As production activities became increasingly fragmented and relocated across borders, a number of observers started to use the expression ‘global value chain’ (GVC).
The term is often used without knowing what a value chain really is or looks like. What is clear is that GVCs as they are usually described do not reflect the international production networks that we see around the world today.
In 1985 there were only four key economic players in the Asian region: Indonesia, Japan, Malaysia and Singapore. The basic structure of the production network was that Japan built up supply chains from countries such as Indonesia and Malaysia.
By 1990 the number of players had increased. Japan, the first regional giant, had extended its supply chains of intermediate products to South Korea, Taiwan, China and Thailand.
While still relying on the productive resources of Indonesia and Malaysia, Japan also started to supply products to other East Asian economies, especially to the group known as the ‘newly industrialised economies’ (NIEs), namely Hong Kong, Singapore, Taiwan and South Korea.
During this phase, Japan relocated production bases to neighbouring countries quickly, due to the yen revaluation agreed to in the Plaza Accord of 1985.
In 1995 the United States came into the picture as the second regional giant. It drew on two key supply chains originating in Japan, one via Malaysia and the other via Singapore. These two countries came to bridge the supply chains between East Asia and the United States.
In the year 2000, on the eve of its accession to the World Trade Organization, China began to emerge as the third regional giant.
The country entered the arena with strong production linkages to South Korea and Taiwan. It gained access to Japanese supply chains through the latter. The United States also brought a new supply chain from the Philippines. In this way the basic structure of the tri-polar production network in the Asia–US region was completed.
By 2005, the centre of the network had completely shifted to China, pushing the United States and Japan to the periphery.
The shift of supply chains towards China typically had a high degree of fragmentation and sophistication, incorporating substantial value-added input from each country involved in the production network.
The competitiveness of Chinese exports was not only attributable to that country’s cheap labour force, but also to the sophisticated intermediate products that the country imported from other East Asian economies, embedded in goods labelled ‘Made in China’.
The organisation of international production networks has so far been mostly regional, producing in a given region and selling to consumers in that same region. This is especially the case in Europe, with Western Europe absorbing the manufactures produced in the eastern part of the continent; and in North America, where the main source of final demands is the United States.
Asia presents a slightly different picture. The ‘supply’ part of the networks is regionally concentrated, yet when it comes to the ‘demand’ side, the networks become fairly global. This configuration stems from the early days of the export-led growth strategy espoused by Japan in the second half of the 20th century and later by the NIEs in the 1970s. The evolution took a dramatic turn with China’s accession to the WTO in 2001. The irruption of one billion Chinese workers into the global economy had a tremendous impact on the redefinition of comparative advantages in the region (and beyond).
The net impact of global value chains on employment has been the subject of a heated debate in years since the global crisis of 2008–09, in view of the high rate of unemployment affecting many open economies. The debate has intensified mainly in developed countries, where lower-skilled workers are exposed to higher chances of job losses. In contrast, countries with large labour surpluses and low wages have observed relatively strong job growth following their GVC integration.
Developed countries specialise in services, particularly research and development or business services, where they have so far maintained comparative advantage. Employment in these countries tend to be mainly in services, with only marginal employment being generated by primary sectors. But there are exceptions. Australia, despite being a developed economy, has a strong primary-based export sector.
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Authors: Hubert Escaith, WTO, Satoshi Inomata, JETRO, and Sébastien Miroudot, OECD