Measuring Competitiveness in a World of Global Value Chains

Abstract

The fragmentation of production across borders coming from global value chains has resulted in a dramatic increase in trade integration over the last two decades. Conventional competitiveness measures, however, assume that only final products cross borders. This paper argues that, as a result, conventional effective exchange rate calculations underestimate the global nature of competitiveness: too much weight is placed on neighboring countries that belong to the same regional supply chain and too little weight on more distant countries that absorb final goods. We also argue that the nature of the exchange rate regimes across the major currencies, in particular the fact that the dollar has tended to move in close tandem with the renminbi but opposite to the euro, has made it difficult to identify these effects on competitiveness measures in the data. As all major currencies move to greater flexibility, assessments of their relative roles in competitiveness calculations will become more important.