Table of Contents

  • There are different ways to analyze the global economy. One is to view it through the lens of growth and structural change in individual economies, developed and developing. A second is to use the lens of global value chains (GVCs), the complex network structure of flows of goods, services, capital and technology across national borders. Both are useful and they are complementary to one another.

  • The Global Value Chains Development Report is a joint publication of the World Trade Organization (WTO), the Institute of Developing Economies (IDE–JETRO), the Organisation for Economic Co-operation and Development (OECD), the Research Center of Global Value Chains (RCGVC-UIBE), the World Bank Group, and the China Development Research Foundation, based on joint research efforts to better understand the ongoing development and evolution of global value chains and their implications for economic development.

  • More than two-thirds of world trade occurs through global value chains (GVCs), in which production crosses at least one border, and typically many borders, before final assembly. The phenomenal growth in GVC-related trade has translated into significant economic growth in many countries across the globe over the last two decades, fueled by reductions in transportation and communication costs and declining trade barriers. But, at the same time, it has contributed to distributional effects that mean that the benefits of trade have not always accrued to all, which has, at least in part, been a driver in the backlash against globalization and the rise of protectionism and threats to global and regional trade agreements. In addition, new technological developments such as robotics, big data, and the Internet of Things (IoT) are beginning to reshape and further transform GVCs. This second GVC development report takes stock of the recent evolution of GVC trade in light of these developments.

  • Taking advantage of a new accounting method to decompose GDP production into pure domestic production, traditional trade, simple and complex GVC activities, this chapter examines recent trends in global value chain (GVC) activities across the world. Our main findings show that the pace of GVC activities picked up in 2017 after a period of slow down since 2012; intra-North American and intra-European GVC activities declined relative to inter-regional transactions due to higher penetration via Factory Asia but value chains still remain largely regional; China is increasingly playing an important role as both a supply and demand hub in traditional trade and simple GVC networks, although the US and Germany are still the most important hubs in complex GVC networks; bilateral trade balances are significantly affected by the supply and demand of third countries; and net imports are no longer a proper measure of the impact of international trade on the domestic economy in the age of GVCs.

  • Trade is a major source of employment. Nevertheless, trade has recently been caught in the crossfire in discussions around the decline of manufacturing employment and the polarization of labor markets in advanced economies. In this chapter we examine what the academic literature has to say on the relationship between trade and labor markets, with a specific focus on studies with a value chain perspective. We find that trade has only modest effects on aggregate employment and is unlikely to have been a major contributor to the decline of manufacturing. However, the effects vary considerably across regions and individuals with different skill levels. This implies that policy has a central role to play in making sure that the gains from trade are shared evenly. Our findings highlight that a value chain perspective is important for assessing the impact of trade on labor markets. The emergence of value chains has strengthened linkages between sectors, magnified trade’s impact on skill demand and requires novel trade statistics. Ignoring this leads to a biased view of trade and overestimates its role in the decline of manufacturing employment.

  • The emergence of global value chains – whereby goods that used to be produced within one country are now fragmented and distributed across global networks of production – has offered developing countries new opportunities to integrate into the global economy. This has also had fundamental impacts for workers in developing countries. The chapter shows that higher earnings and employment within sectors and firms is associated with GVC integration, which also supports other spillovers that operate through labor markets. But it has also had distributional implications of where jobs go and the types of jobs they are. Jobs growth has occurred directly in the export sector, as well as indirectly through linkages of exporting firms to domestic, input-supplying firms. Employment creation and wage gains have been biased towards more skilled workers in developing countries, which contrasts with the predictions of trade theory. The skill-biased nature of GVC trade is associated with increased complexity of global supply chains as well as increased use of skill-intensive inputs, notably services. New emerging trends, including automation and digitization, may further determine how employment in developing countries will be affected by GVC trade in the future. The findings point to education as well as trade and labor policies as important factors for strengthening the GVC-labor relationship.

  • The nature of technology used in products plays a major role in determining the governance structure of value chains and the benefits of participation for developing countries. Standardization through breaking production into modules with a high degree of functional autonomy (limited mutual interference between modules) can dramatically reduce the amount of research and development (R&D), learning by doing, and the number of complementary skills needed to produce a good. This greatly increases opportunities for developing country firms to participate in formerly capital-intensive industries through reducing entry costs into global value chains. However, widespread access to standardized products with little ability to modify technical features can lead to an excessive supply of homogeneous products in a local market, resulting in intense price competition and limited technology transfer. By contrast, technology that facilitates scope for product modification and greater interaction with technology owners can help boost technology transfer and product upgrading by developing country firms. The chapter illustrates this interaction between changes in technology and opportunities for developing countries through developments in the automotive and mobile phone handset industries, with a particular reference to China’s growth experience. It also finds that automation is likely to have only a limited impact on developing countries’ opportunities to participate in value chains through the offshoring of production by high-income countries, at least in the short term.

