Fragmentation, incomes and jobs: an analysis of European competitiveness

Abstract:

Increasing fragmentation of production across borders is changing the nature of international competition. As a result, conventional indicators of competitiveness based on gross exports become less informative and new measures are needed. In this paper we propose a new concept based on the value added that countries contribute to the production of final manufacturing goods, called ‘global value chain (GVC) income’. We develop an ex-post accounting framework to measure this and provide trends for European countries based on a recent multi-sector input–output model of the world economy. We find that gross exports overestimate the competitiveness of economies that rely heavily on imported intermediates, and this bias has increased over time. Based on GVC incomes, we find that revealed comparative advantage of the EU27 is shifting to activities related to the production of non-electrical machinery and transport equipment, and away from non-durables. We also find that the number of jobs involved (GVC jobs) is declining and increasingly carried out by high-skilled workers outside the manufacturing sector, highlighting the uneven distributional consequences of production fragmentation. The results show that a GVC perspective on competitiveness is needed to better inform the policy debates on globalization.