_Note:_ Imported intermediate inputs as shares of total intermediate inputs in manufacturing industry (in %) in 1995 and 2008. A higher share indicates more international fragmentation of domestic production. Countries are grouped into EU15 and EU12 and within the group ranked on GDP in $ 2008. _Source:_ Author’s calculations based on World Input-Output Database, April 2012.

# **4.2 Trends in manufactures GVC incomes in Europe**

In section 2 we developed the concept of a country’s GVC income which was defined as the income of all production factors in the country that have been directly and indirectly used in the production of final manufacturing goods (in short manufactures GVC income). We can define “World GVC income” simply as the GVC income summed over all countries in the world. By definition, world manufactures GVC income is equal to world expenditure on manufacturing goods as we model all regions in the world in our empirical analysis. The share of a country in world GVC income is a novel indicator of the competitive strength of a nation. In this section we show trends in the distribution of world GVC income across countries.

In Figure 3 we provide shares of regions in world GVC income in the production of manufactures. It follows that the share of the EU has been on a slightly declining trend from 32% in 1995 to 29% in 2008. This decline cannot be explained by shifts in the product structure of global manufacturing demand. Since 1995, global demand is shifting mainly away from non-durables towards chemicals, but this shift is too small to account for the aggregate decline. Instead, the decline of the EU share in overall GVC income is due to losses in the value added in each product GVC. As is wellknown, the aftermath of the global financial crisis hit Europe in particular and its share dropped sharply to 24% in 2011.

But up to the crisis, the EU was doing well, at least relative to other advanced regions. The share of the NAFTA countries (comprising Canada, Mexico and US) increased during the ICT bubble years, up to 30% when its share was even higher than the EU. But it rapidly declined after 2001 to 20% in 2008. GVC shares of East Asia (comprising Japan; Korea; and Taiwan, China) were on a long decline already since the 1990s, falling from 21% in 1995 to 10% in 2008. This can be explained primarily by slow growth in domestic demand for manufacturing goods in Japan. But one has to keep in mind that the decline in East Asian GVC income is likely overestimated as it is also related to the offshoring of activities to China, which effectively became the assembly place of East Asia. Income earned by East Asian capital is allocated to the place of production (in this case China), and not by ownership as discussed in section 2. This difference is probably larger for East Asian countries than for NAFTA or the EU which have larger FDI flows within the region (see below).

One might argue that these shifts in regional GVC income shares are unsurprising, given the faster growth of China and other emerging economies vis-à-vis advanced regions. Higher consumption in the home economy would naturally lead to higher GVC incomes. But this is only true to the extent that demand for manufactures has a strong home production bias, that is, mainly geared towards goods with a high level of domestic value added. Given the high tradability of manufacturing goods, this home bias is not obvious however. Increased Chinese demand for say chemicals or electronic equipment can be as easily served by imports as by Chinese domestic production. And in the latter case a sizeable share could still be captured by advanced countries through the delivery of key intermediate inputs and services. Falling shares in global GVC income for advanced regions in Figure 3 indicate that they failed 19