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China’s role grows in evolving global value chains

LIU BIN and WANG XIAONA | 2020-03-31
(Chinese Social Sciences Today)
 
The picture shows a 3D rendering of a robot assembly line in a car factory. In the future international division of labor, artificial intelligence will penetrate the upstream and downstream of concrete product manufacturing, helping enterprises structurally occupy and upgrade industrial chains. Photo: FILE
 

 

Since the 2008 global financial crisis, the world economy has been undergoing major restructuring and change. At the same time, global value chains have been adjusted and reshaped. Along with the apparent deceleration of the division of labor in global production, the trends of regionalization, digitization and service orientation are notable. Moreover, the outbreak of COVID-19 is exerting negative impact on the stability of global supply chains. 
 
In the current complicated situation, China should not only help maintain the stability of global supply chains, but also strive to climb to the high end of global value chains. 
 
 
Evolving global value chains
In the wake of the financial crisis in 2008, the trade of intermediate goods has slowed down, leading to a reduction of trade intensity in almost all production-related value chains and a decreasing proportion of cross-border trade in the global output of commodities. This tendency is particularly significant in developed countries and emerging economies. Trade growth has been distinctly slower than GDP growth. 
 
Second, global value chains are increasingly regionalized, with the attribute of globalization weakening. Specifically, the expansion of regional trade has been accelerating while inter-regional trade has been dwindling. Global production, trade and consumption have shown bloc structures based on US, European and Asian value chains. 
 
Digitalization is also a prominent characteristic, as digital technologies are reshaping global value chains. With the advancement of the new generation of information technology, artificial intelligence, the internet of things and block chain have become embedded in every link of the global production network, speeding up the creation and accumulation of value, while substantially cutting costs in the global division of labor. 
 
According to the World Trade Report 2018, “global trade is projected to grow by an additional 2 percentage points annually between 2016 and 2030 as a result of digitalization, falling trade costs and the increased use of services.” Meanwhile, cross-border services utilizing data flow such as email, real-time navigation, video conferencing and social media have been exploding. Digital channels have been vital paths for the transmission of news and information. 
 
Furthermore, the concentration of knowledge services in global value chains is increasing. In the past decade, the importance of intangible assets is growing. The World Intellectual Property Report 2017: Intangible Capital in Global Value Chains points out that the share of intangible assets in global value chains has reached close to 32% since 2007. The value created by intangible assets was almost double that of tangibles. 
 
Furthermore, the value added of the service sector is constantly rising. The service economy has become a potential agent for the transformation of global value chains. Due to the rapid development of internet technology, the division of labor in global production is no longer limited by time and space, thus improving the tradability of services and expediting the transition of the global economy from a commodity economy to a service economy. 
 
According to the Global Value Chain Development Report 2017, while services as a share of total world gross exports have remained around 20% since 1980, in value-added terms they have increased from below 30% to more than 40% in recent years. In 2017, the growth of cross-border service trade outpaced that of commodity trade by 60%. That of telecommunications, IT and commercial services more than doubled the growth of commodity trade. 
 
“Cloudification” is another feature in global industrial division. Manufacturing is innovatively transforming into a cross-industry, multi-agent and synergistic system. In the traditional pattern of international division of labor, enterprises focus on specific links of global value chains in which they can realize professional production. In the future international division of labor, technologies such as the internet of things, artificial intelligence and block chain will penetrate both the upstream and downstream of concrete product manufacturing, facilitating enterprises to structurally occupy and upgrade industrial chains. 
 
In addition, the recent outbreak of COVID-19 alongside the cost of prevention and control measures has hit global supply chains hard. Automobile and electronics supply chains in particular face the risk of disruption. With the spread of the pandemic, Asian supply chains have been impacted substantially. Against the backdrop of the slowing international division of labor, the pandemic has undermined the stability of supply chains and produced negative impacts on global value chains. 
 
 
China’s role
The reshaping of global value chains and changes in the international division of labor provide a window of opportunity for China to deepen its participation in global value chains. 
 
When it comes to the size of economy, China ranked second in the world in 2019, with a nominal GDP of $14.36 trillion. Furthermore, China’s foreign trade has registered leapfrog growth, as the value of imports and exports soared from $20.6 billion in 1978 to $4.62 trillion in 2018. By 2013, China had already become the largest trader in the world. In terms of investment, China has retained its status as the second-largest foreign direct investor and recipient of foreign investment. At present, China has become an important engine driving global economic development. 
 
In recent years, the dependency of China on the global economy has been decreasing, while that of the world on the Chinese economy is increasing. As a consumer market, supplier and capital provider, China is playing a more and more pivotal role. According to a recent report by the McKinsey Global Institute, the world’s economic exposure to China gradually rose from 2000 to 2017. Developed economies were increasingly dependent on Chinese market demand, and their exports to China doubled during the period. 
 
In the past ten years, the driving force of domestic demand has strengthened. In 2019, final consumption expenditure contributed nearly 58% to GDP growth. It is predicted that China’s share of consumption will account for 16% of global spending by 2030, making China the largest consumer market in the world. The expanding consumer market in China has also provided important investment opportunities for enterprises at home and abroad. As multinationals have taken the Chinese market increasingly seriously, the subsequent rate of penetration into the market has been rising.
 
Technologically, China has adopted global standards for industries like basic materials, electronic components, electronic products, chemicals, transportation and equipment manufacturing. Local enterprises have been capable of producing more than 60% of related technologies independently. The localization of the technology market is noticeable. 
 
In the meantime, research and development expenditure has increased by leaps and bounds, and China’s capacity for technological innovation has been improving steadily. Data released by iiMedia Research shows that the number of accepted patent applications filed by China grew from 828,000 in 2008 to 4.323 million in 2018, an amount that has more than quadrupled. Despite China’s deep integration into global value chains through technological innovation and the impressive market share of many science and technology enterprises in key areas, it is undeniable that competing countries have China in a chokehold when it comes to core technologies like semiconductors and optical devices. 
 
Additionally, the circle of China’s friends and partners in the Belt and Road (B&R) initiative is expanding, bringing into being two-way channels featuring mutual help between the East and the West. In 2019, the volume of Chinese imports from and exports to countries along the B&R grew 11%, 3.2 times higher than the growth of all foreign trade among the countries involved in the initiative. By the end of 2018, China-EU freight trains, the flagship project of the B&R initiative, had made a total of 14,000 trips, connecting China with 50 cities in 15 European countries. The B&R initiative has given a boost to China in creating a new landscape of opening up, marked by mutual help between the East and the West. 
 
The evolution of global value chains has driven China to integrate into the international labor division system, but the country has been trapped at the “low end.” In this light, China should lower costs of innovation by building new innovation alliances, accelerate the aggregation of innovation resources to enhance efficiency, and develop financial technologies to bolster enterprises’ innovation, among other measures, thereby moving up into the high end of global value chains as a major innovative country. 
 
Liu Bin and Wang Xiaona are from the Academy of China Open Economy Studies at the University of International Business and Economics. 
 
​edited by CHEN MIRONG