Business Times

Global product sharing and the myth of the value added economy

Dr. Sirimal Abeyratne, University of Colombo

Policy makers in developing countries are well aware of the importance of international trade as the ‘engine of growth’ so that they do not talk any more about ‘import substitution’. Nevertheless, they seem to remain ‘locked-in’ in the old paradigms even if these paradigms are getting outdated in the changing world. It is quite common to emphasis backward linkages and value-added economy. These concepts seem to dominate even bilateral and multilateral trade agreements so that the agreements often carry the ‘rules of origin’ to safeguard such policy interests. They figured prominently in the import-substitution era and became increasingly irrelevant in a globalized world economy where global production shapes international organization of production and distribution. The single most important sign of global production sharing is the spatial disaggregation of production process among national borders.

Volume versus Unit Value
China and Vietnam, our erstwhile communist friends, are two countries that have clearly understood the phenomenon of global production sharing. They have begun to focus on integrating their economies into global production networks while eschewing policy emphasis on domestic value addition. It is fascinating to learn that exports from these countries started to grow faster than many other countries, in generating incomes, and creating jobs resulting in rapid poverty alleviation. The important lesson that these countries have taught is that it is not the ‘unit value’ of a product (which is essentially a ‘per unit’ concept), but the market dynamism (volume expansion) of a product which is important in economic success through export-oriented industrialization. It is no longer the exchange of ‘wine for cloth’ (as in traditional comparative advantage theory) or ‘wine for wine’ (as in new intra-industry trade theory), but specialization in a given slice (task) of the global production process of a dynamic export commodity.

The global product sharing based on the use of relative cost advantage that determine export success.
Instead of high domestic value addition, it is ‘global product sharing’ which dominates today’s growing trade patterns in the world. The concept of ‘global product sharing’ means ‘splitting of the production process into discrete activities (tasks) which are allocated across countries’. This involves a slicing of a commodity in its production process into many different parts and components of which the production is shared by many countries and, finally assembling the final product in another country. It is different from the old style of producing a commodity in one country by collecting raw materials from other countries.

Slicing a Commodity
With the fast-growing global product sharing in international trade that has been a major source of fast growth of some developing countries, it has become a key topic of interest in policy discussions and debates. Global product sharing is being discussed at different economic and business forums with some other alternative terms such as international production fragmentation, vertical specialization, slicing the value chain and offshoring or international outsourcing. This pattern of specialization and trade first emerged in clothing and electronics and, then spread into many other global industries such as sport goods, footwear, electrical goods, machine tool, scientific and medical equipment, automobile, cameras and watches, and pharmaceuticals.

For instance, Apple iPhone 3G is ‘made in China’ or actually ‘assembled in China’. China is only assisting iPhone assembly as part of its export processing promotion policy package. This product is reported in international trade statistics as an export from China (and as an import of other countries), but its domestic value addition in China is only 3.6% of its f.o.b. value. In addition, its value is contributed by many countries: 35.1% from Japan, 13.3% from South Korea, 17.5% from Germany, 6.3% from USA and, the balance from some other countries. Although China’s per unit value addition is very low, iPhone has added millions of dollars to China’s national income and created thousands of jobs for the Chinese people.

Technology and Liberalization
There were three mutually reinforcing factors that have contributed to rapid expansion in global product sharing, especially during the past three decades: First is associated with the advancement in production technology, enabling an industry to slice up the value chain into finer components (tasks). This has allowed many parts and components of a commodity to be moved across the countries, gaining from the falling cost of production. Secondly, technological innovations in communication and transportation have contributed to a significant reduction in time and money costs. This has enabled the producers to undertake the former – moving parts and components across the countries. Finally, the liberalisation policy reforms in both home and host countries enabled them to take the advantages of the technological progress mentioned under the above two factors. Driven by these forces trade based on global production sharing (‘network trade’) has become the fastest growing segment in world trade. This new form of international exchange now account for well over a half of total exports from dynamic exporting nations in the region such as Korea, Taiwan, China, Malaysia, Singapore and Thailand.

Shift in International Trade
With growing contributions from technological progress and liberalization policy reforms, ‘open economies’ gradually specialize to produce and trade parts and components and, then to assemble them. As a result international trade in parts and components (network trade) grew much faster than the total world trade in manufactures. In this process multinational companies appear to have played a major role so that the growth of network trade has been associated with foreign direct investment flows as well. This has also resulted in a shift in production processes of parts and components from industrialized countries to developing countries which have established competitive investment environments.

Global product sharing has enabled the developing countries to grow faster than many of their counterparts. It has changed the world development thinking filling the knowledge gaps in trade and development and, provided valuable lessons for policy making to achieve growth momentum in other developing countries.

Acknowledgement: In writing this paper I have benefitted from conversations with Professor Premachandra Athukorala (Australian National University). The statistics in this paper are from his work on the subject.

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