  • The reorganization of supply chains using advanced technologies, such as the Internet of Things (IoT), big data analytics, and autonomous robotics, is transforming the model of supply chain management from a linear one, in which instructions flow from supplier to producer to distributor to consumer, and back, to a more integrated model in which information flows in an omnidirectional manner to the supply chain. While e-commerce is uniquely suited to many of these techniques, they also hold the promise of improving efficiency in brick-and-mortar stores. These technologies are generating enormous benefits through reducing costs, making production more responsive to consumer demand, boosting employment (employment in supply chain sectors where such technologies are most likely to be applied has grown much more rapidly than in other supply chain sectors and in the economy as a whole) and saving consumers’ time. The impact of these technologies on the length of supply chains is uncertain: they may reduce the length of supply chains by encouraging the reshoring of manufacturing production to high-income economies, thus reducing opportunities for developing countries to participate in GVCs, or they may strengthen GVCs by reducing coordination and matching costs.

  • Although small and medium-sized enterprises (SMEs) represent the vast majority of firms worldwide, their participation in international trade remains limited relative to their share of overall economic activity and employment as compared to large firms. The rise of the digital economy could, however, open a range of new opportunities for small firms to play a more active role in global value chains (GVCs). This chapter reviews evidence of SME participation in international trade and production networks and looks at how the digitalization of our economies is already affecting, or could affect future, SME contributions to GVCs. New research by Lanz et al. (2018) finds evidence that digitally-connected SMEs in developing countries tend to import a higher share of their inputs than non-digitally-connected firms. Additionally, it is shown that this positive digital effect is greater for SMEs than it is for large firms. The chapter reviews the various opportunities that the digital economy opens for SMEs, especially in terms of cost reductions and the emergence of new business models, but also discusses policy measures that could be taken to promote SME participation in GVCs. Indeed, significant challenges remain for SMEs to enter GVCs, some of which are exacerbated by the new digital economy. A holistic approach that combines investment in ICT infrastructure and human capital with trade policy measures and measures to improve the business environment, access to finance and logistics, and promote innovation and R&D is necessary. Improving the availability of data would also help to better understand and integrate SMEs in GVCs.

  • Global value chains make it easier for developing countries to move away from export reliance on unprocessed primary products to become exporters of manufactures and services. Global value chains (GVCs) allow countries to specialize in a particular activity and join a global production network. As a developing country moves from export of primary products to export of manufactures and services via GVCs, the ratio of domestic value added to gross export value tends to fall. Many developing country policy-makers worry about this trend and aspire to increase their value added contribution to exports. There are a number of reasons why this objective is not good policy. It may seem like simple math that a higher domestic value added share means more total value added exported and hence more GDP. But that simple idea ignores the reality that imported goods and services are a key support to a country’s competitiveness. The chapter documents this via the history of the successful East Asian industrializers as well as more recent evidence from Association of Southeast Asian Nations (ASEAN) economies. If a country artificially replaces key inputs with inferior domestic versions, the end result is likely to be fewer gross exports and less, not more, total value added exports.

  • The use of global input-output tables, and the creation of Trade in Value-Added (TiVA) statistics, has greatly improved our understanding of the fragmentation of global production through value chains. However, their application requires a number of assumptions that, in practice, typically understate the degree of interconnectedness. TiVA estimates implicitly assume identical production functions across firms within an industry, when in reality production functions differ considerably. Typically, larger (and foreign-owned) firms tend to be more trade oriented than smaller (and domestically-owned) firms. As a result, TiVA statistics underestimate the import content of exports for the economy as a whole, a key indicator characterizing global production. Moreover, TiVA analyses are based on basic price concepts, which provide an appropriate view of production through value chains, but are less well equipped to analyse consumption, particularly as they exclude significant distribution margins (in particular retail and wholesale activities, often including marketing activities and brands), which add value at the end of the chain. This can distort analyses using “smile curves”, which show the distance from final demand of different sectors within value chains, and in turn understate the scale of jobs supported by trade.