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China’s upgrading in GVCs

LYU YUE and DENG LIJING | 2021-11-18 | Hits:
(Chinese Social Sciences Today)

China-Europe Railway Express contributes to the stability of the GVCs. Photo: CFP

Confronted with profound changes unseen in a century in our world, the proposal of the new development paradigm is not only an effective strategy to address the shocks of the reconstruction of GVCs in the short term, but also a major strategic choice to guide China to realize advancement along GVCs and high-quality economic development in the long term.

New trends in GVCs
GVCs tend to be regionalized and localized in horizontal distribution. On the one hand, the tripartite competition pattern of China, the United States, and Germany as regional value chain hubs in Asia, North America, and Europe has been formed, the vigorous development of regional trade agreements has also continuously injected impetus into the regionalization of GVCs, and the linkages of value chains within the region have been strengthened. On the other hand, developed countries and regions demonstrate strong demands for localization, trying to address industrial hollowing-out through promoting “reindustrialization,” and reducing the risk of supply disruptions caused by excessive dependence on other countries when confronting sudden shocks.
In vertical distribution, the shortening of GVCs is a trend. Since the 2008 global financial crisis, trade protectionism has arisen. Developed countries encourage industries to return home, which contributes to the shortening of GVCs. Meanwhile, COVID-19 has wreaked havoc on the traditional GVCs division of labor system. In addition, the wide application of emerging technologies such as artificial intelligence has greatly increased the knowledge and technological intensity of various production links, decreasing the internal motivation of multinational corporations to find areas with low costs to refine the division of labor.
GVCs tend to be digitized in the direction of transformation. The digital economy is constantly changing and reshaping the mode of global production and division of labor. Empowered by the digital economy, traditional services that are difficult to trade and with strong regional attributes are transformed into trading products that are almost free of geographical restrictions. Large-scale applications of the digital economy reduce the interconnection costs of all links in GVCs, so as to help more enterprises to participate in it. Meanwhile, COVID-19 has brought about significant digital transformations in people’s lives, international trade, and social development, accelerating the trend of digital transformation of  GVCs.
GVCs tend to be green in the upgrading orientation. At present, more than 130 countries and regions globally have announced their carbon neutral goals. Tackling climate change and promoting green development has become a global consensus, which will affect the future direction of global industrial development and layout through the division of labor in GVCs.
GVCs integration
China may face a more prominent risk of outward transfer of the industrial chains, but it has also accelerated the process of evading dual attacks of “low-end locking” and “high-end blockading.” Developed countries accelerate the returning process of the high-end manufacturing industry to local areas, which lead to the risk of outward transfers of some high-end industrial chains in China to a large extent. With the increase in domestic labor costs and the tariffs following the China-U.S. economic and trade frictions, some labor-intensive industries are diverted to Southeast Asian countries. However, this also forces Chinese enterprises to accelerate the enhancement of independent innovation ability, breaking through the bottlenecks in core technology and key parts, and strive to move toward the higher end of GVCs.
China may be excluded from some regional value chains, but it also creates new opportunities for the establishment of a “self-oriented” regional value chain system. With the high-quality joint construction of the Belt and Road (B&R) initiative, the consolidated economic cooperation in Asian regions brought by the recently-signed Regional Comprehensive Economic Partnership (RCEP), and China’s formal application for joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provide an important starting point for building a new platform for higher-level international cooperation.
At present, the formulation of international rules in the field of digital trade still lags behind. There are differences between the more systematic “American template” and “European template.” China and other developing countries also need to enhance their voices in the formulation of international economic and trade rules. Meanwhile, the unified rules of the global digital economy still lack clearness, therefore the super large market scale and perfect supporting infrastructure will help China attract global advanced factors of production and play a bigger part in the formulation of digital governance rules.
The greening of GVCs will set a higher threshold for China’s integration into the global production division system, and also bring opportunities for China to seek a leap forward in a new round of international competition. At present, although the global green development trend will influence China’s existing trade models and industrial structures in the short term, this trend and China’s goal of striving to peak its carbon emissions by 2030 and to achieve carbon neutrality by 2060 will promote itself to obtain the first-mover advantage in global competition in the future through all-round, green, and low-carbon reforms.
Future plan
Going forward, it is necessary to take the construction of a new development paradigm as a strategic guide, grasping the strategic opportunity period of reshaping GVCs in the post-pandemic era, making full use of domestic and international markets, and constantly moving up the value-added ladder in GVCs.
First is to remove the obstacles in domestic systems and mechanisms, promoting the formation of a strong domestic market. A strong domestic market is not only the cornerstone of building a new development paradigm, but also the support for China to move toward the higher end of GVCs. Therefore, China should effectively break the institutional barriers such as market segmentation and upstream monopoly, fostering the smooth flow of resources and factors of prouduction, accelerating the coordinated regional development, strengthening the eastern region’s role to lead innovation and the central and western regions’ role to undertake industries, so as to build a regional pattern of smoothly realizing the industrial gradient transfer and the mutual assistance between the east and the west regions.
Second is to achieve breakthroughs in core technologies in key fields, strengthening independent innovation and ensuring the safety and stability of industrial chains and supply chains. China needs to facilitate a market-oriented system for technological innovation in which enterprises are the main players and synergy is created through the joint efforts of enterprises, universities, and research institutes.  
Third is to seize the development opportunities in the digital economy and accelerate China’s digitally-empowered upgrading in GVCs. Based on its development advantages in 5G, e-commerce, and other fields, China should accelerate the development of emerging digital industries and the digital transformation of traditional industries, and actively participate in the formulation of new rules for global digital trade. Meanwhile, research, development and innovation at the forefront of digital technologies should be strengthened.
Fourth is to promote the green transformation and upgrading of the economic growth models and accelerate the marriage of GVCs with the green transformation. To take the lead in the low-carbon transformation, China should effectively improve energy efficiency, strengthen clean technology and energy R&D innovation, and help achieve the carbon peak and neutrality targets  by optimizing the energy structure. Meanwhile, China should actively participate in international cooperation and rule-making in the fields of global emission reduction and climate change response.
Fifth is to cultivate a “self-oriented” regional value chain and actively participate in and lead the formulation of international economic and trade rules. At present, the high-quality joint construction of the B&R, the promotion of the RCEP, and the active participation in the CPTPP will provide new choices for China and other economies to integrate into GVCs. Meanwhile, it should also be based on building a higher-level international cooperation platform.
Lyu Yue is a professor from the School of International Trade and Economics and Deng Lijing is from the China Institute for WTO Studies at the University of International Business and Economics.
Edited by ZHAO YUAN