ASIA
26 March 2014
Global value chains at OECD Week 2013
Global value chains provide many economic benefits, but should be managed with more responsibility, according to panel discussions at OECD Week 2013.
Global value chains provide many economic benefits, but should be managed with more responsibility, according to panel discussions at OECD Week 2013.
What do we mean by global value chains? OECD's director for science, technology and industry, Andy Wyckoff, offered the following introductory comments.
The classic example is that of the i-Phone. Invented in Calfornia. Assembled in China. Components made in Germany, Japan, Korea and elsewhere. In other words, today's manufacturing production is fragmented by phases of production, with each country specializing in a phase according to its comparative advantage. Indeed, countries now tend to specialize in phases of production more than products per se.
In reality, such value chains have always existed. But not to the extent of today's vast, complex and fast-changing value chains.
One consequence is that imported parts and components make up one-third of exports. Imports make up one-half of electronics exports from countries like China, Korea and Mexico. Even for large countries like the US and Japan, imports make up one-fifth of exports.
In other words, in order to export, you need to import. Thus import protectionism is a folly. And trade facilitation is an imperative.
The classic value chain is made up of the following phases -- research and development, design, logistics, production, logistics (again), marketing, and after-sales service. The manufacturing phase, like the i-Phone assembly in China, has the lowest value-added.
The policy challenge, especially for developing countries, is to capture more value added by doing more than just manufacturing production. This is where human capital, and innovation capacities are key to climbing the value chain.
Other policy challenges are income inequality. Lower-skill production is now offshored from advanced countries to developing countries, thereby reducing the demand for lower-skilled labor in advanced countries. Then there are the risks of value chains. In recent years, floods in Thailand and an earthquake/tsunami/nuclear crisis in Japan disrupted Asian value chains. And tax avoidance is facilitated as companies shift production and profits around the world.
In the discussion, Peder Holk Nielsen of Novozymes, reminded us that fragmenting value chains involves costs, as well as benefits. Co-locating production and research and development can be very beneficial, as many ideas can emerge from the production process.
Tariq Rahman from the University of Delaware provided an example demonstrating how 3D-printing can enable the customization of devices to help crippled children or stroke victims.
New Zealand trade minister Tim Groser highlighted some of the political aspects of global supply chains. Protection is even more dumb than we previously thought. A tax on imports is de facto a tax on exports. Having a business-friendly environment is also critical for trade, especially in the area of logistics. Otherwise, you miss out on global value chains.
Foreign aid which builds infrastructure can help developing countries participate in value chains. In emerging economies, a large share of global value chain activity takes place in "export processing zones" which have free trade policies. These zones can be a pathway to development success, as they inspire liberalization elsewhere in the economy.
An increasing share of manufactured exports embody services. This means that liberalizing services trade, though important in itself, can also facilitate trade in manufactures. Many value chains are more regional than global in nature, meaning that regional free trade agreements are very important, even if global trade liberalization remains the ideal.
Protecting intellectual property rights is more of a challenge in value chains, as more different companies and countries are involved in the production of one product.
John Evans who heads the trade union delegation to the OECD (TUAC) highlighted the labor rights risks of global value chains, as evidenced by the recent tragic cases in Bangladesh.
As labor costs have risen in China, more and more clothing production has been located in Bangladesh, a country at the bottom of the global value chain. This has promoted poverty reduction, even though average wages are about $1 a day. This has also empowered young women, who are the main employees in the industry.
But local governance failures in Bangladesh have exposed these workers to risks, with 1200 dying in a recent building collapse, and many dying in factory fires. The Bangladeshi government should have sound building and safety regulations, which should be enforced. It should allow workers to freely create trade unions to defend their rights.
Multinational companies who have invested in, or do business with Bangladesh, should take corporate responsibility more seriously. It is in their own interest to do so, to protect their brand reputations. But it is also the right thing to do. The recent agreement between a number of multinational companies regarding occupational health and saftey is a positive step, but refusal by Walmart and Gap to join the agreement is deplorable.
The OECD can play an important role in promoting corporate social responsibility on global value chains through its guidelines for multinational enterprises. But while the OECD has been vocal in promoting its technical work on global value chains, it has been curiously silent on the corporate social responsibility aspects.
