Global Value Chain
A global value chain is the sequence of activities through which a good or service is produced, distributed, and delivered, when those activities are spread across multiple countries. The concept captures the fragmentation of production across borders and the resulting interdependence of national economies.
Concept
The global value chain describes the full range of activities that firms and workers perform to bring a product from conception to end use, including design, production of components, assembly, marketing, distribution, and after-sales service. When these activities are located in different countries, the chain is global.
The concept emphasises the governance of the chain, which determines how the activities are coordinated and who captures the value. Lead firms, which typically own the brand and the design, coordinate the activities of suppliers and determine the terms of participation.
Governance
The governance of global value chains takes different forms. In producer-driven chains, which are typical of capital-intensive industries such as automobiles and electronics, the lead firms are manufacturers with control over the technology and the production process.
In buyer-driven chains, which are typical of labour-intensive industries such as apparel and footwear, the lead firms are retailers and brand owners with control over design and marketing. They coordinate a network of suppliers, often in developing countries.
The governance structure determines the distribution of value in the chain. Lead firms capture the rents from branding, technology, and design, while suppliers compete on cost. The ability of suppliers to upgrade, by moving into higher-value activities, depends on their capabilities and on the opportunities that the chain offers.
Trade Measurement
The fragmentation of production complicates the measurement of trade, since intermediate goods cross borders multiple times. Conventional measures of exports overstate the value that a country adds, since they count the full value of the goods exported, including the imported inputs.
The concept of value added trade addresses this problem by measuring the value that each country adds to the final product. The measurement requires input-output data that track the flows of goods and services across industries and countries.
The measurement has implications for the analysis of trade balances. The bilateral balance between two countries may differ substantially depending on whether it is measured in gross or in value-added terms, since the goods that a country exports may embody inputs from third countries.
Implications
Global value chains affect the transmission of shocks. A disruption in one country can propagate through the chain, affecting production in other countries, as the experience of natural disasters and of the pandemic demonstrated.
Global value chains also affect the analysis of trade policy. Tariffs on intermediate goods raise the cost of production in the importing country, since they tax inputs that are embodied in exports. The formation of regional trade agreements has been driven in part by the desire to reduce these costs.
The chains affect development, offering opportunities for countries to participate in production and to upgrade. The extent to which countries benefit depends on their capabilities, on their institutions, and on their position in the chain.
Regional Value Chains
Global value chains are often organised on a regional basis, with production concentrated within a geographic area. In Europe, the chains that link the countries of the region are the most dense, reflecting the integration of the European market and the reduction of barriers to trade and to investment.
In Asia, the chains centred on China and on other East Asian economies have grown rapidly, with components produced in several countries and assembled for export. The region has become the centre of global manufacturing, and the chains reflect the differences in costs and in capabilities among the countries.
In North America, the chains that link the United States, Canada, and Mexico are significant, particularly in the automotive and electronics industries. The regional trade agreement has reinforced the integration of production across the borders.
The regional character of the chains has implications for the analysis of trade and of policy. It suggests that the effects of a disruption in one country are felt most acutely in the region, and that regional cooperation matters for the resilience of production.
Upgrading and Development
The participation of developing countries in global value chains offers opportunities for upgrading, by which firms and countries move into higher-value activities. Upgrading can take several forms, including process upgrading, in which production becomes more efficient, and product upgrading, in which the goods produced become more sophisticated.
Functional upgrading involves moving into activities that are higher in the value chain, such as design or marketing. Chain upgrading involves moving into a different value chain with higher value added.
The extent to which firms and countries can upgrade depends on their capabilities, on the governance of the chain, and on the support that they receive. Lead firms may facilitate upgrading, by transferring knowledge and by setting standards, or they may resist it, if it threatens their position.
The evidence on upgrading is mixed, with some countries and some firms making rapid progress and others remaining in low-value activities. The outcome depends on the interaction of the strategies of firms, the policies of governments, and the structure of the chains.
Resilience and Reconfiguration
The vulnerability of global value chains to disruption has prompted a reassessment of their design. The concentration of production in a small number of locations, and the reliance on just-in-time delivery, mean that a disruption in one place can propagate through the chain.
The pandemic and other disruptions exposed these vulnerabilities, and they prompted firms to consider shortening their supply chains, diversifying their suppliers, and holding larger inventories. The reconfiguration of the chains is a gradual process, and it is shaped by the trade-off between efficiency and resilience.
The reconfiguration has implications for the analysis of trade and of industrial policy. It affects the pattern of investment and of trade, and it creates opportunities for countries that can offer resilience as well as cost. The policy response includes measures to support domestic production of critical goods and to diversify sources of supply.
Summary
Global value chains are the organising principle of international production, and their governance, their regional character, and their implications for development shape the analysis of trade and of policy. The resilience of the chains has become a central concern in the wake of recent disruptions.