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Inclusive governance drives growth of global value chain

By Yang Danhui | 2016-09-05 | Hits:
(Chinese Social Sciences Today)

A gallery in Sichuan Province exhibits artwork made through 3D printing. The increased application of emerging technologies has given rise to innovative business models.


At present, the world economy is undergoing profound adjustments in the aftermath of a series of crises. Weakness in overall demand poses a severe obstacle to recovery and the development of the real economy. The expansion rate of international trade has lagged behind world GDP growth for three consecutive years.

In recent years, developed countries, such as the United States and Germany have launched a reindustrialization strategy to steer away from excessive virtualization and reinvigorate manufacturing. With the advent of Industry 4.0, new technologies and business models are transforming the international division of labor, fundamentally changing the way resources and productive factors are allocated and integrated. Affected by technological innovation and the slowdown in trade, the global value chain has entered into a period of reshaping and readjustment.


Burgeoning frontier technologies
As developed countries increase investment in the real economy, cutting-edge technologies, such as wearable technology, 3D printing and automated driving, are increasingly being used in workplaces. The combination of these technologies and smart hardware, such as devices with strong computing capabilities and high-performance sensors, signals a breakthrough in scientific innovation.

Moreover, the increased application of emerging technologies and shorter production cycles have boosted consumption while spawning innovative business models.

In the big data era, an enterprise with an advantage in data resources is more likely to be a dominant player in the global value chain. Internet giants, such as Google, Facebook and Amazon, are accelerating the process of turning the bulk of data resources into assets, and in the process, they are squeezing the interests of traditional leading enterprises in the sector, such as IBM. The strategic meanings and value-added ratios have changed for different links of the value chain.

In response to the challenges, traditional transnational corporations have begun a new round of transformation. In order to secure a leading role in the value chain in the next 20 to 25 years, IBM has given up the business consulting and technical services that were once its bread and butter in favor of a narrower focus on solutions and cloud platforms.

As Internet companies move up the value chain and join the competition in fields like new smart devices and service-oriented manufacturing, companies that have sophisticated technologies are paying more attention to the internalization of research and development. They try to control the link with the highest added value within themselves by making full use of the information about clients and consumers, which leads to further industrial integration.


Closing the gap 
Developed countries are active competitors in the Industry 4.0 era. Though America’s reshoring initiatives have brought some of its manufacturing industry back, it still relies largely on intermediate goods and final products produced overseas. Aimed at protecting intellectual property and ensuring the safety of the supply chain, the Trans-Pacific Partnership Agreement is conducive to the establishment of secure, steady, low-cost and sustainable facilities around the world that comply with US laws and regulations. Also, it will help enhance the governance abilities of US enterprises in new fields, such as big data and the Internet of Things.


Leveraging its advantages in high-end products and robotics, Germany was the first to launch Industry 4.0, and its purpose is to dominate the discourse under international standards. Japan is also seizing the opportunities presented by robotics to reform such areas as manufacturing, health care, agriculture and transportation.

By contrast, the position of developing countries within the global division of labor has not improved. And the gap separating them from developed nations has become wider in the latest round of scientific research and development, industrial innovation, and the reestablishment of trade rules.

In the first decade of the 21st century, emerging economies served as a driving engine for global economic growth. This gave them higher status in the value chain as well as a greater voice in global governance. In recent years, however, structural problems and cyclic contradictions have undermined sustainable growth.

Moreover, self-interest and protectionism are prevailing while transformation stalls and systemic risk grows, impeding the progress of economic globalization. By only relying on their advantages in resource endowment and labor cost, developing countries cannot stand out in frontier technologies and emerging industries in the short term. Furthermore, the growing digital divide will further squeeze their space in the value chain.


Inclusive governance
The current complex and difficult environment for international trade and investment has exposed the limitations of the multilateral system led by the WTO. To break through the deadlock of protracted WTO negotiations, the United States and European countries have put forward a series of regional cooperation agreements.

The new agreements admit developing countries as member states to generate broad appeal. This has raised pressure on the operation of the multilateral trading system, which, however, in turn could stimulate reform within the WTO. Nonetheless, the new frameworks of integration have weakened the leading role of the WTO. In addition, the high threshold in terms of technologies and laws will exclude from the frameworks many small and medium-sized enterprises, especially those from developing countries. This will hinder the integration of developing countries into the global division of labor while damaging the regional value chain.

Revitalization of global trade and economy requires a governance mechanism that is open, inclusive and coordinated. Since the international financial crisis, G20 summits have played an increasingly important role in broadening governance agendas and improving international coordination.

The 2016 G20 summit that China will host from Sept. 4 to 5 will push forward the establishment of an inclusive global value chain, which was proposed during the 2015 summit.

The establishment of a coordinated and inclusive governance system for the global value chain is one of the major long-term objectives of trade reform. The new chain should be tolerant of differences in corporate scale, technological level and forms of ownership. At the same time it should provide fair and open channels for enterprises from different countries and regions—small and medium-sized businesses in particular.

Doing this will remove the barriers to trade and investment, guaranteeing the interests of enterprises from developing countries in the international division of labor. Also, the upgraded global value chain will ensure them access to fair competition and transparent information.

For the emerging industries, it is important to follow the objective law of development and protect intellectual property. For the traditional industries, institutional reform is needed to create conditions for the transition to more eco-friendly and intelligent forms of manufacturing.

As a whole, it is vital to maintain the multilateral trading system led by the WTO while advocating innovative trade and investment rules. Furthermore, alternative economic governance platforms, like the G20, need to be made more effective.

From the resistance to further opening up in Latin American and some African countries to Brexit, globalization has encountered the most severe challenges seen since the 1990s. This has also underscored the urgent need for new trade rules and better governance of the global value chain.

As the host of the 2016 G20 summit, China should seize the opportunity to formulate strategies as a major country in line with the national economic and social development situation as well as the vicissitudes of the international landscape. It should shoulder responsibilities as a major player and shift from the role of adapting to international rules to that of participating in the establishment of rules. In this way, China will contribute to the establishment of a new economic order that is more innovative, dynamic and inclusive.


Yang Danhui is from the Institute of Industrial Economics at the Chinese Academy of Social Sciences.