How Global Value Chains Are Transforming Manufacturing
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- Authors: DAVID DOLLAR
- Published: June 1, 2019
Key findings and overview
- Global value chains are transforming manufacturing and distorting the globalization debate.
- From smartphones and autos to TVs and computers, more than two-thirds of international trade now takes place within such global value chains; that’s up from 60 percent in 2001.
- Decades-old methods of gathering trade data measure gross value of trade, not value added at each link, producing a skewed picture of the movement of goods and services and amplifying misguided calls for protectionism.
- Example: a smartphone exported by China is recorded in official trade statistics as a full-value import from China, whereas value-added analysis shows the United States imports different types of value added from different partners, including labor-intensive assembly from China and sophisticated manufacturing inputs from South Korea.
- 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.
Growth driver: how value chains benefit developing economies
- Breaking up the production process lets countries specialize in specific activities where they have comparative advantage, enabling diversification away from commodities toward higher-value-added manufactured goods and services.
- China: research and development and design mostly take place in Germany, Japan, and the United States, with China starting to play a significant role as well given the 5 million STEM (science, technology, engineering, and mathematics) graduates it trains each year.
- China’s 2009 exports of electrical and optical equipment: advanced-economy inputs (design, finance) and sophisticated parts (computer chips) come from Japan, the United States, South Korea, and Taiwan Province of China; China adds value toward the end of the chain with simple parts and assembly and has backward linkages to domestic metal and plastic manufacturing; in exports of these products to the United States, China contributes almost half the value added.
- Vietnam: after market-oriented reforms and opening to global trade, major investments by foreign firms (e.g., Samsung) created extensive backward linkages. In 2012, about 5 million Vietnamese worked for firms that manufactured for export; the number working in firms that sold to exporters was much higher at 7 million.
- Policy implication for developing economies: exporters need access to the best imported inputs; common solutions include special economic zones with duty-free access to imported parts (Shenzhen example), but economy-wide liberalization is preferable so indirect exporters and domestic producers can access the best inputs.
Advanced-economy impact and distributional consequences
- Advanced economies concentrate on high-value-added activities: advanced technology, financial services, sophisticated manufacturing components, and marketing and servicing.
- Labor-market effects:
- The United States 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, leaving total employment largely unchanged.
- College-educated American workers have seen their salaries rise; 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.
- Drivers of job polarization include both trade/value chains and technological change; middle-skill routine tasks are easiest to automate or move to lower-wage countries.
- Protectionism example and effects:
- US tariffs 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 tariff lists were weighted toward these items, which US firms use to be more competitive.
- Tariffs increased costs for US firms, reduced sales, and—combined with Chinese retaliation—imposed additional losses on US exporters.
- In a world of complex value chains, import tariffs are hard to predict precisely, but some firms and workers in the protectionist country will be hurt and the net effect will be negative.
Shifting perspective on services and trade statistics
- 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.
- In every major economy, the share of services in trade is larger in value-added terms than in gross value terms.
- 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 services matter more in value-added terms:
- Growing use of software and other services embedded in merchandise.
- Managing global supply chains requires transportation, finance, and insurance.
- Prices of services have risen while manufacturing prices have declined due to faster productivity growth in manufacturing.
- Imported services boost manufactured exports of emerging market economies by improving access to high-quality inputs; this effect is constrained when developing economies maintain greater restrictions on imports of services and on foreign direct investment in service industries.
Developing-economy and policy lessons
- Global value chains do not overturn trade theory but provide a more complex picture and new integration opportunities for rich and poor economies.
- To attract and benefit from value chains, countries need the “platform” of rule of law, infrastructure, education, and health care.
- For rich countries, integration and innovation create winners and losers; protectionism is counterproductive:
- Total isolation cuts a country off from the dynamic global economy.
- Partial protection benefits some firms at the expense of others and hurts consumers.
- With complex value chains, fine-tuning trade policy to help a geographic region or group of workers is impossible.
- Recommended public policies:
- Ease adjustment for displaced workers rather than erect protectionist barriers.
- Do not try to distinguish sharply between job losses from trade versus technology when designing safety nets.
- Consider tax and transfer policies to mitigate inequality (example: Germany’s progressive taxation and strong safety net led to little change in inequality as measured by its Gini coefficient calculated after taxes and transfers; by contrast, the United States has seen a significant increase in inequality, with public policy exacerbating market trends through regressive tax cuts).
- Liberalize trade and investment in services, especially in the developing world, given the growing role of services in production and value chains.
How Global Value Chains Are Transforming Manufacturing — F&D Magazine, David Dollar, June 2019.
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