GLOBAL VALUE CHAIN DEVELOPMENT REPORT 2019 TECHNOLOGICAL . - Global Trade

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G L O B A L VA L U E C H A I N D E V E L O P M E N T R E P O R T 2 0 19TECHNOLOGICALINNOVATION, SUPPLYCHAIN TR ADE, ANDWORKERS IN AGLOBALIZED WORLD

2019 World Trade OrganizationWorld Trade OrganizationCentre William RappardRue de Lausanne 1541211 Geneva 2SwitzerlandTelephone: 41 (0)22 739 51 11Internet: www.wto.orgThis work is a product of the World Trade Organization, the Institute of Developing Economies (IDE-JETRO), the Organisation for EconomicCo-operation and Development, the Research Center of Global Value Chains headquartered at the University of International Business andEconomics (RCGVC-UIBE), the World Bank Group, and the China Development Research Foundation. It is based on joint research effortsto better understand the ongoing development and evolution of global value chains and their implications for economic development. Thefindings, interpretations, and conclusions expressed in this work are those of the authors and do not necessarily reflect the views of theco-publishing partners, their Boards of Executive Directors, or the governments they represent.The co-publishing partners do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and otherinformation shown on any map in this work do not imply any judgment on the part of the co-publishing partners concerning the legal status ofany territory or the endorsement or acceptance of such boundaries.Rights and PermissionsThe material in this work is subject to copyright. Because the co-publishing partners encourage dissemination of their knowledge, this workmay be reproduced, in whole or in part, for non-commercial purposes as long as full attribution to this work is given.Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818H Street NW, Washington, DC 20433, USA; fax: 202–522–2625; e-mail: pubrights@worldbank.org.WTO print ISBN 978-92-870-4967-4WTO web ISBN 978-92-870-4968-1This publication uses US spelling. All mentions of dollars refer to US dollars, unless otherwise indicated. The term “billion” refers to a thousand million.The Research Center of Global Value Chains acknowledges the financial support from the Bill & Melinda Gates Foundation.

iiiContentsForeword by Michael Spence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vCo-publishing partners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viContributors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiAcknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiiAbbreviations and acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ixKey messages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xExecutive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1David DollarChapter 1Recent patterns of global production and GVC participation. . . . . . . . . . . . . . . . . . 9Chapter 2Trade, value chains and labor markets in advanced economies . . . . . . . . . . . . . . . . 45Chapter 3Global value chains and employment in developing economies. . . . . . . . . . . . . . . . 63Chapter 4Technological progress, diffusion, and opportunities for developing countries:Lessons from China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83Xin Li (Beijing Normal University), Bo Meng (IDE-JETRO), and Zhi Wang (RCGVC-UIBE)Marc Bacchetta (WTO) and Victor Stolzenburg (WTO)Claire H. Hollweg (World Bank Group)Satoshi Inomata (IDE-JETRO) and Daria Taglioni (World Bank Group)Chapter 5Understanding Supply Chain 4.0 and its potential impact on global value chains . . . . . . 103Michael J. Ferrantino (World Bank Group) and Emine Elcin Koten (World Bank Group)

iv Technological innovation, supply chain trade, and workers in a globalized worldChapter 6The digital economy, GVCs and SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121Chapter 7Should high domestic value added in exports be an objective of policy?. . . . . . . . . . . 141Chapter 8Improving the accounting frameworks for analyses of global value chains . . . . . . . . . . 155Appendix 1Chapter Authors’ Conference: Final programme . . . . . . . . . . . . . . . . . . . . . . . 179Appendix 2Technological Innovation, Supply Chain Trade, and Workers in a Globalized World: GlobalValue Chain Development Report 2019 Background Paper Conference. . . . . . . . . . . . 181Emmanuelle Ganne (WTO) and Kathryn Lundquist (WTO)David Dollar (Brookings Institution), Bilal Khan (RCGVC-UIBE), and Jiansuo Pei (SITE-UIBE)Nadim Ahmad (OECD)

