Recent patterns of global production and GVC participation

Taking advantage of a new accounting method to decompose GDP production into pure domestic production, traditional trade, simple and complex GVC activities, this chapter examines recent trends in global value chain (GVC) activities across the world. Our main findings show that the pace of GVC activities picked up in 2017 after a period of slow down since 2012; intra-North American and intra-European GVC activities declined relative to inter-regional transactions due to higher penetration via Factory Asia but value chains still remain largely regional; China is increasingly playing an important role as both a supply and demand hub in traditional trade and simple GVC networks, although the US and Germany are still the most important hubs in complex GVC networks; bilateral trade balances are significantly affected by the supply and demand of third countries; and net imports are no longer a proper measure of the impact of international trade on the domestic economy in the age of GVCs. • The growth of global value chains has slowed since the 2008-09 Global Financial Crisis but has not stopped. From 2000 to 2007, global value chains (GVCs), especially complex ones, expanded at a faster rate than GDP. During the global financial crisis there was naturally some retrenchment of GVCs, followed by quick recovery (2010-2011), but since then growth has mostly slowed. However, most recent data for 2017 show that complex GVCs grew faster than GDP. • Value chains remain largely regional but they are not static. Between 2000 and 2017, intra-regional GVC trade increased in “Factory Asia” reflecting, in part, upgrading by China and other Asian economies. In contrast, intra-regional GVC trade in “Factory Europe” and “Factory North America” decreased slightly relative to inter-regional GVC trade reflecting stronger linkages with “Factory Asia”. • China has emerged as an important hub in traditional trade and simple GVC networks, but the United States and Germany remain the most important hubs in complex GVC networks. 10 • Technological innovation, supply chain trade, and workers in a globalized world Global value chains, where firms specialize in a particular set of activities in one country to produce parts and components for other countries, have spread the production process across countries; their share of world production and trade has expanded greatly over the past three decades. In the years immediately after the global financial crisis, however, the expansion of GVCs significantly slowed, according to GVC production measures reported in the 2017 GVC development report. At the same time, the world has seen the emergence of populist, protectionist movements in many advanced countries. The looming trade tension between the United States and its major trading partners, especially China, the second largest economy in the world, will have significant consequences for growth opportunities in developing countries, but also, in a world of high levels of interdependence, developed economies. The first chapter of this report updates trends in GVC production and trade activities in both developed and developing economies by technology (knowledge) intensity and income level, according to the production decomposition method proposed by Wang et al (2017). This approach classifies the embodied factor content in a product into GVC and non-GVC activities based on whether it crosses national borders or not. Value-added creation is only classified as a GVC activity when the embodied factor content in a product crosses a national border for production purposes (Box 1.1). The chapter is organized as follows. Section 1 describes the changing pattern of global production activities and GVC participation across countries and industries based on global inter-country input-output (ICIO) tables constructed by Asian Development Bank, which covers 62 economies and 35 industries up to 2017. Section 2 demonstrates the changing distribution of value-added production activities along typical global value chains, as more developing countries have been integrated into the global production network. Section 3 uses network analysis to demonstrate the topology of the global production network structure of traditional trade, simple and complex GVC activities, and their evolution between 2000 and 2017. Section 4 analyzes the multilateral nature of bilateral trade and focuses on three sensitive bilateral trade relations (US-China, US-Germany, US-Japan) to demonstrate the roles third countries have played in determining bilateral trade balances in the age of global value chains. Section 5 concludes. BOX 1.1 A production decomposition to identify and measure GVC activities In Wang et. al. (2017), production activities are divided into 4 broad types depending on whether they involve production sharing between two or more countries. The first type is value added produced at home and absorbed by domestic final demand without involving international trade. No factor content crosses national borders in the entire production and consumption process. The second type is domestic value added embodied in final product exports, that is, traditional trade: products are made completely by domestic factors and factor content crosses a national border once for consumption only. The third type is domestic value added embodied in a country-sector’s intermediate trade that is used by the partner country to produce its domestic products consumed locally, or is foreign value added that is imported directly from partner countries and used for domestically consumed products. Factor content is used in production outside the home country and crosses a national border once for production. Therefore, it is referred to as “simple GVC activities”. The last type is value added embodied in intermediate exports/imports that is used by a partner country to produce exports (intermediate or final) for other countries. In this case, factor content crosses a national border at least twice, so is referred to as “complex GVC activities.” Production activities in the first two types are entirely conducted within national borders, and there is no cross-country production sharing; the difference between the two is whether they satisfy either domestic or foreign final demand. The last two types are cross-country production sharing activities; the differences between the two are whether they satisfy partner country or other countries’ final demand, and the number of times factor content crosses national borders. Domestic and import input-output coefficient matrixes in ICIO tables are used to distinguish domestic and foreign factor content in various production activities. The classification and relation among the four types of production are depicted in Figure 1.1. According to this decomposition method, GVC activities as a share of total production activities can be used to measure the intensity of each country-sector’s participation in cross-country production sharing activities. Essentially, this approach measures the percentage of production in a particular country-sector that has been engaged in global production networks. The forward GVC participation indicator is based on a decomposition of GDP production; it shows the percentage of production factors employed in a country-sector that have been involved in cross-country production sharing activities. The backward participation indicator is computed based on a decomposition of final goods production; it shows the percentage of final products produced by a country-sector coming from GVC activities. Recent patterns of global production and GVC participation • 11 1. The changing pattern of global production activities and GVC participation2 GVC activities as a share of global GDP fell from 2011 to 2016, as the share of purely domestic production activities rose (see Figure 1.2, which is an update of Figure 2.3 in the 2017 GVC Development Report based on the newly released ICIO tables by the Asian Development Bank). This continues the downward trend in GVC activities shown in the 2017 GVC report based on data through 2014. However, the growth of global trade surpassed the growth of global GDP for the first time in nearly six years in 2017, and there were signs of a recovery of GVC activities. The nominal growth rate of all types of production activities (the four activities are defined in Box 1.1) fell sharply during 2012-2016, with a much sharp slowdown in cross-country, production-sharing GVC activities. The decline was the steepest for complex GVC activities, followed by simple GVC activities, traditional trade and domestic production activities; the average annual changes for these four types of activities during 20122016 were -1.65%, -1.00%, -0.28% and 1.49% respectively (individual year data are reported in Figure 1.3, which is an update of Figure 2.5 in the 2017 GVC report). Thus, the limited increase in global GDP from 2012-2016 was almost entirely accounted by the growth of pure domestic production; international trade contributed very little during this slow recovery period. In 2017, the growth rate of global trade exceeded that of global GDP, a 10% increase in complex GVC activities led the growth. However, rising trade tensions between the United States and its major trading partners, especially China, has introduced tremendous uncertainty in the global economy recovery process. Determining whether the recovery of cross-country production sharing activities in 2017 has started a new trend requires more years of data and further analysis. A first step is to measure the impact of the recent, sharp changes in commodity prices on nominal growth rates of production activities shown above. The global prices of crude oil and other bulk commodities have gone through a “super circle” since 2000. For example, the per barrel crude oil price (dated Brent) fluctuated dramatically during 2000-2018, rising from less than 30 US dollars in 2000 to over 110 dol