In conclusion, while economic upgrading is important, social upgrading is equally important, because trickle-down economics is not working. The OECD needs to play a more forceful role here.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
What do we mean by global value chains? OECD's director for science, technology and industry, Andy Wyckoff, offered the following introductory comments.
The classic example is that of the i-Phone. Invented in Calfornia. Assembled in China. Components made in Germany, Japan, Korea and elsewhere. In other words, today's manufacturing production is fragmented by phases of production, with each country specializing in a phase according to its comparative advantage. Indeed, countries now tend to specialize in phases of production more than products per se.
In reality, such value chains have always existed. But not to the extent of today's vast, complex and fast-changing value chains.
One consequence is that imported parts and components make up one-third of exports. Imports make up one-half of electronics exports from countries like China, Korea and Mexico. Even for large countries like the US and Japan, imports make up one-fifth of exports.
In other words, in order to export, you need to import. Thus import protectionism is a folly. And trade facilitation is an imperative.
The classic value chain is made up of the following phases -- research and development, design, logistics, production, logistics (again), marketing, and after-sales service. The manufacturing phase, like the i-Phone assembly in China, has the lowest value-added.
The policy challenge, especially for developing countries, is to capture more value added by doing more than just manufacturing production. This is where human capital, and innovation capacities are key to climbing the value chain.
Other policy challenges are income inequality. Lower-skill production is now offshored from advanced countries to developing countries, thereby reducing the demand for lower-skilled labor in advanced countries. Then there are the risks of value chains. In recent years, floods in Thailand and an earthquake/tsunami/nuclear crisis in Japan disrupted Asian value chains. And tax avoidance is facilitated as companies shift production and profits around the world.
In the discussion, Peder Holk Nielsen of Novozymes, reminded us that fragmenting value chains involves costs, as well as benefits. Co-locating production and research and development can be very beneficial, as many ideas can emerge from the production process.
Tariq Rahman from the University of Delaware provided an example demonstrating how 3D-printing can enable the customization of devices to help crippled children or stroke victims.
New Zealand trade minister Tim Groser highlighted some of the political aspects of global supply chains. Protection is even more dumb than we previously thought. A tax on imports is de facto a tax on exports. Having a business-friendly environment is also critical for trade, especially in the area of logistics. Otherwise, you miss out on global value chains.
Foreign aid which builds infrastructure can help developing countries participate in value chains. In emerging economies, a large share of global value chain activity takes place in "export processing zones" which have free trade policies. These zones can be a pathway to development success, as they inspire liberalization elsewhere in the economy.
An increasing share of manufactured exports embody services. This means that liberalizing services trade, though important in itself, can also facilitate trade in manufactures. Many value chains are more regional than global in nature, meaning that regional free trade agreements are very important, even if global trade liberalization remains the ideal.
Protecting intellectual property rights is more of a challenge in value chains, as more different companies and countries are involved in the production of one product.
John Evans who heads the trade union delegation to the OECD (TUAC) highlighted the labor rights risks of global value chains, as evidenced by the recent tragic cases in Bangladesh.
As labor costs have risen in China, more and more clothing production has been located in Bangladesh, a country at the bottom of the global value chain. This has promoted poverty reduction, even though average wages are about $1 a day. This has also empowered young women, who are the main employees in the industry.
But local governance failures in Bangladesh have exposed these workers to risks, with 1200 dying in a recent building collapse, and many dying in factory fires. The Bangladeshi government should have sound building and safety regulations, which should be enforced. It should allow workers to freely create trade unions to defend their rights.
Multinational companies who have invested in, or do business with Bangladesh, should take corporate responsibility more seriously. It is in their own interest to do so, to protect their brand reputations. But it is also the right thing to do. The recent agreement between a number of multinational companies regarding occupational health and saftey is a positive step, but refusal by Walmart and Gap to join the agreement is deplorable.
The OECD can play an important role in promoting corporate social responsibility on global value chains through its guidelines for multinational enterprises. But while the OECD has been vocal in promoting its technical work on global value chains, it has been curiously silent on the corporate social responsibility aspects.
In conclusion, while economic upgrading is important, social upgrading is equally important, because trickle-down economics is not working. The OECD needs to play a more forceful role here.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com