A worker installs rubber onto the windows of the doors along a production line at a truck factory of Anhui Jianghuai Automobile Co. Ltd (JAC Motors) in Hefei, Anhui province May 5, 2014. Photo: Reuters/Stringer

As production activities became increasingly fragmented and relocated across borders, a number of observers started to use the expression “global value chain” — a term that is often used without knowing what a value chain really is or what one 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 industrialized economies,”  namely Hong Kong, Singapore, Taiwan and South Korea. During this phase, Japan moved production bases to neighboring countries quickly, due to the yen revaluation agreed to in the Plaza Accord of 1985.

The organization of international production networks has so far been mostly regional, producing

in a given region and

selling to consumers

in that same region

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 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 tripolar production network in the Asia-US region was completed.

By 2005, the center of the network had completely shifted to China, pushing the United States and Japan to the periphery. The shift of supply chains toward 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 labor force, but also to the sophisticated intermediate products that the country imported from other East Asian economies, embedded in goods labeled “Made in China.”

The organization 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 manufactured goods produced in the eastern part of the continent; and in North America, where the main source of final demand 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 newly industrialized economies in the 1970s.

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

The evolution took a dramatic turn with China’s accession to the WTO in 2001. The irruption of hundreds of millions of 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 the years since the global crisis of 2008 to 2009, 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 labor surpluses and low wages have observed relatively strong job growth following their GVC integration.

Developed countries specialize in services, particularly research and development or business services, where they have so far maintained the comparative advantage.

Employment in these countries tends 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.

Strength in basic commodities does not always mean a large employment impact: Chile, the world’s largest exporter of copper, employs relatively few in its mining sector considering its gross export strength in that area. This apparent paradox reflects the fact that modern mining industries are highly capital-intensive and thus generate relatively low employment.

Most of the jobs indirectly related to extracting operations are in supporting activities such as maintenance, energy supply, and transportation, which are classified in the service sector rather than the mining sector itself.

When it comes to considering the performance of non-exporting sectors, some firms may participate in export efforts indirectly by providing intermediate products to exporting-led firms.

This mode of GVC participation is particularly important for providers of services (which were traditionally considered “non-tradable”) or for small and medium-size firms, which do not have the capacity to engage in global market operations.

Compared with the previous import-substitution industrial policies that underpinned the development of large-scale industries, the utilization of more flexible networks of second-tier suppliers is one of the distinctive features of the new mode of industrialization.

Irrespective of an economy’s development status, the export-related demand for low-skilled jobs has gone down in all countries, while demand for higher-skilled positions is on the rise.

Over the past few decades, cross-border production networks have evolved and continually expanded according to countries’ comparative advantages. This process was intrinsic to the development of Japan and China, as well as the newly industrialized economies in Asia. It has also shaped income distribution across the Asia-Pacific region.

As Asian integration goes forward, understanding the nature and dynamics of these production networks will be more important to securing stable and fair growth throughout the region.

Hubert Escaith is the World Trade Organization’s Chief Statistician.
Satoshi Inomata is Chief Senior Researcher at the Development Studies Center, Institute of Developing Economies, Jetro.
Sébastien Miroudot is Senior Trade Policy Analyst at the Trade in Services Division of the OECD Trade and Agriculture Directorate.

This article summarizes a paper prepared for the 2016 Pacific Trade and Development Conference in Australia. This article appeared in the most recent edition of the East Asia Forum Quarterly, Towards Asian integration. You can read it here.

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