Wednesday, September 4, 2013

Global Supply Chains and the Changing Nature of International Trade

The World Investment Report 2013 from UNCTAD (the UN Conference on Trade and Development) is my go-to source for statistics about levels and trends of foreign direct investment. This year, Chapter IV offers an interesting additional essay on "Global Value Chains: Investment and Trade for Development. Here are a few points that jumped out at me.

The Preeminence of International Trade in Intermediate Goods 

The textbook story of international trade, in which an easily identifiable product made in one country like cars, computers, textiles, oil, wine or wheat is traded for a similar good in another country is no longer a fair representation of the majority of world trade. "About 60 per cent of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various
stages in the production process of goods and services for final consumption."

Here's a concrete example of trade in intermediate goods through a global value chain as it operates in Starbucks:

"For instance, even the relatively simple GVC [global value chain] of Starbuck’s (United States), based on one service (the sale of coffee), requires the management of a value chain that spans all continents; directly employs 150,000 people; sources coffee from thousands of traders, agents and contract farmers across the developing world; manufactures coffee in over 30 plants, mostly in alliance with partner firms, usually close to final market; distributes the coffee to retail outlets through over 50 major central and regional warehouses and distribution centres; and operates some 17,000 retail stores in over 50 countries across the globe. This GVC has to be efficient and profitable, while following strict product/service standards for quality. It is supported by a large array of services, including those connected to supply chain management and human resources management/development, both within the firm itself and in relation to suppliers and other partners. The trade flows involved are immense, including
the movement of agricultural goods, manufactured produce, and technical and managerial services."

And here's are a couple of figures showing the importance of trade in intermediates to the exports of various countries. The darker green bar shows the "upstream" component of global supply chains: that is, what is the share of foreign value-added that is first imported, but then is re-exported by an economy. The lighter green bar shows the "downstream" component of global supply chains: that is, what share of exports from the country is later going to be part of the value-added of exports from another country. The sum of these two is the "GVC participation rate," that is, what share of exports from a country are involved either upstream or downstream in a global value chain.

And here's a list by country:

The Centrality of Transnational Corporations in International Trade

Global supply chains are typically coordinated by transnational corporations, often through making foreign direct investments in other countries (which is why it makes sense to have a discussion of global supply chains in a report focused on foreign direct investment). In fact, a relatively small number of transnational corporations are the organizations that coordinate and carry out the overwhelming majority of international trade, through some combination of owning foreign subsidiaries, contract manufacturing, franchising, or arms'-length buying and selling from local firms.

"In the EU, the top 10 per cent of exporting firms typically accounts for 70 to 80 per cent of export volumes, while this figure rises to 96 per cent of total exports for the United States, where about 2,200 firms (the top 1 per cent of exporters, most of which are TNC [transnational corporation] parent companies or foreign affiliates) account for more than 80 per cent of total trade. The international production networks shaped by TNC parent companies and affiliates account for a large share of most countries’ trade.  On the basis of these macro-indicators of international production and firm-level evidence, UNCTAD estimates that about 80 per cent of global trade (in terms of gross exports) is linked to the international production networks of TNCs ..."

Global Value Chains and Economic Development

Clearly, global supply chains lead to prices for consumers in the importing countries that are lower than they would otherwise be--that's most of the reason that transnational corporations develop such chains. They also make profits for transnational corporations? But do the global supply chains help low- and middle-income countries develop? The answer depend several factors.

  • Does the position in the global value chain lend itself to additional learning? "Is it the type of chain that presents potential for learning and upgrading? Will it enable capabilities to be acquired by firms that can be applied to the production of other products or services? In the garments industry, Mexican firms have been able to acquire new skills and functions, becoming full-package suppliers, while it seems very difficult for firms in sub-Saharan Africa supplying garments under the African Growth and Opportunity Act programme to move beyond cut, make and trim."
  • Does the host economy offer a supportive environment? "Is there an environment conducive to firm-level learning and have investments been made in technical management skills? Are firms willing to invest in developing new skills, improving their capabilities and searching for new market opportunities? Local firms’ capabilities and competences determine their ability to gain access to cross-border value chains, and to be able to learn, benefit from and upgrade within GVCs [global value chains]. Government policies can facilitate this process." 

The overall pattern seems to be that participation in global value chains does in fact typically benefit economic growth and development, but there are a bunch of potentially difficult and important issues about treatment of workers, environmental effects, interactions with local institutions and the host government, ans so on.