vForewordThere are different ways to analyze the global economy.One is to view it through the lens of growth and structural change in individual economies, developed anddeveloping. A second is to use the lens of global valuechains (GVCs), the complex network structure of flows of goods,services, capital and technology across national borders. Both areuseful and they are complementary to one another.The 2019 edition of the GVC Development Report is enormously valuable, in part because it captures the underlying technological and economic forces that are transforming the patternsof global interconnectedness.The report notes that there are two megatrends in process.One is the growth of developing countries, the expansion of themiddle classes in them, and the shift in the share of global purchasing power toward the developing economies. By itself this wouldproduce major shifts in the characteristics of GVCs. Regional traderises as a share, especially in Asia. More production now goes torapidly growing domestic markets in developing countries insteadof being exported outside the region. Trade is shifting from astark version of comparative advantage based on differential laborcosts and labor arbitrage, toward something that more closelyresembles the intra-industry model of trade among developedeconomies based on product and technological differentiation. Ofcourse, that process is far from complete, and there remain early-stage, and relatively low-income developing countries for whichthe growth models will continue to depend on accessing globaldemand via labor-intensive, process-oriented manufacturing.The second megatrend is the digitization of the underpinningsof entire economies and, by implication, GVCs and the globaleconomy. This too is a process that is underway and one that hasmuch further to go. It is difficult if not impossible to accurately predict the endpoint, if there is one. But there are important insightsthat the second GVC report highlights.One clear message is that as economies move to being builtin part on digital foundations, trade, GVCs and digital technologycannot be separated and dealt with as independent trends andforces.For early-stage developing countries, automation will at somepoint displace the labor-intensive technologies that underpinnedthe earlier Asian growth stories. That shift will occur differentiallyby sector, with textiles and more generally the sewing tradesbeing the least vulnerable in the short run. The message is twofold: don’t give up on the traditional growth model but move rapidly to expand internet capability and the digital underpinningsand infrastructure of the economy.The mobile-internet- and platform-centered open ecosystems,along with mobile payment systems and enabled financial services,have the potential to support inclusive growth patterns and expandthe channels, opportunities, and accessible markets for SMEs. Datafrom China’s domestic economy experience supports these trends.Exploiting the international potential of these platforms to expandtrade and access for SMEs requires investment and infrastructure indeveloping countries, but also new trade regimes that increase theopenness of the ecosystems. In other words, the potential to support growth and employment in SMEs via access to global marketson digital platforms is as yet largely unexploited.The report supports and adds to a broad range of studies thatsuggest that the combination of trade and various aspects of digitaltransformation has contributed to job and income polarization, andthat vigorous policies (by government and business) are required torestore more inclusiveness to the observed growth patterns. This isespecially true in developed economies. Key policies are those thatsupport the workforce in transitions as a growing range of tasks areautomated and jobs shift toward a mix of tasks that are complementary to the machines.In developing countries, especially those in the middle-incomecategory, while the pressures on the structure of jobs and employment are similar to developed economies, the net impact of digital technology appears to have been positive for growth and foremployment.There is an important caution in the report. The long-run goalof development is of course to increase productivity, employmentand incomes. But in the context of GVCs, attempts to artificiallyincrease the domestic value-added content of exports, aheadof the technological deepening of the economy, are likely to becounterproductive.At a more macro level, while trade continues to grow, especiallyin services (where there remain challenging measurement problems) the declines in trade relative to global GDP and the risingshare of intraregional trade are understood to be largely the naturalconsequences of economic development and the early stages ofthe digital transformation of economies, and not mainly the resultof trade frictions and resistance to globalization engendered bythe adverse distributional features of growth patterns.The second GVC report is carefully researched and deep ininsights. It does an admirable job of capturing the complexity ofa global economy in rapid transition, and especially of bringinginto focus the major forces and trends and their impacts.Michael SpenceNobel Laureate in Economics

