Many economists have argued that the international fragmentation of production should bring significant benefits to developing countries. When production of a good is split globally, tasks within the supply chain are dispersed across countries based (in part) on comparative advantage. This should promote trade between industrial and developing countries, since comparative advantage differs more between these groups than between industrial countries. The gains from trade should expand for all countries, since tasks within the production process are allocated more efficiently. For developing countries, the scope of production should also expand to include relatively high tech- or high skill-intensive products, since they can specialize in specific tasks within the production chain.
But have developing countries received some of the economic benefits from global supply chains? Value-added (VA) trade data cannot directly answer this question, because it does not measure the gains from trade (gains from specialization, exchange, variety, etc.). But VA trade data can help us answer related questions that are crucial for understanding how much developing countries benefit.
Are developing countries actually participating in these global supply chains? One indicator might be rapid growth in parts and components as a share of total trade. A few studies have found evidence of this for East Asia and for China, in particular.2 Another indicator might be the foreign content in a country’s exports. If countries are specialized in the beginning or the end of a supply chain, their exports are likely to have very low or very high foreign content, respectively. In the Chinese case, data suggest that foreign content accounted for 25-46% of the value of exports in 2002. China imported many intermediates goods from Japan and the Four Tigers, added value, and then exported the finished or semi-finished goods on predominantly to the United States and Europe.3
But how do we measure participation across many countries and many goods? Detailed VA trade data could identify specific product (or industry) supply chains, which countries are participating, and at what stage they operate in the process. The structure of different industry chains could be traced more clearly, from the innovation stages of a product to its completion. This would allow a clearer view of the interdependence between specific industrial and developing countries.
Tracking movement “up the chain”
Do developing country firms “move up” the chain to more complex tasks over time? Comparative advantage helps explain the allocation of tasks across countries at a point in time. In 2002, the foreign content of Chinese IT-related exports was very high, while that of textile exports was very low. This suggests that China was specializing only in tasks at the end of the IT-related supply chains, while engaging in many more tasks locally in the relatively labor-intensive textile chains.4 Property rights and quality control may also be important. In relatively R&D-intensive industries — where contract enforcement and ability to meet product specification requirements may matter more — Chinese supply chain exports had relatively higher foreign content, and were more likely to expand if production could be done via a foreign affiliate.5 We also might expect positive spillovers to be important. Interaction with other firms in supply chains may give developing country firms access to better technological knowhow, management skills, etc.
VA trade data at the country-industry level over time could help reveal the position of developing countries within many global chains, and movement by developing countries to higher value activities within these chains. With these data, we could also test for the role of increased human and physical capital, property rights improvements and spillovers in explaining the position of developing countries in a chain at a point in time, and over time.
Promoting more market access
Will developing countries see more open markets due to supply chain trade? The experience of China at first does not look promising. During the past decade, international controversy and protectionist sentiment arose due to the perception that China was suddenly competing directly with industrial countries in high-tech, sophisticated exports. But a closer look suggested that this “sophistication” was likely due to participation in global supply chains. In general, Chinese and OECD exports differed dramatically across destinations. Where they were similar, Chinese exports had high foreign content — suggesting that much of their value originated in the OECD.6
With detailed VA trade data by sector, one could trace the sources of intermediates and semi-finished goods that make up part of developing country exports. This would reveal to what extent industrial countries are re-importing their own value-added, in the form of finished goods from developing countries in the same supply chains. By shedding light on this interdependence between industrial and developing countries within chains, VA trade data might encourage more open trade policy and more effort towards trade facilitation.
Does participation in global chains encourage more sustainable production in developing countries? Evidence shows that internationally fragmented industries tend to be relatively clean, relatively high-tech industries. Thus, participation in these chains means shifting some resources out of relatively dirtier traditional industries into cleaner production. Chinese exports have been shifting over time toward highly fragmented sectors (office and computing machinery and communications equipment) and away from traditional exports that are less fragmented. The amount of Chinese involvement in this fragmented trade appears to have played a key role in reducing the pollution intensity of Chinese exports over time. Rising foreign investment has also contributed to cleaner exports—potentially through expanding the range of tasks in the chain done locally, and using greener technologies.7
But how do we measure the actual range of tasks done in a developing country, and track how that range expands? VA trade data could begin to fill this gap, by more clearly showing the foreign content of imported intermediates and the value-added in a developing country’s exports within an industry or a product. Tracing this over time would provide a better proxy of changes in the range of tasks undertaken locally, and allow a more direct assessment of the average pollution intensity of those tasks.
Developing countries have the potential for large benefits from the international fragmentation of production. VA trade data can increase our ability to measure how much developing countries are participating in global chains, what tasks they undertake, and how those tasks change over time. By tracing out the changing trade patterns between industrial and developing countries, and underscoring the interdependence of firms, they can also help promote more open markets and better trade facilitation. Finally, by providing better measures of the range of activities carried out in specific countries, they can help in testing the potential environmental benefits of supply chain trade.
1. A fuller discussion can be found in A. Mattoo, Z. Wang, and S. Wei, eds., The Fragmentation of Global Production and Trade in Value-Added, forthcoming.Back to text
2. Premachandra Athukorala and Nobuaki Yamashita, “Production Fragmentation and Trade Integration: East Asia in a Global Context,” North American Journal of Economics and Finance, 17:233-56, 2006. Back to text
3. Judith M. Dean, K. C. Fung, and Zhi Wang. “Measuring Vertical Specialization: the Case of China,” Review of International Economics, 19:609-25, 2011; Robert Koopman, Zhi Wang, and Shang-Jin Wei, “Estimating Domestic Content in Exports When Processing Trade is Pervasive,” Journal of Development Economics, forthcoming.Back to text
4. Ibid.Back to text
5. Judith M. Dean and K. C. Fung. “Explaining China’s Position in the Global Supply Chain,” prepared for the Joint Symposium on U.S.-China Advanced Technology Trade and Industrial Development October 23-24, 2009, Tsinghua University (manuscript), 2009.Back to text
6. Dean, Fung, and Wang, 2011.Back to text
7. Judith M.Dean and Mary E. Lovely, “Trade Growth, Production Fragmentation, and China’s Environment,” in R. Feenstra and S. Wei, eds., China’s Growing Role in World Trade (Chicago: NBER and University of Chicago Press), 2011.Back to text