Global Value Chain

07 Nov 2019

Opting out of the Regional Comprehensive Economic Partnership (RCEP), will likely result in India missing out on the regional and Global Value Chains (GVC) crisscrossing this region.
Due to the fragmented nature of global trade which is best captured in the phrase Global Value Chain, ignoring the RCEP might be a big mistake by India.

What is a Global Value Chain?

It is a chain of separate but inter-linked and coordinated activities, which can be undertaken within a single firm or be divided among multiple firms in different geographical locations to bring out a product or a service to complete production and delivery to final consumers.
According to the World Bank, “a GVC is the series of stages in the production of a product or service for sale to consumers. Each stage adds value, and at least two stages are in different countries.
For example, a bike assembled in France with parts from Germany, Italy, and Malaysia and exported to the Arab Republic of Egypt is a GVC.
So according to this definition, a country, sector, or firm participates in a GVC, if it engages in (at least) one stage in a GVC.

Difference between Value Chain and Global Value Chain

A value chain can be contained within a single geographic location or even a single firm (for ex.a fruit that is grown, packaged, sold and consumed within one country).
Value chains become “global” when their component activities are geographically dispersed across borders to multiple country locations.
The GVC Initiative is particularly interested in understanding value chains that are divided among multiple firms and spread across several locations, hence the term global value chain.”

Importance of GVC

Tool to Economic Growth: GVCs are a powerful driver of productivity growth, job creation, and increased living standards. Countries that embrace GVC grow faster, import skills and technology, and boost employment.
Diversifying Country’s Export Sector: It provides opportunities for developing countries to diversify their exports and intensify their integration into the global economy.
Access to International Market: Participation in GVCs provides important opportunities for firms to access international markets, absorb new technology, and rapidly expand their economies of scale.
Magnifying Trade Scenario: Itallows resources to flow to their most productive use, not only across countries and sectors, but also within sectors across stages of production. As a result, GVCs magnify the growth, employment, and distributional impacts of standard trade.
Boost to Development Process: With GVC-driven development, countries generate growth by moving to higher-value-added tasks and by embedding more technology and know-how in all their agriculture, manufacturing, and services GVCs provide countries the opportunity to leap-frog their development process.
Boon to Developing Countries: Global value chains have been a boon to developing countries because they make it easier for those countries to diversify away from primary products to manufactures and services.

India and GVC

India’s integration with GVCs is among the lowest in G20 countries.
Compared with the ASEAN group of countries, India’s GVC integration is far lower with a decline in both its backward (that is, import content of exports) and forward (domestic value added embodied in other country exports as a share of gross exports) GVC linkages.

Reasons for Low GVC Integration

Poor Trade Infrastructure

India still lags behind in trade infrastructures which not only increases cost and time of export operations but also it almost prohibit a country from participating in GVCs is not sufficiently known.
China, Japan, South Korea, Thailand and Malaysia have become part of GVCs through the quality trade infrastructure route. India could not as it does not meet the benchmarks for efficient entry/exit at the most ports/customs.

Small size of Small Basket Products

Ironically, 70 percent of India’s export earnings come from the small basket products (Agri- based products). The small size of the global basket limits the potential for future growth. Also, most products face intense competition from low-cost countries such as Bangladesh and Vietnam.
A country that exports products that belong to the large basket will have higher chances to grow.

Weak Global Share

India has an insignificant presence in large basket products (Electronics, telecom, and high-end engineering products) that have become important in world trade. It contribute to 30 percent of India’s export earnings.
India has a weak global export share in commodities such as mobile phones (0.19 per cent), integrated circuits (0.01 per cent), computers (0.04 per cent), solar-powered diodes, transistors (0.14 per cent), LCDs (0.04 per cent).

Way Forward

In current time, around 70 percent of the world trade is structured within GVCs of multinational corporations.Harnessing the potential of GVCs for broad-based economic development requires active and purposeful policies. It also requires an understanding of the characteristics and dynamics of GVCs across different regions and industries.
For many countries, especially developing and low-income countries, the ability to effectively insert themselves into GVCs is a vital condition for their development. This supposes an ability to access GVCs, to compete successfully and to “capture the gains” in terms of national economic development, capability building and generating more and better jobs to reduce unemployment and poverty.
To strengthen the benefits that countries obtain from participating in GVCs, it will need to support the upgrading process by strengthening the business environment, supporting investment in knowledge assets such as R&D and design, and fostering the development of important economic competencies, notably skills and management.
GVC participation leads to job creation in developing countries, provided it occurs with increased and high-skill based value addition. So, to gain a part of GVCs, countries like India need an education system based on skilldevelopment. As well as a competition policy enhancing rivalry, and a tax system and intellectual property laws encouraging investment.
GVC is a world-wide phenomenon. It works effectively when there is active participation from different economies in various stages of growth. It has a strong foundational link to roles, regulations, products and services, and processes across markets. So understanding it’s functioning and assimilating it is crucial for countries like India, that are ready for next level of growth.