vi Technological innovation, supply chain trade, and workers in a globalized worldCo-publishing partnersThis work has been co-published by the World TradeOrganization, the Institute of Developing Economies(IDE-JETRO), the Organisation for Economic Co-operation and Development, the Research Center of GlobalValue Chains headquartered at the University of InternationalBusiness and Economics (RCGVC-UIBE), the World Bank Group,and the China Development Research Foundation.The World Trade Organization (WTO) is an internationalorganization that deals with the global rules of trade betweennations. The WTO administers agreements, negotiated andsigned by its members, which provide the legal ground rules forinternational commerce. Their purpose is to help trade flow asfreely as possible for the economic development and the welfareof its members’ citizens. The WTO is serviced by a secretariatwhich provides expert, impartial and independent support tomember governments, including research, analysis and statisticalinformation related to the role and developments of trade in theglobal economy.IDE-JETRO is a government-affiliated research institute thatconducts basic and comprehensive research on economics,politics, and social issues in developing countries. Through itsresearch, IDE-JETRO contributes knowledge of developingeconomies and better understanding of the regions to the government and public.The Organisation for Economic Co-operation and Development (OECD) is an international and inter-governmentalorganization comprising the world’s main industrialized marketeconomies whose mission is to promote policies that will improvethe economic and social well-being of people around the world:“Better Policies for Better Lives”. The OECD does this by providing a forum for governments to share experiences and by seeking solutions to common problems.The Research Center of Global Value Chains (RCGVC) is aglobal academic think tank headquartered at the University ofInternational Business and Economics, focusing on basic andinterdisciplinary research activities on the development of globalvalue chains (GVCs) and its implication on global economies.The World Bank is an international development institutionestablished by Articles of Agreement adopted by its membercountries. The World Bank’s overarching mission is to reducepoverty, improve living conditions, and promote sustainable andcomprehensive development in its developing member countries. It has established two ambitious goals to anchor its mission: end extreme poverty within a generation and boost sharedprosperity. The World Bank will achieve these goals by providingloans, concessional financing, technical assistance, and knowledge sharing services to its developing member countries andthrough partnerships with other organizations.The China Development Research Foundation (CDRF) is apublic foundation initiated by the Development Research Centerof the State Council (DRC). Its mission is to advance good governance and public policy to promote economic development andsocial progress.

viiContributorsCo-editorsDavid DollarSenior Fellow, China Center, Brookings InstitutionEmmanuelle GanneSenior Analyst, World Trade OrganizationVictor StolzenburgResearch Economist, World Trade OrganizationClaire H. HollwegSenior Economist, World Bank GroupSatoshi InomataChief Senior Researcher, Institute of Developing Economies –Japan External Trade OrganizationBilal M. KhanAssistant Professor, Research Center for Global Value Chains,University of International Business and EconomicsZhi WangProfessor and Director, Research Center for Global Value Chains,University of International Business and Economics (RCGVCUIBE); Research Faculty and Senior Policy Fellow, Schar Schoolof Policy and Government, George Mason UniversityEmine Elcin KotenConsultant, World Bank GroupOther contributorsKathryn LundquistStatistician, World Trade OrganizationNadim AhmadHead of Trade and Competitiveness Statistics Division,Organisation for Economic Co-operation and DevelopmentMarc BacchettaCounsellor, World Trade OrganizationMichael J. FerrantinoLead Economist for Trade Policy, World Bank GroupXin LiProfessor, School of Statistics, Beijing Normal UniversityBo MengSenior Overseas Research Fellow (New York), Institute ofDeveloping Economies - Japan External Trade OrganizationJiansuo PeiAssociate Professor, School of International Trade andEconomics, University of International Business and EconomicsDaria TaglioniSenior Economist, World Bank Group

