Services And GVCs - Asia-Pacific Economic Cooperation

2014/SOM2/CTI/DIA3/014Services and GVCsSubmitted by: ICTSDPublic-Private Dialogue on BuildingAsia Pacific Partnership Through GlobalValue Chains CollaborationQingdao, China12 May 2014

13/5/2014ServicesNetworkAPEC Public Private Dialogueon building Asia Pacificpartnership through GlobalValue Chains CollaborationQingdao, 12 May 2014Dr. Sherry StephensonPECC Services Expert;ICTSD Senior Fellowsstephenson@ictsd.chNew Structure of World TradeThe new structure of World Trade : Moving toward more trade inintermediates than final products Comparative advantage determined by“tasks” rather than by final products Services allow for this productionfragmentation to take placeServices play a key role in comparativeadvantage and explaining trade patterns1

13/5/2014Commercial Services are Fastest Growing Component ofWorld Trade and underpin Production Fragmentation &Intermediate Trade Other CommercialServices (i.e.business supportservices) are thefastest growingcomponent of worldtrade – much fasterthan GoodsSources: UN Comtrade Database andWTO estimatesServices’ share in World Exports is higher thanunderstood on a value-added basis - 45%WTO-OECD Value-Added Database Structure of World Exports (2008)Value Added Terms Services embodied in thetrade of primary and manufactured products2

13/5/2014Drivers of Global Value Chains The reduction oftransportation costs, IT and telecommunicationsimprovements, Technological innovation, Human capital availability, Competitive labor costs, Proximity to supply sourcesor to final markets becauseshort lead times orcustomization required bycostumersMany of thesefactors haveto do withSERVICESDomestic value-added content has fallen asproduction continues to fragment on a global basis19952005Major trade flows were between the EU(27), NorthAmerica and Japan.Trade showed a high domestic content inexports, over 90% for North America and Japan,and over 85% for China.A much higher degree of fragmentation in worldproduction, with significant flows between China andall other major regions, and the emergence of aproduction hub in Asia.The domestic value-added content of Chineseexports has fallen to around 70% (so 30% isconstituted by imported components / services)Production and Trade patterns havefollowed FDI flows to create supply chains3

13/5/2014FDI Flows in Services driving GVCsServices weight in Trade (in gross and valueadded terms) and Inward FDI Stock (2010)GVCs makeextensive useof services SERVICES Playing a key rolein GVCs, which isshown whenmeasuring trade invalue-added terms Services accountby far for themajority ofInvestment FDIstockSource: UNCTAD-Eora GVC Database, UNCTAD FDI Database.Source: www.oecd.org/trade/valueadded4

13/5/2014Source: www.oecd.org/trade/valueaddedTaking part in Supply Chains is not justfor developed economiesEvolution of the developing economy share inGlobal Value Added Trade20%(1990)30%(2000)40%(Today)Source: UNCTAD (2013). “Global Value Chains and Development. Investment and Value Added Trade in the GlobalEconomy”. Available at: 1 en.pdf5

13/5/2014Positive Correlation between Growth inGVC participation and GDP per capita Economies with the fastestgrowing GVC participationhave GDP per capita growthrates some 2% above theaverage economies that increasedtheir participation in GVCsand their domestic valueadded in exportsexperienced GDP per capitagrowth of 3.4%, comparedto 2.2% for economies thatonly increased theirparticipation in GVCswithout “upgrading”SERVICESAdd valueSERVICES are what adds mostValue to OutputA particularity of SERVICES They are not as visible asintermediate goods but they are alsoembodied along production addinghigh valueSource: Business Week Online Extra, May16, 20056

13/5/2014Embodied Services in the iPodMore than 50% ofthe iPod’s valuehas nothing to dowith merchandisecomponents andall to do withservices activitiesinvolved inconception,design, softwaredevelopment2. Many off-shored services gointo Value ChainsFirms have many options now forOutsourcing & Off-shoring Services Possibilities arevast and willdepend on eachparticular businessstrategy, coststructure andattractiveness ofoutsourcingoptionsOffshoring ServicesSource: Sako, Mari. (2005). Outsourcing and Offshoring: Key Trends and Issues. Paper presented at the Emerging Markets Forum.7

13/5/2014Case Study: Services used bySandvik Tooling Sandvik Tooling, a hightechnology goodsmanufacturer, needs 40different services to deliverproducts globally The company supplies 15services themselves SERVIFICATION Goodproducing companiesincreasingly buy, produce,sell and export servicesSource: “Global Value Chains and Services”.Kommerskollegium 2013:1. National Board of Trade.Available ainsand-services-an-introduction.pdfOffshore Services going intoValue ChainsHorizontalActivities: BPO ITO KPOVerticalActivities:IndustrySpecificSource: Gary Gereffi (2010).Center on Globalization,Governance &Competitiveness at DukeUniversity8

13/5/2014Upgrading along OffshoreServices Value Chains Policies first focus on ENTERING GVCs throughcapturing off-shoring services activities; thenfocus on UPGRADING in next phase whileupgradingDifferent education levels, revenue and salary per employeefor a types of services off-shoring activitiesSource: Fernández-Stark, K., P. Bamber y G. Gereffi (2011). “The Offshore Services Global Value Chain. Economic Upgrading and Workforce Development”.Center on Globalization, Governance & Competitiveness. Duke University. (2011). P. 12.Supply and Demand Centers for OffshoreServices: many APEC economiesAPEC Good potential for offshoring services9

