China ascends Asia-Pacific value chain
Since the 1990s, with the deepening of the reform and opening up policy, China has embedded into the Asia-Pacific value chain’s division of labor system, and it gradually becomes a processing, manufacturing and export center in the Asia-Pacific region. In this system, the United States was in the high-end link, mainly engaged in the research and development of core technology and key components, responsible for the sales and after-sales service of products. Advanced economies such as Japan and South Korea were in the middle of the chain, responsible for manufacturing technology and important components. Less developed economies such as China and Vietnam were at the lower end of the chain, mainly engaged in product manufacturing and assembly and exporting the products to the US and Europe.
However, the outbreak and spread of the international financial crisis in 2008 not only depressed the global economy, but also inflicted heavy losses on the global value chain. In 2009, the US launched a “reindustrialization” strategy to revive its economy by attracting manufacturing companies back home. Under the impact of the above events, the Asia-Pacific value chain underwent restructuring in its organization, degree of cooperation and mode of division of labor from 2005–2015.
In terms of the length of the value chain, the structural variation between Asia-Pacific economies was prominent. The length of that of the United States, Mexico and Peru and most other economies tended to shrink, while that of China, South Korea, Russia, Vietnam, Malaysia and another 11 economies tended to extend.
The degree of cooperation on the value chain between major developing economies and most other economies was on the decline, but that between major developed economies and most other economies was on the rise, which indicates that the developed economies still held a high position in the Asia-Pacific value chain with strong influence and control over the chain, while most developing economies were easy to be pushed out of the value chain or forced to reduce participation in the chain.
In terms of status in the value chain, both from the perspective of demand and production, the status of developing economies tended to rise, while that of developed economies tended to fall.
With the deepening of the restructuring of the Asia-Pacific value chain, China’s role in the chain changed significantly. From 2005 to 2015, the parts of the chain where China participated tended to extend, and the division of labor in the value chain with other Asia-Pacific economies became increasingly complicated, which to some extent reflected China’s growing influence in the value chain.
At the same time, as China’s previous advantages in labor and land gradually weakened, multinational companies from America, Japan and other countries gradually transferred the processing and assembly links from China to Southeast Asian economies such as Vietnam, which possessed greater advantages in cost. China’s dependence on the mode of division of labor in the America-centered Asia-Pacific value chain thus weakened.
As large numbers of processing and assembly links were transferred to Southeast Asian economies, China, relying on strong capital and technological accumulation, began to gradually undertake the production activities of core components for which Japan, South Korea and other countries were previously responsible, and China gradually ascended to the middle and high-end of the Asia-Pacific value chain.
It is estimated that between 2005 and 2015, China’s relative position in both the demand-driven Asia-Pacific value chain and the production-driven chain improved, with growing influence and control.
Since the international financial crisis, although China’s position in the Asia-Pacific value chain has risen and its influence has been growing, it is still at the middle and lower end of the chain and is facing the possibility of Vietnam and other ASEAN countries competing for its current advantages in processing and assembly.
However, the restructuring of the Asia-Pacific value chain provides a historical opportunity for China to climb to the middle and high-end of the value chain.
One way to seize this opportunity is to continue to guide and encourage enterprises to carry out independent innovation activities. It is necessary to adopt preferential tax policy and supportive measures for innovation in key sectors so as to improve the enterprises’ independent innovation ability and production technology, which provides technical and intellectual support for China to ascend to the middle and high end of the Asia-Pacific value chain.
In addition, since the United States has the largest demand market in the Asia-Pacific region, China has been highly dependent on the demand market of the United States for a long time. The value added created by China continues to rise in the final demand of the United States and has reached a high level. Therefore, in the current Asia-Pacific value chain system, it is an important choice for China to realize stable foreign trade and high-quality economic development by gradually reducing its dependence on the American demand market and by strengthening its power of discourse in the value chain system.
To be specific, it is advisable to effectively expand the scale of domestic demand and promote the upgrading of the consumption structure. At present, China has an abundant market demand with huge potential, but due to insufficient effective supply, supply and demand do not match, making effective demand difficult to fully meet. Therefore, deepening the supply-side structural reform has become an important means to strengthen domestic consumption and invigorate the domestic market. Also, it is necessary to expand the foreign demand market and implement the export-diversification strategy. With huge economic scale and market demand, countries along the route of the Belt and Road initiative can become important underpinnings for China to implement the export-diversification strategy.
Zhang Zhiming is associate professor from the School of Economics and Trade at Guangdong University of Foreign Studies.
edited by BAI LE