viii Technological innovation, supply chain trade, and workers in a globalized worldAcknowledgmentsThe Global Value Chains Development Report is a jointpublication of the World Trade Organization (WTO),the Institute of Developing Economies (IDE–JETRO),the Organisation for Economic Co-operation andDevelopment (OECD), the Research Center of Global ValueChains (RCGVC-UIBE), the World Bank Group, and the ChinaDevelopment Research Foundation, based on joint researchefforts to better understand the ongoing development and evolution of global value chains and their implications for economicdevelopment.This second report draws contributions from 23 backgroundpapers; 16 of them were presented and discussed at the conference “Technological Innovation, Supply Chain Trade, and Workers in a Globalized World” in Beijing during March 22–23, 2018,organized by the RCGVC and the China Development ResearchFoundation. Drafts of the eight chapters of the report were presented and discussed at the second Authors’ Conference inGeneva on October 8, 2018, organized by the WTO. The editorsthank the authors of background papers and individual chapters and the discussants and participants in the two conferencesfor insightful comments and suggestions that helped draft andimprove the chapters (see appendices 1 and 2 for the programs).Special thanks go to our external reviewers: Jonathan Eaton(Penn State University), Gary Hufbauer (Peterson Institute forInternational Economics), Alonso de Gortari (Princeton and Dartmouth), Kalina Manova (University College London), Maurice DKugler (George Mason University), Marcel Timmer (the Universityof Groningen), and Felix Tintelnot (University of Chicago). Theeditors are grateful to Michael Spence for his keynote speechat the background paper conference in Beijing and his invaluable expertise and advice on the overall narrative of the report.The editors also thank Robert Koopman, chief economist of theWorld Trade Organization and Caroline Freund, director of theWorld Bank Group’s Trade, Regional Integration and InvestmentClimate, for their guidance and support during the joint researchprocess as well as research and data contributions from the AsianDevelopment Bank.The editors are grateful to William Shaw, who copy-edited thereport, and to Anthony Martin, Head of WTO Publications, andHelen Swain, WTO Publications Editor, who were responsible forthe production of the report.The RCGVC would like to acknowledge the financial supportfrom the Bill & Melinda Gates Foundation and National ScienceFoundation of China (grant No. G0304-71733002).The report’s co-editors are David Dollar, Emmanuelle Ganne,Victor Stolzenburg and Zhi Wang.

ixAbbreviations and Asian Development Bankartificial intelligenceAssociation of Southeast Asian na Development Research FoundationChief Executive Officerost, insurance and freightcustomer-managed inventoryDevelopment Research Center of the StateCouncildomestic value-addeddomestic value-added ratioelectronic control unitelectronic data interchangeextended supply-use tableforeign affiliates statisticsforeign direct investmentfree-on-boardforeign trade zonegross domestic productglobal manufacturingglobal system for mobile communicationGlobal Trade Helpdeskglobal value chainhigh-income countryinter-country input-outputinformation and communication technologyInter-American Development WTOInstitute of Developing EconomiesInternational Monetary FundInternet of Thingsintellectual property rightsInternational Trade CentreWorld Bank’s Labor Content of Exportsleast-developed countrylow/medium-income countrymost-favored nationmultinational enterpriseOrganisation for Economic Co-operationand Developmentresearch and developmentResearch Center of Global Value Chainsradio frequency identificationsmall and medium-sized enterpriseSystem of National Accountsscience, technology, engineering, andmathematicssupply and use tabletotal factor productivitytrade in value-addedUniversity of International Business and EconomicsUnited Nations Conference on Tradeand Developmentvendor-managed inventoryWorld BankWorld Input-Output TablesWorld Trade Organization

