2.4 Global value chains and production networks

Global value chains have revolutionized international trade, breaking production into stages across countries. This shift challenges traditional trade concepts, emphasizing tasks and value-added over final goods. It allows countries to specialize in specific production stages, potentially boosting competitiveness.

Lead firms, often multinationals, coordinate these complex networks. New metrics like Trade in Value Added (TiVA) have emerged to measure each country's contribution. This approach reveals the true nature of global trade, showing how products like iPhones involve multiple nations.

Global Value Chains in Trade

Concept and Characteristics of Global Value Chains

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• Global value chains (GVCs) encompass the full range of activities firms and workers perform to bring a product from conception to end-use and beyond
  • Span multiple countries and firms
  • Involve geographical fragmentation of production processes
  • Different stages of production occur in different countries based on comparative advantages
• GVCs challenge traditional notions of international trade
  • Emphasize trade in tasks and value-added rather than final goods
  • Transform international trade patterns
  • Lead to increased trade in intermediate goods and services
• Participation in GVCs allows countries to specialize in specific production stages
  • Potentially enhances competitiveness and productivity
  • Enables countries to focus on areas of strength (electronics manufacturing in China, software development in India)

Coordination and Measurement of Global Value Chains

• Lead firms, often multinational corporations, coordinate GVCs
  • Manage complex networks of suppliers and subcontractors
  • Examples include Apple coordinating iPhone production across multiple countries
• GVC emergence led to development of new trade measurement metrics
  • Trade in value-added (TiVA) statistics
  • Captures the actual contribution of each country to the final product value
  • Example: While final assembly of an iPhone occurs in China, components come from various countries, each adding different levels of value

Drivers of Production Fragmentation

Technological and Logistical Advancements

• Information and communication technology advancements enable efficient coordination of geographically dispersed production
  • Cloud computing, enterprise resource planning systems, video conferencing
• Transportation cost reductions and logistics improvements facilitate movement of intermediate goods across borders
  • Containerization, automated port systems, tracking technologies
• Development of modular production techniques eases separation and relocation of different production stages
  • Allows for plug-and-play components from various suppliers (automotive industry)

Economic and Policy Factors

• Trade liberalization and removal of foreign direct investment barriers create conducive environment for cross-border production sharing
  • Free trade agreements, investment treaties, special economic zones
• Factor endowment and production cost differences across countries incentivize efficient production stage location
  • Labor-intensive stages in low-wage countries, high-tech stages in countries with skilled workforce
• Pursuit of economies of scale and scope drives global production process reorganization
  • Centralizing certain processes to reduce costs (centralized R&D hubs)
• Increased global market competition pushes firms to seek cost-saving opportunities
  • International outsourcing and offshoring (textile manufacturing shifting to Southeast Asia)

Implications of Global Value Chains

Economic Development and Innovation

• GVC participation provides developing countries with industrial upgrading and economic diversification opportunities
  • Moving from simple assembly to more complex manufacturing (electronics industry in Malaysia)
• GVCs facilitate technology transfer and knowledge spillovers from lead firms to local suppliers
  • Enhances productivity and innovation in participating countries
  • Example: Automotive suppliers in emerging markets adopting advanced manufacturing techniques

Employment and Income Distribution

• GVC integration leads to job creation in developing countries, particularly in labor-intensive industries
  • Garment manufacturing in Bangladesh, electronics assembly in Vietnam
• GVC participation may result in job losses in developed countries due to offshoring and outsourcing
  • Manufacturing job losses in the United States and Western Europe
• Value creation distribution along GVCs often uneven
  • Lead firms capture larger share of total value added
  • Example: Apple capturing majority of iPhone profits while assemblers receive small portion
• GVCs contribute to wage inequality within countries
  • Favor skilled workers and increase skill premium
  • Widening gap between high-skilled and low-skilled workers in both developed and developing countries

Challenges and Opportunities in Global Production Networks

Integration and Upgrading in GVCs

• GVC participation offers countries opportunities to access global markets and integrate into world economy rapidly
  • Example: Vietnam's rapid integration into electronics GVCs
• GVCs provide pathway for industrial upgrading
  • Allows firms to move from lower to higher value-added activities over time
  • Example: South Korea's transition from simple electronics assembly to high-tech manufacturing and design
• Countries face challenges in capturing larger value-added share and avoiding "middle-income trap" within GVCs
  • Difficulty in moving beyond low-value assembly operations
• GVC governance structures, often dominated by powerful lead firms, can limit smaller suppliers' bargaining power and upgrading prospects
  • Example: Small garment manufacturers struggling to move up the value chain

Global Challenges and Future Trends

• Environmental and social concerns arise from potential "race to the bottom" in labor and environmental standards
  • Countries competing to attract GVC activities by lowering regulations
• COVID-19 pandemic exposed GVC vulnerabilities
  • Led to discussions about reshoring and increasing supply chain resilience
  • Example: Pharmaceutical companies considering bringing production closer to home markets
• Technological advancements pose both opportunities and threats to countries' GVC positions
  • Automation and 3D printing may reduce labor cost advantages of developing countries
  • Artificial intelligence and Internet of Things create new opportunities for value creation and capture in GVCs