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EU industrial structure 2011 — Trends and Performance
IV.5 Trade in intermediate goods
This section aims at providing information about how the
globalisation process and increased trade in intermediate
goods have impacted on the trade performance of EU
industries. This is analysed in two ways. First, the extent
of imported intermediates in exports for countries and
industries is analysed. This is followed by analysis of the
competitiveness of EU manufacturing in intermediate trade.
The EU manufacturing industry is compared with those of
the BRIC countries, Japan and the USA.
A distinct feature of the increased globalisation is the
fragmentation of firms’ value chains and establishment of
cross‑border networks by an increasing number of firms.
This implies that imports and exports move together, since
companies’ production process are increasingly characterised
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box IV.7: Vertical specialisation
by sequential production in different locations depending on
the comparative advantages of the locations. An increasing
share of firms’ exports is composed of imports: for example,
it is no longer valid to label a product which is exported from
the UK as ‘Made in UK’ since the production of components
and services needed to produce the product has taken place
in many locations across the world. The concept ‘vertical
specialisation’ [Hummels et al. (2001)] which is a measure of
the import content of exports, has been proposed to gauge
this feature of trade with intermediate goods.
The concept of vertical specialisation concerns both imports
and exports of goods between at least three countries.
Intermediates are imported in one country from a source
country and used in the production of further intermediate
goods or final goods which are exported to a destination
country, cf. Box IV.7.
When an industry i in country k uses imported inputs to produce an exported good, vertical specialisation VS is ki
defined as: 78
Vertical specialisation for a country k equals the sum of VS for all i, VS = Σ VS . Relating it to exports yields vertical
k i ki
specialisation share of total exports for a country: 79
VS share of total exports for country k =
where X denotes exports. 80
78 Hummels et. at. (2001) p. 78.
79 The concept ‘import content of exports’ is sometimes used to describe the same phenomena, OECD (2010).
80 See Hummels et. al. (2001) p. 79 for details. It is shown that vertical specialisation for a country k is an export-weighed average of the sector
vertical specialisation export shares. The equivalent matrix notation of the expression above is uAM[I — AD] -1 X/X k, where u is a vector of 1’s,
AM is the n x n imported coefficient matrix, I is the identity matrix, AD is the n x n domestic coefficient matrix, X is n x 1 vector of exports,
Xk is total country exports and n is the number of sectors. In order to calculate the shares for sectors, X is replaced by a n x n vector with
sector exports in the diagonal and zeros elsewhere. See OECD (2010) for details.