AT APEC, Ministers Endorse Strategic Blueprint for Promoting Global Value Chains

November 12, 2014

By Véronique Salze-Lozac'h and Amy Warren

This year’s Asia-Pacific Economic Cooperation (APEC) Forum in Beijing kicked off Nov. 7-8 with the 26th Ministerial Meeting, which focused on three priority areas: advancing regional economic integration, promoting economic growth, and strengthening connectivity and infrastructure development. In its joint ministerial statement, the group endorsed the “APEC Strategic Blueprint for Promoting Global Value Chain Development and Cooperation” as a mechanism to strengthen mutual economic cooperation within the global value chain network.

At the 26th Ministerial Meeting, the group endorsed the “APEC Strategic Blueprint for Promoting Global Value Chain Development and Cooperation” as a mechanism to strengthen mutual economic cooperation within the global value chain network. Photo/Flickr user Luther Bailey.

The statement is the latest example of the growing attention on regional and global value chains (RVCs and GVCs). In the update to its “Asian Development Outlook (ADO) 2014” report, the Asian Development Bank echoed the role that RVCs and GVCs have played in transforming developing economies. ASEAN and UNCTAD also launched their joint ASEAN Investment Report, “FDI Development and Regional Value Chains,” on November 10, analyzing the rise of investment into the region as transnational corporations (TNCs) expand their operations.

In regional and global value chains, the activities involved in bringing a good or service from conception to end use – including design, production, marketing, and distribution – are spread out across multiple firms and geographic locations. This allows TNCs, which typically manage these operations, to benefit from the most cost competitive places. As a result of this phenomenon, the world economy has radically changed over the last quarter century, causing traditional notions and measures of trade to become increasingly outdated.

For developing economies, GVCs serve as a potent force for raising income levels, productivity, and employment. A 2013 UNCTAD report found that 80 percent of all international trade flows now take place within global production networks, either as inter-affiliate transactions or within supply chains that are built, coordinated, and sustained by TNCs. According to the ADO update, Asian economies whose GVC trade doubled between 1995 and 2008 experienced a 12 percent increase in real per capita income. Meanwhile, industries that doubled GVC growth, such as electronics, machinery, chemicals, and textiles, saw employment and output rise by 10 and 19 percent, respectively.

At the micro-level, GVCs also benefit local firms, since export-platform foreign direct investment (FDI) often generates backward linkages to indigenous suppliers. TNCs can become important sources of knowledge, capital, and technology, providing small and medium-size enterprises (SMEs) with skills training, technical assistance, and access to international markets. These firms may also be required by TNCs to upgrade their production techniques and quality control procedures, enhancing their competitiveness.

However, many Asian countries have not fully capitalized on these potential development benefits. While Asia has helped drive the expansion of GVC trade, the ADO reported that participation has been uneven, with significant sectoral and regional differences. East and Southeast Asia dominate, while South and Central Asia are still largely excluded from cross-border production networks. In South Asia, for instance, GVC trade totaled less than 0.5 percent of worldwide manufacturing exports in 2008, compared to 12.1 percent in East Asia. Moreover, SMEs remain underrepresented and are often unable to move up the value chain.

Even economies that have had greater success with GVC integration now face considerable challenges. For Southeast Asia in particular, the key concern is how to shift away from downstream activities like final assembly and upgrade to higher-value stages such as research and development. Doing so would help countries avoid long-term economic stagnation and the dreaded middle-income trap.

To strengthen links to global production networks and attract high value-added upstream activities, Asian countries must tackle a wide range of barriers to GVC participation. These include insufficient skills, capital and R&D investments, poor transportation infrastructure, high energy costs, low innovation levels, weak institutional environments, regulatory hurdles, policy deficiencies, and unconducive business environments that hinder the emergence of suppliers.

According to the ADO update, governments can make a significant difference creating a supportive business environment, for example, by reducing non-tariff barriers (NTBs), implementing low and predictable tariff rates, streamlining customs procedures, harmonizing product standards and regulations, and reducing transport costs by investing in the necessary infrastructure. Public-private dialogues (PPD) in various sectors can facilitate these reforms, by providing policymakers with a way to engage directly with the private sector to identify the exact challenges companies are facing.

Greater involvement and action by policymakers is needed. ASEAN and APEC’s recent recognition of the role of GVCs in Asia’s future economic growth is certainly encouraging. As leaders meet in Myanmar for the 25th ASEAN Summit and 9th East Asia Summit, they should continue discussing how to strengthen connectivity to regional and global production networks. But the real challenge will be in turning the high-level policy dialogue into concrete action once the summits end. Only then will Asian economies be able to fully reap the benefits of GVCs and achieve inclusive and sustainable economic growth.

Véronique Salze-Lozac’h is The Asia Foundation’s senior director for Economic Development Programs and Amy Warren is a junior associate with the Economic Development Programs unit. They can be reached at [email protected] and [email protected]. The views and opinions expressed here are those of the individual authors and not necessarily those of The Asia Foundation.

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