## Value chains transform manufacturing—and distort the globalization debate

## Source details

**Canonical URL:** [Value chains transform manufacturing—and distort the globalization debate](https://www.imf.org/-/media/files/publications/fandd/article/2019/june/global-value-chains-transforming-manufacturing-dollar.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2019/june/global-value-chains-transforming-manufacturing-dollar.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2019/june/global-value-chains-transforming-manufacturing-dollar.pdf.json)

---

### Nature of global value chains
- Modern manufactured products (for example, a car) consist of about 15,000 components produced by different firms in different locations.
- There are three main hubs for auto production—North America, Europe, and east Asia—with research and development and design mostly in Germany, Japan, and the United States; China is increasingly important given the 5 million STEM (science, technology, engineering, and mathematics) graduates it trains each year.
- More than two-thirds of international trade now takes place within global value chains, up from 60 percent in 2001.
- Official trade statistics record gross trade values (for example, the full value of a smartphone imported from China), not the value added at each link in the chain; services such as computer coding, logistics, and marketing embedded in manufactured goods are often not captured in gross trade statistics.
- Example: Much of the value added in a nominally Chinese-made smartphone (computer coding and marketing) originates in the United States and other advanced economies; viewed in value-added terms, the contentious US trade deficit with China is roughly cut in half because China tends to be at the end of many value chains.

### Impact on developing economies
- Global value chains enable countries to specialize in particular production steps rather than master whole products, allowing diversification away from commodities toward higher-value-added manufactured goods and services.
- China’s role in the global value chain for electrical and optical equipment (category including smartphones, tablets, cameras) is concentrated toward the end of the chain with production of some simple parts and assembly; China also has many backward linkages to domestic sectors such as metal and plastic manufacturing.
- In the case of exports of these products to the United States, China contributes almost half the value added.
- Vietnam example:
  - In 2012, about 5 million Vietnamese worked for firms that manufactured for export.
  - In 2012, about 7 million Vietnamese worked in firms that sold to exporters (i.e., indirect exporters).
- Policy implications for developing economies:
  - Exporters need access to the best imported inputs; many countries address this via special economic zones that give exporters duty-free access to imported parts (Shenzhen, China, cited as a classic example).
  - The author argues it would be better to liberalize the entire economy so indirect exporters and producers of goods sold domestically also have access to the best inputs.
- Preconditions to attract value chains: rule of law, infrastructure, education, and health care—the “platform” required so the globalization “train” stops at a country’s location.

### Impact on advanced economies
- Advanced economies tend to concentrate on high-value-added activities (advanced technology, financial services, sophisticated components, marketing, servicing), yielding winners and losers within labor markets.
- Empirical patterns:
  - The United States has lost middle-skill manufacturing jobs because of trade with China and economies contributing to its value chains, while gaining jobs in high-skill manufacturing and in services; total employment largely unchanged.
  - College-educated American workers have seen their salaries rise, while those without a college education have seen wages decline.
  - Between 1995 and 2015, advanced economies saw increases in high- and low-skill jobs and declines in middle-skill employment, a pattern driven importantly by technological change as well as trade.
- Trade policy and protectionism:
  - United States tariffs imposed in 2018: 25 percent on $50 billion in imports and 10 percent on $200 billion in additional imports.
  - Parts and components comprise 37 percent of US imports from China; the list of taxed products appears heavily weighted toward these items.
  - The cost of tariffs was passed on to US firms, which lost sales; Chinese retaliation imposed additional losses on US exporters.
  - In a world of complex value chains, import tariffs unpredictably hurt firms and workers in the protectionist country and the net effect will be negative.
- Social safety nets and redistribution:
  - Distinguishing between job losses from trade and from technology is not useful for designing safety nets.
  - Germany cited as an example where progressive taxation and a strong safety net led to little change in inequality as measured by its Gini coefficient after taxes and transfers.
  - The United States is cited as having a significant increase in inequality because public policy exacerbated job and wage polarization through regressive tax cuts.

### Statistics and trends in trade content
- Official statistics: about 80 percent of world trade consists of manufactured goods and primary products, with the remaining 20 percent consisting of services; this ratio has changed little in 40 years.
- Value-added perspective:
  - The share of services in trade, measured in value-added terms, rose by more than a third from 1980 to 2009—from 31 percent to 43 percent.
  - Among the 34 economies in the Organisation for Economic Co-operation and Development, services account for about half of value added in exports.
  - For emerging market economies well integrated into global value chains (Mexico, China, Vietnam, Thailand), the proportion is about 40 percent.
- Reasons for rising services share in value-added trade:
  - Growing use of software.
  - Managing global supply chains relies more on services such as transportation, finance, and insurance.
  - Prices of services have risen while manufacturing prices have declined because manufacturing has experienced more rapid productivity growth.
- Use of imported services:
  - Advanced economies use substantial imported services in their production chains.
  - Developing and emerging market economies tend to use less imported services because they have greater restrictions on imports of services and on foreign direct investment in service industries.
  - Recent research shows using imported services enhances manufactured exports of emerging market economies by improving productivity.

### Policy recommendations and conclusions
- Protectionism is a poor strategy in a global value-chain world; it will hurt some firms and workers in the protectionist country and has negative net effects given complex cross-border production relationships.
- Public policy should focus on easing adjustment for displaced workers rather than trying to isolate economies from integration and innovation.
- For both rich and poor countries:
  - Concentrate on policies that ease adjustment as production and jobs evolve naturally.
  - Free trade remains the best policy; the world has achieved reasonably free trade in manufactures (until recent protectionist episodes).
  - Because services are increasingly important in production and value chains, liberalizing trade and investment in services is a logical next focus—especially in the developing world.
- Developing-economy homework: build the platform (rule of law, infrastructure, education, health) to attract and benefit from global value chains.

*David Dollar, Finance & Development, June 2019.*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/june/global-value-chains-transforming-manufacturing-dollar.pdf_