x Technological innovation, supply chain trade, and workers in a globalized worldKey messages The growth of global value chains has slowed since the GlobalFinancial Crisis of 2008-09 but not stopped. In fact, complexglobal value chains (GVCs) grew faster than GDP in 2017. Factoring in GVCs when studying the impact of trade onlabor markets reveals that trade has not been a significantcontributor to declines in manufacturing jobs in advancedeconomies, and that job gains in services have offset joblosses in manufacturing. The emergence of GVCs has offered developing countriesopportunities to integrate into the global economy by delivering jobs and higher income. The impacts of technological change and increased productivity on employment linked to GVCs have been offset bygrowing consumer demand, and in the short term, automation will not dramatically reduce the attractiveness of lowwage destinations, especially for labor-intensive tasks thatrequire human dexterity. The impact of new digital technologies on GVCs is uncertain:they may reduce the length of supply chains by encouraging the re-shoring of manufacturing production, thus reducingopportunities for developing countries to participate in GVCs,or they may strengthen GVCs by reducing coordination andmatching costs between buyers and suppliers.Despite the aggregate gains they create, trade, automationand digital technologies can cause disruption and widen existing disparities across regions and individuals. This calls forbroad and comprehensive adjustment policies.While small and medium-sized enterprises (SMEs) areunder-represented in GVCs, the digital economy provides newopportunities for SMEs to play a more active role.Open and transparent policies tend to promote GVC-ledgrowth more than import-reducing policies targeted at raisingthe share of domestic value-added in exports.Using value-added trade rather than gross trade statisticsis crucial to understanding GVCs and their impact on jobs.Efforts to continue to improve the quality of these estimatesare strongly encouraged.

Executive summaryDAVID DOLLARMore than two-thirds of world trade occurs throughglobal value chains (GVCs), in which productioncrosses at least one border, and typically manyborders, before final assembly. The phenomenalgrowth in GVC-related trade has translated into significant economic growth in many countries across the globe over the lasttwo decades, fueled by reductions in transportation and communication costs and declining trade barriers. But, at the sametime, it has contributed to distributional effects that mean thatthe benefits of trade have not always accrued to all, which has, atleast in part, been a driver in the backlash against globalizationand the rise of protectionism and threats to global and regionaltrade agreements. In addition, new technological developmentssuch as robotics, big data, and the Internet of Things (IoT) arebeginning to reshape and further transform GVCs. This secondGVC development report takes stock of the recent evolution ofGVC trade in light of these developments.Update on trends in GVCsThe growth of global value chains has slowed since the globalfinancial crisis. A country’s GDP (value added) can be decomposed into purely domestic, traditional trade, in which a productis made in one country and consumed in another, simple valuechain trade, in which a good made in one country crosses oneborder and is used in production in the partner country beforeconsumption there, and complex value chain trade, in whichproduction crosses multiple borders. From 2000-2007, GVCs,especially complex ones, were expanding at a faster rate thanother components of GDP. During the global financial crisis therewas naturally some retrenchment of GVCs, followed by quickrecovery (2010-2011) but since then, with the exception of 2017,growth has, in the main, slowed. In 2017 expansion of complexGVCs was faster than GDP growth, but it is too early to say if thisis a new trend or just a one-year blip.Concerning which sectors are particularly amenable toGVCs, over a long period we found that, the higher the technology (knowledge) intensity of a sector, the more significant theincrease of complex GVC activities. Thus, GVC linkages are especially important for high-tech sectors and it is in these areas thatwe see highly complex value chains involving many countries.We also distinguish between intra-regional GVC activities andinter-regional ones. Activities within North American economieswould be an example of the former, whereas China’s growingcontribution to value chains centered on the U.S. or Germanywould be examples of the latter. Between 2000 and 2017, theweight of intra-regional GVC activities in “Factory Asia” came toexceed that of “Factory North America”. In contrast, the share ofintra-regional GVC activities declined relatively in both Europeand North America and their share of inter-regional productionsharing activities increased, especially their GVC linkages with“Factory Asia”, reflecting in large part increased inter-connectedness with China. China is increasingly playing an importantrole as both a supply and demand hub in traditional trade andsimple GVC networks, although the U.S. and Germany are stillthe most important hubs in complex GVC networks.GVC analysis also provides some insight into bilateral tradebalances and how they should be interpreted. In a world in whichmost trade consists of parts and components, bilateral trade1

