Less than Meets the Eye

China’s apparent heavy dependence on exports for its GDP growth conceals the low value-added contents of its exports.

China exported 37% of its GDP in 2007. For a large economy, this ratio seems to show China’s excessively large export dependence for its GDP growth. A comparable figure for Japan, a supposed export powerhouse, is only 14% in 2005.

But the value of exports is gross of their imported contents while GDP represents only value added by the economy. In other words, the value of imported contents has not been subtracted from the value of exports to show only the value added. So most of the value of China’s exports reflects imported contents that are re-exported after light processing. Senior officials at China’s Commerce Ministry estimated the value added content of its exports averages to be about 33%. In other words, only 12.2% (i.e., 37% * 33% = 12.2%) of China’s GDP was exported in 2007 (see iPadded).

It may be puzzling why the world’s attention has been fixated on China’s rapidly rising export volume when Germany’s exports represent a much higher ratio of its GDP. In 2005, the ratio of exports to Germany’s GDP was a whopping 45%, almost 10 percentage points higher than that of China. And Germany’s GDP was comparable in size to that of China’s. Germany’s excessive dependence on exports was highlighted only when China’s exports barely overtook Germany’s in absolute volume for the first half of 2009.

Part of the answer to this puzzle may be due to the fact that Germany exports are high-tech niche products with much higher value-added contents. But with increasing outsourcing of more labor intensive components to China, the value-added contents of German exports are declining. On the other hand, the value-added contents of Chinese exports is increasing because China is moving up the value chain by manufacturing components with higher labor productivity per worker outsourced by higher-tech countries like Germany.

This process of moving up the value chain in both Germany and China is motivated by increasing domestic wages. But it may be a mixed blessing for the domestic labor market. Higher value-added manufacturing jobs mean fewer jobs for the same GDP as labor productivity increases unless newer non-manufacturing jobs with equally high labor productivity are created and the labor force can be upgraded to qualify for these jobs.