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New Development Calls for Global Value Chain Restructuring

Mar 27 , 2017
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

Not long ago, Director of the US National Trade Council Peter Navarro announced that some US trading partners bought US companies and technology with the money made from the US, which reduced the US competitiveness, adding that the US would take back its leadership in the global (supply chain) value chain and reverse the tendency of declining labor supply in manufacturing. However, can the US recapture the global value chain under the Trump Administration’s policies against globalization?

Possibly, Navarro wrote a wrong “prescription” that cannot “cure the disease”. In essence, the formation and development of the global value chain is an important and inevitable outcome of deep integration. After World War II, three big global shifts happened in the manufacturing area. The cross-border investment, technology cooperation and contract manufacturing greatly drove the globalization of production. In particular, with the globalization of the multinational companies and the formation of production network, the economic globalization in production, manufacturing and circulation is dominant, thus giving birth to the global value chain.

Under the mode of the global value chain, trade of the intermediate products increased, multinational investment pushed the global production and the service trade played an important role in the production network operation. In this century, the international labor division has experienced a multi-layer division in the different procedures and the value chains of both different and similar products. The range and area of international labor division are increasingly widening.

The labor division among industries evolves into an intermediate input trade (intra-product trade) based on intra-product division, thus forming “global value chain division”. The global value chain, industrial chain and the supply chain have had great impact on the international production, trade and investment, enhancing global market dependence. “The global manufacturing” is replacing “Made in US” and “Made in China”. In the era of global value chain division, the relevance and dependence of the industrial structure in the world has enormously increased; one country’s industrial structure must interconnect and interact with other countries’ industrial structure in operation, and achieve dynamic adjustment and upgrading with mutual benefits and win-win effect to each other. Thus, the resource integration, the efficient allocation of the key elements and the increase of the total-factor productivity will increase dividends.

Recently, especially after the international financial crisis, the global market further shrank, mainly due to the following factors: The demand of the global market was extremely low, the modular industrial layout was almost complete, the multinational companies returned to home base, the investment of developed countries flew back, the global investment and trade rules were redesigned, the fragmented global economy had the splitting effect on the traditional global value chain and the global production gap kept widening, which weakened the lifting effect on the global economy.

Therefore, if the US wants to control the global value chain again, it should further open its market, integrate into the global value chain, upgrade the allocation efficiency of global resources rather than rely on the “return home” and “America First” policies to pull the chain apart. Only by restructuring the global value chain and by allowing the free movement of production factors can the world create new trade.

Undoubtedly, relying on restructuring the global value chain to push forward the new globalization is the general trend. In recent years, the WTO, the OECD, the UNCTAD and the APEC were all committed to establishing an accounting system of value-added trade and laying down a global value chain policy to improve the global value chain efficiency. Other goals: promoting the cooperation among the governments, enterprises and the private sectors, comprehensively integrating into the global value chain, realizing a balanced and sustainable development of the global economy and finally constructing an inclusive international economic governance system.

The global value chain revolution will certainly trigger a deeper structural change. One of the results of the global value chain and deep trade integration is that trade share of the intermediate products will exceed the trade share of the final products. As an important part of the global value chain and a big country with the world largest intermediate trade, China has a huge trade creation effect, which means that China has created more trade opportunities for the other economies. On the one hand, with the global value chain deepening and evolving, China’s integration into the global division network and the analysis and decision making on trade issues using traditional trade statistics will inevitably lead to misreading and distorting the reality.

On the other hand, in the globalized environment, an individual country’s industrial upgrading has become intricate and complicated. The industrial upgrading research should not be conducted within one country. Instead, the research should be based on the global value chain system to judge the industrial competitiveness and trade interest distribution. In particular, at the present, the global value chain service and digitization has heavily changed the international trade and the meaning of the old trade interests. A new trade statistical method and frame is needed to support the relevant analysis and decision making with the value-added trade statistics.

In the foreseeable future, the trade pattern in the world including the Asia Pacific region will step into a stage of restructuring. Given that Trump will lead the US to isolationism, protection and nativism, frictions, conflicts and collision will happen on an unprecedented. This will certainly be a big challenge to China, which has positively advocated “globalization” and has claimed to build an “inclusive” global value chain, but it is also a rare historical chance. China should take the opportunity of the global value chain restructuring to comprehensively strengthen the competitiveness of the national industrial structure and China should also better contribute the “public goods” in global governance concepts and rules to benefit the global economy.

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