2 Technological innovation, supply chain trade, and workers in a globalized worldbalances are significantly affected by the supply and demand ofthird countries; and, net imports are no longer a proper measureof the impact of an international trade shock on the domesticeconomy in the age of GVCs, compared to the time when finalgoods trade dominated. China happens to be at the end ofmany Asian value chains, taking sophisticated components fromJapan, the Republic of Korea, and Chinese Taipei and assemblingthese into final products. Two-thirds of all intermediate importsof information and communication technology (ICT) products,coming from other countries in Factory Asia, but also with significant contributions from Europe and North America, are used asinputs into Chinese exports. Indeed, the Chinese domestic valuecontent of their exports of ICT products accounts for only aroundhalf of the total export value. As such, trade balances look verydifferent in value-added terms. For example, the U.S. trade deficit in ICT products with China is roughly cut in half if the calculation is made in value added terms.Labor market effects of GVCs in developedcountriesOne of the main controversies of globalization is its effect onlabor markets in both developed and developing economies.Across advanced economies, the real median wage has grownslowly over the past two decades and manufacturing employment has been on the decline, while incomes of highly skilledworkers and owners of capital have soared. There are of coursemany factors at work here, and not all are related to globalization, especially countries’ own domestic tax and transfer policies,but one additional factor has been big developing countries,especially China and Eastern European economies, opening upand joining the global economy.A number of studies have concluded that, in particular, theimpact of Chinese import competition on the U.S. labor market,especially after China joined the WTO, was a significant factorbehind U.S. manufacturing employment dropping sharply after2000. But these analyses have typically only provided a partialview of the overall impact on employment, by and large ignoringthe reality of value chains. A full view requires that we account forthe fact that the development of value chains results in churningacross economies, as firms and countries specialize and createcertain types of jobs while eliminating others. General equilibrium analyses of the so-called “China shock” that take accountof GVCs find that, for the U.S., trade was not a main contributor to the loss of manufacturing jobs and has only minor aggregate employment effects. One important reason for this morenuanced effect is that while some industries contracted becauseof increased competition, others expanded thanks to the costsavings that GVC linkages provided, counterbalancing jobs lostin contracting industries. This is consistent with economic theory,which suggests that trade should not have a large net effect onemployment.That being said, the effects vary considerably across regionsand individuals with different skill levels. Moving from thenationwide and sectoral level to regional and individual outcomesreveals substantial heterogeneity in how aggregate effects mapout. For instance, when local labor markets within countries arenot sufficiently diversified, trade can widen regional disparities.Regions specialized in import-competing and upstream industriescan fall behind, while areas with industries that export or benefitfrom cost savings due to cheaper imported inputs pull away.Similarly, trade may work in the same direction as other driversin contributing to labor market polarization. In particular, automation has impacted jobs in the middle of the skills distribution, withremaining jobs concentrated at the high and low ends. Between1999 and 2007, the years when China was reducing barriers andentering the WTO, nearly all advanced economies had increasesin employment shares for high- and low-skilled jobs, and declinesfor middle-skill work (see Figure 1).While trade and automation are making a country as a wholericher, there is a need for adjustment policies to ensure a moreeven distribution of these gains. This is especially the case asvalue chains magnify trade-induced changes in skill requirementsand thereby raise the demand for worker flexibility and the needfor training support. With regard to the optimal design of suchpolicies, value chains make targeted or specific labor marketinterventions increasingly difficult. As input-output linkagescause trade shocks to spread more widely within economies,import competition is less and less limited in terms of industries,regions, or skill levels. As a result, it can become more difficult toidentify the exact reason for individual displac

ing solutions to common problems. The Research Center of Global Value Chains (RCGVC) is a global academic think tank headquartered at the University of International Business and Economics, focusing on basic and interdisciplinary research activities on the development of global value chains (GVCs) and its implication on global economies.

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