Global Value Chains and trade statistics: Why do they matter?

Global value chains and their linkage with the trade statistics may lead us to interesting conclusions on inconsistency between trade statistics and modern trade

Global value chain (GVC) is perceived by the developing countries to improve their manufacturing sector, with the help of their comparative advantage of cheap and skilled manpower. It is also seen by them as an opportunity to reduce the trade deficit.

For the path to GVC, an economy’s government and private sector should work in coordination to develop its domestic manufacturing companies to enable them to compete globally. This involves innovation coupled with skilling manpower and at the same time enabling competitive global access. Reducing the cost of compliance and developing infrastructure facilities also seems necessary on which India is in the front run.
 

China was the leading country that took advantage of production fragmentation witnessed in global trade since the 1990s. It is considered as the manufacturing hub as also the assembling point of the products of the leading electronic companies. There was also news about some of the firms shifting production out of China emanating from the US-China trade tensions since 2019. Studies also reported relocation of firms from China to other countries mainly to Vietnam, Taiwan, and Thailand.

However, the intricacies of this GVC concept and its linkage with trade statistics may lead us to interesting conclusions. This may be best explained with the help of China-US trade. 
 

Implications on trade statistics
 

Most Chinese exports to the US are manufactured and traded via GVCs where Chinese firms mainly specialize in low-value-added tasks while lead firms of GVCs concentrate on high-value-added tasks. The popularity and rapid expansion of “Made in China” products in the US is largely facilitated by the spillover effects of brands, originating from the intellectual property of GVC lead firms. 
 

Value chain trade represents a new division of labour in the same product and differs significantly from conventional cloth-for wine trade in terms of organization and the composition of value added. Production of ready-to-use information and communication technology products is organized along value chains, where China is the centre for assembly of parts and components supplied by other countries, such as Japan, the US, Germany, and South Korea.

Taking advantage of GVCs, many American multinational corporations (MNCs) have turned factory-less, for example, Apple and Nike.  In 2012, 21 of S&P 500 index companies were exclusively factory-less manufacturing, including Nike, AMD, Qualcomm Inc., and Cisco System (Bayard and Byrne, 2015). These factory-less MNCs mainly derive revenues from their intellectual property, such as brand, patented technology, and distribution networks.
 

In the perspective of GVCs, the inconsistency between trade statistics and modern trade based on GVC is a major cause of the huge imbalance between China and the US. (Yuqing Xing 2019). Trade statistics are compiled with an implicit assumption that the full value of exported good is created by the exporting nation. The same is not true in GVC trade. It only counts the goods crossing national borders as exports/imports. It fails to recognize the reality that geographic locations of production and the ownership of manufacturing products are separated in GVC trade. It cannot record the revenues of multinational enterprises derived from their intangible intellectual property in foreign markets. 
 

The degree of the statistic distortion reached the highest for the bilateral trade balance between China and the US, as the former is the global centre of manufacturing assembly, while the latter is the home of most factory-less manufacturers. Current trade statistics do not recognize the revenue as part of US exports, because their products sold in global markets do not cross the US border, and the value added of their intellectual property is embedded in physical products rather than sold separately as royalties or license fees.
 

Apple’s sales in China were $56.5 billion in 2015, but not even one dollar of the sales was counted as US exports to China.  All Apple products are designed by Apple in California and assembled in China. Chinese consumers paid not only the production costs of Apple products but also the value added of Apple’ intellectual property (Brand, design, IOS systems, etc.) embedded in these products. The value added captured by Apple is a missing export of the US. In 2015, the value added gained by Apple in the Chinese market was estimated at $19.2 billion, much larger than any other single item (soybeans, airplanes, etc.) listed in trade statistics. Apple products should be the single largest item the US exported to China. If the value added were considered as a US export to China, its exports to China would rise by a significant percentage and the corresponding fall in the deficit would also have been reflected.
 

This interesting scenario is common to all countries involved or may involve future in GVC, especially one like India, which has a large customer base. In value chains, Chinese firms’ relations with lead firms are asymmetric. This arrangement frees Chinese firms of the risks associated with R&D, brand development, and marketing. But, when lead firms decide to search for alternative suppliers, Chinese firms face the danger of being cut off from GVCs. The US-China trade confrontation clearly demonstrated the vulnerability of GVC strategy. The trade war was cutting off the linkage of Chinese contract manufacturers with existing GVCs, and may damage China’s export capacity in the long run.

Surjith Karthikeyan is an Indian Economic Service (2010) Officer
 

The views expressed are personal