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Trade Policy Framework Needed to Boost the Global Value Chain

By Zhang Monan (Researcher, China Int'l Economic Exchanges Center)

Global trade, after having grown at twice the speed of the global economy for three decades, now has lost steam as a driving force, due to weak demand, rising costs, increasing trade frictions, among other cyclical and structural causes. Global trade is in the doldrums now, but a fundamental solution lies in boosting productivity on a global scale, improving efficiency by improving the division f labor along the global value chain, and instituting a forward-looking trade policy framework. This will also have a profound impact on efforts to secure global growth and prosperity.

Recent years saw “global value chain and trade in value-added (TiVA)” moving to the front and center of research on global trade, investment, value chain and division of labor. Tellingly, the subject has been featured prominently on the agenda of 天河 WTO, OECD, UNTAD and other international organizations. In November 2014, the APEC summit meeting endorsed two overarching documents, namely the APEC Strategic Blueprint for Promoting Global Value Chains Development and Cooperation, and Strategic Framework on Measurement of APEC Trade in Value Added (TiVA), with a view to advance the development of the global value chain.

The Global Value Chain, also known as the GVC, has become a critical building block of the global economic cycle. With the advent of global production network, the GVC has become a hallmark defining the global economy. Regarding Asia, regional integration, especially in East Asia and Asia Pacific, is gaining ground with greater speed. The APEC community is becoming more closely knit, and the ASEAN integration, a China-ROK FTA, a China-ROK-Japan FTA and the TPP are all advancing. With cross-border production and service networks growing and expanding, reform initiatives at country level have been made to further integrate an individual country into the GVC, thus paving the way for a fresh round of profound restructuring of the GVC.

The GVC’s rapid development has reshapes the world economic landscape, and redefined how trade, investment and production work across borders. A salient feature of the GVC is that in the production cycle, at least two stages are located in two different countries or more countries, and the input by these countries generate value added, hence large amounts of intermediate trade products and value added trade.

The production of the iconic IPhone is a good example in point. An iPhone has its various parts sourced and produced in over 30 countries and regions, before being assembled into the final product in China. Apple works with a selection of companies along the value chain, and by producing iPhones, it offers a platform that integrates and fosters synergy among different partners and their resources, and when amplified it contributes to creating a new system of division of labor.

Under the traditional model of division of labor and trade pattern, cross-border trade is measured by the final products. But in the GVC, cross-border trade is dominated by intermediate trade products. According to statistics from UN Comtrade, intermediate trade products have accounted for over 50% of global trade since 1995, and shot up to 69.32% in 2013. It is evident that intermediate trade occupies a dominant position in global trade.

But against this prevailing trend, behind-the-border trade barriers have been on the rise in recent years, marking a departure from the ongoing GVC formation. In the wake of the global financial crisis, non-trade barriers citing technical, IPR and other reasons are deployed out of a parochial pursuit of national interests. According to the G20 trade-restrictive measures released by the WTO and 15th trade surveillance report, G20 members are applying for more restrictive measures, with the monthly average reaching a new high since the surveillance was launched in 2009.

The TPP, meanwhile, creates new rules on place of origin to ensure the production, supply, and investment chains all take shape and take root in TPP member countries, and the intermediate trade products will also be produced in TPP community and be eligible for favorable tariffs. Increase in trading costs as a result of regionalization may have a negative impact on trade liberalization globally, and may result in large-scale trade diversion.

All these combined will pose a significant risk to GVC cooperation, as in an intertwined system such as the GVC, countries are so interconnected and interdependent that any trade barrier triggered by any country threatens to upset the function of the value chain, to the detriment of its own interests and could only end up disrupting the GVC and division of labor.

All in all, in order to enhance global trade and value creation, reducing trade friction-induced costs should be a top priority, which will contribute to elevating GVC cooperation in Asia and at large. Measures should be taken to lower the average tariff level by paring peak tariff, and encourage further trade liberalization. Tariff escalation must be kept at bay, by removing quota and other forms of restrictive measures in trade. For rules of place of origin, practices such as origin cumulation should be rectified to foster regional value chain and remove value chain barriers. In the meanwhile, as two major trade power in the world, China and the U.S. should actively take forward the GVC partnership initiative under the G20 framework, with the 2014 APEC Strategic Blueprint for Promoting Global Value Chains Development and Cooperation as the roadmap, and set up the system for valued added calculation, reduce tariffs for intermediate trade products, improve IPR protection and ultimately advance the GVC partnership.

Please click to view the full article on the website of China-United States Focus.

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