13/5/2014The AT Kearney GlobalServices Location Index 2011 8 of the top 10locations forservices offshoring are ietnam-Philippines-ChileSource: The AT KearneyGlobal Services LocationIndex 2011Services have a doublerole in Supply Chains1. They are enablers of GVCs,acting as the glue among thedifferent productionssegments: many off-shoredservices go into GVCs2. They constitute Services ValueChains on their own10

13/5/20143. Services constitute ValueChains on their ownBanking &FinancialServicesValue ChainSource: Fernández-Stark, K; P. Bamber yGary Gereffi (2011). “The OffshoreServices Global Value Chain. EconomicUpgrading and WorkforceDevelopment”. Duke University, Centeron Globalization, Governance andCompetitiveness.Tourism Value Chain11

13/5/2014Policy Lesson 1: Services and ValueChains: Barriers no longer Protect With trade in intermediates and services –the cost ofprotectionism is magnified and higher than is generallyunderstood since goods and services cross borders severaltimes during GVC operations. It is therefore critical to maintain open markets for crossborder trade in goods and services & FDI. In a world of Global Value Chains, tariffs & servicesrestrictions punish domestic producers who use imported“inputs” because those inputs are re-exported.With GVCs “Trade Barriers no longer Protect”The world effectively becomes the market!!Policy Lesson 2. Supply chains shift Focusfrom Tariffs to Logistics where Services are Key The operation of supply chains in goodsshifts focus on trade barriers from tariffs tologistics: recent WEF-World Bank reportshowed that improving logistics halfway to worldbest practice (Singapore) could increase worldGDP 6 times more than removing tariffs Among the logistics barriers, efficientservices play a key role, especiallytelecoms and transport12

13/5/2014Policy Lesson 3. It is easier to capturea Services ‘Task’ in a Supply Chain It is no longer necessary to “build” an entire supply chain athome; economies can capture one ‘task’ of the supplychainOften easier to do in services than goods – Why Because services require less capital intensiveinvestments: the greatest investment is in human capital Services are also suited to output on smaller economies ofscale and especially to SME operationsTo capture services tasks in a supply chain, it isessential to focus on services efficiency &competitivenessPolicy Lesson 4. Government policies cando a lot for services efficiency & to promoteparticipation in Value ChainsFactors affecting COMPETITIVENESS IN SERVICES:1) Human Capital (talent, education, skills, ideas)2) Cost considerations (financial attractiveness)3) Enabling Digital Infrastructure – efficient telecoms4) Investment in Intangible Assets (copyright, businessmethods, brands)5) Quality of Institutions and Policy Focus6) Open trade and investment framework7) Efficiency of Domestic Regulation13

13/5/2014Policy Lesson 5: Gains from Participating inValue Chains can be Widespread Joining a value chains is not a zero sum game ;many economies can provide services off-shoringtasks as these are highly differentiated All economies and economic activities can benefit;possibilities are vast if the fundamentals in place There is still a huge potential for expansion ofservices trade within APEC which could alsoreinforce its position in supply chainsThis argues for a great focus on SERVICESwithin APEC at level of the SOMServices in APEC not asimportant as they could beDespite prominence of GVCs in APEC,services still underperform1. Trade in services (as measured)remains low2. Many behind the border barriersaffect trade in services3. Value chain operation could bemuch higher in region14

13/5/2014Services contribute significantly to GDP(67%) and Employment (52%) in APECSource: “Trade in Services in the APEC Region”. The University of Southern Carolina Marshall School of Business.September 2012. Available at: http://www.keidanren.or.jp/abac/report/20120918 USC Report.pdfService Export Growth in the past 10 years inAPEC has been mainly in only 2 sectors Growth in ServiceExports for mostservice sectors hasbeen minimumwithin APEC Travel & Transportremain mostimportant servicestradedSource: “Trade in Services in the APECRegion”. The University of SouthernCarolina Marshall School of Business.September 2012. Available at:http://www.keidanren.or.jp/abac/report/20120918 USC Report.pdf15

13/5/2014Trade in Services in APEC is low incomparison with Trade in Goods (2010)Services Exports /Services Production6%Goods Exports /Goods Production63%Consequently there is a largepotential for expansion of serviceswithinAPECSource: “Trade in Services in the APEC Region”. tradeThe University ofSouthern CarolinaMarshall School of Business. September 2012.Available at: http://www.keidanren.or.jp/abac/report/20120918 USC Report.pdfBehind-the-border Regulatory Barriersare impeding Services Exports in APEC Behind the border barriers and impediments arethe most significant obstacles for trade inservices. Domestic regulations, industry standards,professional requirements and efficiency ofgovernment agencies have larger impact thanmarket access barriers. These are still quite present in APEC region.16

13/5/2014Many Trade Impediments affect Services Sectors-While Market Access index varies across servicessectors, the other category level impediments arecomparable in importance and cover behind theborder impediments to services trade in APEC.Other Challenges: Data Availability andDepth of Services Agreements in APEC Scarcity of data on trade in services implications forpolicy making– Differences in definitions, measurement and the lack ofdetailed service trade statistics for all economies difficulty toidentify trade pattern trends / difficulty to measure theeffectiveness of policies Service provisions within FTAs lack depth– Among the APEC FTAs, 80% of service provisions focus onmarket access barriers while only 20% focus on behind theborder issues such as regulatory heterogeneity betweeneconomies.17