Background materials

Value Added Trade of Agricultural and Food Products

So far, International agricultural trade has been one of the most cushioned sector of goods with limitations and restrictions. Several reasons, such as vital and strategic interests as well as multi-functionality of agriculture and others have been put forward. Measures taken by countries during the peak of the last crisis in 2008–2009 have been mapped by the Trade Committee of FAO. Since its establishment in 1994, WTO multilaterally and countries and customs areas bilaterally have been trying to make agricultural trade more open and the results have been visible as a global general trend.  In recent years, OECD has been focusing its attention on such a point of view that in the food production chain all stake holders are bound and interested in giving more value added. The work on instruments to measure the share of additional value added is close to conclusion and it will hopefully help to see international agricultural trade as a common interest.


Trade in value added of agricultural and food products

Background paper based on

To develop a more disaggregated database of trade in value added jointly by OECD and WTO

An overview of relevant indicators that provide a more complete and inclusive picture of the role of global value chains, particularly for agricultural and food products in specific countries, is becoming more and more important. This analysis shows us which countries, and with which products, are more integrated in the value chains of the world market. It is important to examine countries’ competitiveness in agricultural and food products, the impacts of tariffs and tariff accumulation on agriculture and food trade, and to conduct relevant policy scenario analyses.

What does it mean – GVC (Global Value Chains)? International trade is a tool for supplying goods for final or intermediate consumption. Intermediate goods are destined as inputs for further processing at least once prior to final consumption either domestically or they are traded abroad.

OECD analysis (2012) shows that intermediate inputs accounted for more than 56 % of trade in goods and 73% of trade in services in OECD countries in 2006. Much of agricultural trade can also be considered as trade in intermediate products as commodities, such as wheat, maize or soybeans, which are used as inputs for the production of flour or vegetable oils or used as feed ingredients for livestock production. The share of trade in intermediate products has risen as firms are able to slice production into various stages located in multiple countries and seek to lower production costs. The fragmentation of production has been assembled into value chains.

The value chain can be defined as the „full range of activities that firms and workers do to bring a product from its conception to its end use and beyond“(Gereffi and Fernandez-Stark, 2011). These activities include production, design, marketing and distribution to the final consumer. They can be undertaken by a single company or divided among several firms and they can be concentrated in a single location or spread out over several locations domestically or internationally. The fact that they are increasingly spread over several countries explains why the value chains are regarded as „global“.

The GVC can include producer driven or consumer/buyer driven chains. In agriculture, a value chain „identifies the set of actors and activities that bring a basic product from the field to final consumption and add value at each stage of the production process.  The terms „ value chain” and “supply chain” are often used interchangeably. Modern value chains are characterised by vertical coordination or consolidation of the supply base, agro-industrial processing and the use of standards throughout the chain (Gereffi and Fernandez-Stark 2011). Global value chains, led by retailers and food processors, are increasingly dominating the agriculture and food sectors. Multinational retailers work with importers and exporters and more and more control how products are grown. Control of quality, food safety standards and traceability along the supply chain requires vertical co-ordination. A relatively small number of companies organise the global supply of food and link producers in developed or developing countries to consumers all over the world. Various stages to produce and market the good and indications of the different actors potentially involved in the chain like input providers, processors, exporters and retailers should be taken into consideration.

Bilateral trade statistics and output measures at the national level make it difficult to visualise the production „chain“. We could assume that one country using domestic inputs produces a good valued at 100 USD that is exported to another country (B). Country B uses the intermediate good to generate additional 10 USD of value added with its domestic inputs, and produces a final good valued at 110 USD that is exported and consumed in country C. Bilateral trade data would show that country A exported goods worth 100 USD  to country B, and country B exported goods worth 110 USD to country D. The total value of traded goods would amount to 210 USD. However, in value added, only 110 USD was created. Country A, which did not directly export to country C gains the most from the consumption of country C, while country B has a 10 USD trade surplus with country C.

Case studies on global value chains based on detailed micro data on a single product have provided detailed examples of the stages involved in moving a product from the farm gate to the consumer, whether through domestic or international chains, and have provided detailed examples of  discrepancy between gross and value added trade, but they offer neither a comprehensive picture of the gap between value added and gross trade nor a country’s participation in cross-border production chain.

In the analysis of GVC, we have to consider the import content of exports. Food sector is more integrated internationally, with global suppliers having higher import content in their exports compared to the primary agricultural sector. More complete picture of a country’s involvement in GVC is given by the participation index. This index includes both forward and backward linkages. The index shows the extent to which a country is involved in vertically fragmented production processes, measures the share of its exports involved in a vertically fragmented production process. It is the sum of the vertical specialisation share and the percentage of exported goods and services used as imported inputs to produce other countries’ exports. One of the indicators for providing information about distance to final demand, which indicates a country’s position in the value chain, explains the position of selected countries in the agriculture and food sectors’ value chains.