Asia on Course to Cement Leadership in Global Value Chains
Region accrues benefits of participation in global production networks.
Over the last two decades, Asia has benefited the most from Global Value Chains (GVCs), establishing itself as a global leader in GVC development and manufacturing. A report* by the Asian Development Bank concludes that Asia is well-positioned to cement its leadership role in global production networks, thereby boosting income and employment across its economies, particularly in the East and Southeast Asian countries.
Reducing Costs through ICT
According to the report, fragmented production became cost-effective in the 1980s, when Information and Communications Technology (ICT) led to cheaper and more reliable telecommunication and transmission capacity as well as increased computing power, thus radically lowering coordination costs. The spread of GVCs accelerated in the 2000s, as household consumption grew globally, supported by the accession of China and Taiwan to the World Trade Organization in 2001.
Between 1998 and 2008, the portion of manufacturing exports in 59 OECD:WTO economies due to GVC trade grew from 36.9% to 48.0%, suggesting the increased importance of GVCs in mediating trade. By 2005, China overtook Japan as the center of the Asian regional production network.
GVCs enable greater specialization and improved productivity. The more developed economies in Asia, such as Japan, Hong Kong, South Korea and Taiwan, have a comparative advantage in knowledge- and contract-intensive tasks, whereas, labor-abundant economies such as China, Vietnam and Cambodia concentrate on downstream assembly activities, of lower value-add.
Reduced trade costs, including for tariffs and shipping, falling costs of business air travel and the use of ICT in coordinating far-flung production processes have helped the rise of GVCs. The report notes that when American or Japanese multinationals combine frontier technologies with offshore labor costs from Asia that are a fraction of those at home, it leads to significant reductions in delivered costs and growth in GVCs.
The role of ICT, in particular, has been vital in dispersing GVCs across the world. The report cites a study by Fort (2014) that provides a compelling example of this by examining the use of contract manufacturing services, wherein companies move the production of certain inputs offshore. This is strongly related to the adoption of computer-aided design and manufacturing. In addition, ICT-aided high-speed communication and computer modeling of specifications allow for production to be geographically separated, allowing firms to exploit the scale and comparative cost advantages of far-off economies. Essentially, without these ICT breakthroughs, GVCs to produce these inputs would not be feasible.
The report finds a strong correlation between the rise of GVCs, and increase in income, employment and output, leading to an increased share of the participating economies in the global GDP. The G7 nations that enjoyed a steady increase in their share of world output for 168 years, peaking to 67% in 1988, saw a precipitous drop to 50% by 2010, coinciding sharply with the growth of emerging markets, particularly China.
Trade Growth and Supply Chain
Asian GVCs’ links to global ones can be traced back to the 1980s when Japanese companies—followed by those of other developed economies—moved production bases to economies in East and Southeast Asia to leverage locational advantages and develop export platforms. Finished products were exported to global markets from a country with low labor costs. Asia’s GVC trade share in worldwide manufacturing exports rose to 16.2% by 2008, most of it in East and Southeast Asia.
The report examines the ratio of forward and backward linkages in GVCs. A low ratio implies the economy is closer to producing directly for the final consumer—meaning more value-add—while a high ratio meansthat the economy is producing inputs primarily for use in other industrial processes, which is a lower value-add. Japan has a balanced ratio—for every dollar of inputs it exports for use in production elsewhere, it imports slightly more than a dollar of inputs for domestic production. In sharp contrast, Cambodia has a 1:30 ratio, which implies that for every dollar of inputs exported for foreign use, Cambodia imports $30 of inputs for domestic production. It is a key policy concern for many economies in Asia to move towards more balanced ratios by moving to higher-value-add contributions to GVCs.
There appears to be a connection in Asia between the magnitude of trade growth and the extent of supply chain trade. Services are another key—and undervalued—component of GVCs. The report finds that services’ share of value-add amounts to two-thirds to four-fifths of the total value or more in some cases. It cites the example of a jacket that retailed at $425, of which the manufacturing value-add was only $38 (or 9%). The rest was in invisible payments such as retail, logistics and banking services; besides intellectual property, profit, and other unknowns.
GVC participation varies by industry. The Intra-Industry Trade (IIT) index is a globally accepted benchmark for GVC participation levels. A value of 1 (or 100%) indicates exports and imports within an industry exactly balanced, while zero (0) indicates a one-way flow (only exports or only imports). As the following table shows, different regions within Asia have specializations in different sectors:
Strengthening the World's Workshop
The report recommends that Asian policy-makers reduce barriers that negatively impact trade volumes and shipping costs, pursue policies that counter monopolies on shipping routes, and set investment priorities to improve trade infrastructure. The development of harmonized or mutually recognized standards can go a long way in improving international trade in Asia. Government policy to foster the development of laboratories and facilities for calibration, accreditation and certification in this domain can be crucial to attract opportunities to participate in GVCs.
Aided by falling trade costs, GVCs in Asia have seen explosive growth since the 1980s, benefiting the economies of East and Southeast Asia the most, with China as a regional hub for final assembly. More can be done, particularly in the area of tariff reduction and rationalization, normalizing trade relations with partners, lowering transport costs and delays, and investments in infrastructure. Process and product standards may be developed to support trade. The study suggests the development of appropriate investment and policy priorities to help economies boost their incomes and employment by building on Asia's reputation as the world's workshop.
The implications of this report are profound for Cisco. With more than a thousand contract manufacturing and component suppliers, logistics (3PL) and other service partners, along with more than 25,000 orderable product IDs , Cisco runs a massively complex but resilient supply chain of global scale that places it among the world's largest. Cisco is invested in ensuring the success of the Asian GVCs.
The report concludes that looking ahead, Asia is well-positioned to deepen, broaden and upgrade its role in global value chains.
* Reproduced with permission. This article is largely based on Chapter 3 of Asian Development Outlook 2014 Update: Asia in Global Value Chains