient of total imports content induced by one unit of exports by the bMj

    jth sector:

    nnnnnndddddd (j = 1,2,,n), baaaaaaaaaa?;;;;!!!!!!MjMjMiijMkkiijMsskkiijiikiks??????111111

    which in matrix form can be written as

    ddddddBAAAAAAAAAA?;;;;MMMMM

    23ddd?;;;;AIAAA() (2.14) M

    1d?;AIA()M

    where and represent a row vector of Aaaa(,,,)Bbbb(,,,)MMMMn12MMMMn12

    imports content and a row vector of total imports, respectively.

2.4. Relation between Total Imports and Total Value Added

    We will prove that the coefficient of total VA is equal to (1 - coefficient of total imports), bVj

    i.e.

    , (j = 1,2,,n), b1bVjMj

    or in matrix form we will prove:

    , (2.15) BiBVM

    From (2.5) and (2.14) we have

    ddd;;;111 BBAIAAIAAAIA;?;;;?;;()()()()VMVMVM

    Because for each sector the sum of intermediate input coefficient and value added coefficient

    equals unity, i.e.

    dm (2.16) iAiAAi;;?V

    Then we have

    d1BBAAIA;?;;()()VMVM

    md1?;;()()AiAIAV

    dd1 (2.17) ?;;()()iiAIA

    dd1?;;iIAIA()()

    i

    It means that gross value of exports is equal to the sum of total value added and total imports, both of which are induced by the exports. Using this important relation between total value added and total imports we can calculate the total domestic value-added contained in exports by the second definition (2.15).

    As an illustration in China, in producing US$1,000 of textiles for exports, the value of direct imports is US$326.5. The value of the first round of indirect imports is US$44.0. The value of the second round of indirect imports is US$9.3. The value of the third round of indirect imports is US$3.5. After adding up the direct and all indirect imports, the value of total imports is US$394.7 for every US$1,000 of exports of textiles produced. By equation (2.15), total value added is therefore equal to US$1,000 US$394.7 = US$605.3, precisely as calculated according

    to the first definition (2.5).

    3. Using Extended Input-Output Table Capturing Processing Exports to Calculate Total Domestic Value Added and Total Imports

    China’s exports are divided into two categories: processing exports and non-processing exports. Processing exports includes two types: “Processing and Assembling ” (P&A) type exports

    and “Processing with Imported Materials ” (PIM) type exports. For example, according to data

    released by China Customs, the total value of Chinas exports in 2002 was US$325,596 million, in

    which the value of processing exports was US$179,927 million, and the value of non-processing exports was US$145,669 million. In processing exports, the value of P&A exports was US$47,474 million and the value of PIM exports was US$132, 454 million.

    Thus, to capture Chinas special production structure in light of its extensive participation in global production, in this study we divide Chinas total production into three parts. The first one is

    production for domestic use in China (D). The second one is processing exports production (P), The last one is non-processing exports production and other production of foreign investment enterprises (N). It should be noted that in China much of the value of exports is produced by Foreign Invested Enterprises (FIEs). There are three types of FIEs: (i) Foreign Funded Enterprises, (ii) Enterprises with Funds from Hong Kong, Macao and Taiwan, and (iii) Joint-venture Enterprises with foreign investment. The other production of FIEs is the difference of gross value of FIEs and their exports value.

    Table 2: An Input-Output Table of the Non-Competitive Imports Type with Processing Exports and Non-Processing Exports and Others

    Intermediate Use Final Use Gross

    Production Non- Output Processing Gross Total for processing Consum- or Exports Total Capital Exports Others Final Domestic Exports and ption Imports (P) Formation Use Use (D) Others (N)

    1,2,…, n 1,2,…, n 1,2,…, n

    Production for

    DDDPDNDCDIDDDomestic Use 0 FFXXXFX

    (D) Domestic

    -ally Processing

    PEPPInter-medExports 0 0 0 0 0 FFX iate (P)

    Inputs Non-processing

    NNENPNNNCNINExports and 0 F FXXFXF

    Others (N)

    Intermediate Inputs

    from Imports

    MMDMPMNMCMIM1 FFXXXXF

    :

    N

    Total Intermediate Inputs

    DPNValue-added VVV

     DPNTotal inputs XXX DPNEmployees LLL

    Table 3: Total Value Added and Total Imports Induced by per 1000 USD Exports of

    China and US in 2002

    Total Total VA Imports

    Chinas total exports (US$1000) 466 534

    # Processing exports 287 713

     Non-processing exports 633 367

    Chinas exports to US (including re-exports 368 632

    via HK, US$1000)

    # Processing exports 300 700

     Non-processing exports 606 394

    US total exports (US$1000) 885 115

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