Global Trade Interdependence: U.S. Trade Linkages With Korea, Mexico, and Taiwan

The global economy has become increasingly interlinked, as nations—and enterprises therein—specialize in productive activities wherein they enjoy the greatest levels of comparative advantage. This phenomenon has become especially pronounced in the globalization of value chains for sectors such as information and communications technology (ICT), electronics, aerospace, and automotive, with Asian nations (and Mexico) becoming central players in many of these supply chains, especially for the manufacture of ICT products. With this internationalization of supply chains, the success of original equipment manufacturers depends greatly on the health and vitality of suppliers in other nations—and the ability to trade with them. In this report, the Information Technology and Innovation Foundation (ITIF) examines trade linkages between the United States and three key trading partners—Mexico, Korea, and Taiwan—analyzing the extent of interand intra-industry trade across six key sectors: automobiles, chemicals, computers and electronics, machinery, other transportation equipment (including aerospace), and pharmaceuticals. ITIF’s report demonstrates both that U.S. industries in these sectors depend greatly on trade with suppliers in these partner nations, and that these nations are key importers of U.S. exports from these high-tech industries.

The report begins by analyzing the evolution of trade in the 21st century, characterized especially by the rise of global supply chains. It next provides an in-depth analysis of U.S. trade with the three partner nations, including value-added and inter- and intra-industry trade linkages and flows in the six industries across the three countries. In order to illustrate the nature of global value chains in concrete terms, it then provides a case study assessing the nature of U.S.-Taiwan trade and economic linkages, before concluding with policy recommendations.

The report finds that, in 2014, the United States had a $26.5 billion gross trade deficit with Korea ($34.4 billion in value-added terms), a $100.5 billion deficit with Mexico ($88.8 billion in value-added terms), and a $16.5 billion deficit with Taiwan ($17.6 billion in value-added terms). However, on an intra-industry basis—that is, cross-country trade Korea, Mexico, and Taiwan represent vital trade partners for the United States, not only as destinations for U.S. exports, but more importantly as key partners whose firms supply critical intermediate goods on which the health of America’s advanced technology industries depend on balances within the six sectors studied—the United States actually holds a $13 billion trade surplus with Mexico, a $352 million trade surplus with Taiwan, and a $1.4 billion trade deficit with Korea. Examined on an intra-industry basis, the United States holds trade surpluses with both Korea and Taiwan in many sectors, including ICT, chemicals, pharmaceuticals, machinery, and other transportation equipment (including aerospace). The report argues that it is important to understand the trade flows between the Unites States and these nations—not on an aggregate trade balance basis, but on a deeper level of how trade enables specialization in industrial production among the nations, and how this bolsters the underlying competitiveness of U.S. high-tech industries.

ITIF

[To view the original report, click here]