The age of global value chains

João Amador, Filippo di Mauro 09 September 2015

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The importance of global value chains (GVCs) has been steadily increasing in the last decades and, as reported in UNCTAD’s World Investment Report 2013, about 60% of global trade consists of trade in intermediate goods and services, which are then incorporated at different stages of production (UNCTAD 2013). The prevalence of GVCs in the world economy impacts strongly on trade and labour markets, but also on issues such as inequality, poverty and the environment.

This notwithstanding, the measures that usually inform the policy debate, such as bilateral trade balances, export market shares or real exchange rates, continue to be used with little indication of the caveats that affect severely their accurateness.

In a recent VOX eBook we have collected relevant research by scholars directly or indirectly associated with CompNet, the Competitiveness Research Network of the EU System of Central Banks. There are three messages we want to share here on the three parts that comprise the eBook – GVC mapping, GVC impacts, and the firm-level dimension – leaving the rest to the readers to discover.

  1. The mapping. When compared internationally, value chains based in the Eurozone appear to be further integrated globally, though they still maintain a strong regional character. More specifically, following a temporary contraction in 2009, foreign value added in exports rose sharply in 2011 (Figure 1). Such higher global integration notwithstanding, most of the foreign value added was to a major extent sourced from other Eurozone countries (Figure 2). Similarly, as Los et al. put it in Chapter 2 of the eBook, regional blocs like ‘Factory Europe’ are still important, but the construction of ‘Factory World’ is progressing rapidly.

Figure 1. Foreign value added in exports in major economies (% of total exports)

Source: Amador et al. (2015).

Figure 2. Decomposition of foreign value added in exports by origin (% of total foreign value added in exports), 2011

Source: Amador et al. (2015).

  1. The impacts. The existence of GVCs has impacts on several economic dimensions. Indicators such as revealed comparative advantage and real effective exchange rates, for instance, usually based on the trade in gross terms, are no longer fully relevant. The concept of ‘country of origin’ also is increasingly difficult to apply, as the various production operations are spread across the world. In fact, a country may appear to be a large exporter of a specific good relative to the world average without having contributed much value added to its production. As a result, the analysis of a country’s export potential, competitiveness and labour market developments needs to take into account its integration in GVCs. The recent Global Crisis showed that GVCs affect the magnitude and the international transmission of macroeconomic shocks (e.g. Ferrantino and Taglioni 2014). During this period, the collapse in global trade was severe, synchronised across the world, and particularly pronounced for trade in capital and intermediate goods. Several transmission mechanisms were at play, but GVCs appear to have had a central role in the transmission of what was initially a demand shock in some markets along with a severe credit shortage. Chapter 8 of the eBook, by Nagengast and Stehrer, shows that changes in vertical specialisation contributed substantially to the decline in value added trade during the crisis, and also highlights the importance of changes in the composition of final demand. Furthermore, in stark contrast to gross exports, both the services and manufacturing sectors were strongly affected by the collapse in value added trade.
  2. The firm-level dimension. The operation and organisation of GVCs mostly relates to the ability of firms to incorporate value added originating from different sources and sell their products for further transformation or final consumption, more than to the concept of comparative advantage applied at the aggregate sector-country dimension. Using firm-level data, Manova finds in Chapter 13 of the eBook that financial considerations govern the location and network decisions of multinational companies. Ceteris paribus, stronger financial institutions in the host economy lower multinationals’ incentives to pursue foreign direct investment for horizontal motives, and instead favour vertical and export-platform motives. The literature also suggests that credit-constrained firms might be stuck in low value added stages of GVCs and unable to pursue more profitable opportunities, raising the possibility that strengthening capital markets might be an important prerequisite for moving into higher value added, more profitable activities.

Concluding remarks

There is an urgent need for policymakers to fully acknowledge the extent to which conventional indicators related to gross trade are severely flawed as policy benchmarks because they fail to take into account the existence of GVCs and their increasing role in shaping the global economy. Academics and scholars are also well advised to stop quarrelling over definitions and to start proposing workable alternative indicators that are systematically produced and readily available. The eBook presented in this column tries to bridge this gap.

References

Amador, J and F di Mauro (2015), The Age of Global Value Chains, A VoxEU.org eBook, CEPR Press.

Amador J, R Cappariello and R Stehrer (2015), “Global Value Chains: A View from the Euro Area”, Asian Economic Journal 29(2), pp. 99–120.

Ferrantino, M J and D Taglioni (2014), “Global value chains in the current trade slowdown”, VoxEU.org, 6 April.

UNCTAD (2013), World Investment Report 2013 – Global Value Chains: Investment and Trade for Development, New York and Geneva: United Nations. 

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Topics:  International trade

Tags:  GVCs, Factory Asia, Factory Europe

Head of the Fiscal Policies and Structural Studies Division at the Economics and Research Department, Banco de Portugal; Assistant Professor, Nova School of Business and Economics

Senior Adviser in the Research Department, European Central Bank; Chairman, CompNet

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