Organised by In partnership with

CAPACITY BUILDING WORKSHOP

TRADE AND TRADE POLICY ANALYSIS
FOR THE POST COVID-19 RECOVERY
TUESDAY, 7 DECEMBER 2021
10:00 - 11:15 AM BKK TIME (UTC+7)
THURSDAY 9 DECEMBER 2021
09:30 AM - 15:45 PM BKK TIME (UTC+7)

FRIDAY 10 DECEMBER 2021

13:30 - 15:15 PM BKK TIME (UTC+7)

VIRTUAL MEETING, MS TEAMS

 Biswajit Nag
Professor,
Indian Institute of Foreign Trade
New Delhi, INDIA
2
 Learning Objectives
1. Globalization and GVCs
• Defining GVCs
• Value Chain Ecosystem: Reference Model
• GVCs & IPNs
• Different types of IPNs
2. Introduction to the Value Chain Approach
• Emergence of GVCs
• Analytical Approaches to GVCs
• Typology of GVCs
• Types of Upgrading
• Organisation of GVCs
3. Ways to capture Value Addition in the Chain
• Mapping GVCs by firm business records
• Mapping GVCs by input-output tables
• Input-output based analytical approaches
4. Trade in Value Added
• From trade in goods to trade in tasks
• Trend in intermediate and final goods
5. Current Developments
• Covid-19 & GVCs 3
1. Globalization and GVCs

4
 What are GVCs ?
• A GVC breaks up the production process across countries, with firms specializing in a specific
task and stages of production rather than producing the whole product.

• With fragmentation, the carrying of specific parts of the production process in certain countries
is eased when costs are minimized through economies of scale as well as specialization.

• Hyper-specialization and sustained firm-to-firm relationship builds which lead to increase in

technology and knowledge transfer as well as access to capital.

• This allows firms to raise productivity and income and renders GVC trade more powerful than
traditional trade in supporting growth and poverty reduction.
5
 Where do Bicycles come from?

Bicycle Value Chain

6
 Value-Chain Ecosystem
Porter (1985) identifies a value chain as a set of activities that a firm performs to deliver a
valuable product or service to the market. The concept builds a corporate strategy to promote
firm competitiveness by directing attention to the entire system of activities involved in
producing and consuming a product.

A value chain can be broken down into:

Inbound Outbound Marketing After-Sales

Operations
Logistics Logistics & Sales Services

Receiving raw Conversion of Delivering the Incentivizing Improving

materials, and raw materials final product or potential customers consumer
managing into finished service to the to purchase the experiences,
inventory product or end user final product or services.
services services
7
 Value Chain Reference Model
• Introduced by Stacy Frederick (2010 and 2014), the value-chain reference model (VCRM)
provides a comprehensive picture of value chain ecosystem. It consists of four parts:
value-adding activities, the supply chain, end-use markets, and the business supporting
environment.
• The Supply Chain consists of: (1) supply of materials to a manufacturer; (2) the
manufacturing process; and (3) the distribution of finished goods to final customers
through a network of distributors and retailers.

8
 GVCs & IPNs
• In global production fragmentation—production activities are increasingly carried out by various
entities located in different countries that are linked horizontally, vertically, and diagonally
(Henderson et al. 2002).

• GVCs have been recognized as an important driver of structural change in the world economy
(Sturgeon and Memedovic 2011) and have become an important aspect of cross-border trade.

• This has led to increase in offshoring and outsourcing activities, the use of imported intermediate
inputs, and trade in intermediate goods.

How Do We Define Value Chains and Production Networks?

• “Chain” maps the vertical sequence of events leading to the delivery, consumption, and
maintenance of a particular good and service.

• A “network” maps both the vertical and horizontal linkages between economic actors, i.e.,
recognizing that various value chains often share common economic actors and are dynamic as
they are reused and reconfigured on an ongoing basis.

• E.g- “original equipment manufacturer,” which is widely used in both the motor vehicle and
electronics industry. 9
 Different Production Networks
• Firms or countries are specialized in some but not all stages of the production process
(Hummels, Rapport, and Yi 1998).
• Technological change has enabled various tasks of a production process to be physically
separable and tradable leading to intra-product specialization (Grossman and Rossi-Hansberg
2006).
• Productivity gains, economies of scale, and potential savings in learning costs encourage the
creation of firms focusing on component production.

Different Shapes of Global Production Networks

Based on the configurations-
1. Spiders- It refers to multiple limbs (parts) coming together to form a body (assembly), being
either the final product itself, or a component.

2. Snakes- goods moving in a sequence from upstream to downstream, with value added at each
stage.

3. Snikers- combinations of the two- affecting production locations as well as interactions

between firms.
10
Snake, Spider, and Sniker production
configurations

11
Network and Chain (Net-chain) Approach
among the Actors of Production

Source: Lazzarini et al. (2001).

12
2. Introduction to the Value Chain Approach

13
 Analytical Approaches to GVCs
Major Theories Other field Theories
The initial theory of production fragmentation Conceptualized first in the discussions of the Global Value Chains
(Jones and Kierzkowski 1990). Slicing of Initiative (2000–05), sponsored by the Rockefeller Foundation,
production process due to increased transportation and further crystallized by Gereffi, Humphrey, and Sturgeon
and communication services. (2005), focusing on the governance structure of organizing IPNs.

Trade in Intermediate goods (Feenstra and Roots in Development theory, business management to industrial
Hanson, 1996; Campa & Godberg, 1997; Yeats organization theory, a comprehensive study on the structure and
1998). This has led to outsourcing and offshoring mechanism of value distribution among countries led to the term
of certain functions. “global value chains” (Gereffi, Humphrey, and Sturgeon 2005).

Unbundling (Baldwin 2006). This process captures The empirical aspect of GVC studies is relatively newer.
the vertical specialization.
Value-added analyses earlier were based on firms’ business
records (Dedrick et al., 2008; Xing and Detert, 2010).
Trade in tasks on factor productivity (Grossman
and Rosi-Hansberg, 2008).
Now complemented by input-output analysis, using multi-country
input-output databases, such as trade in value added (Johnson and
Noguera 2012, Koopmans et al, 2014) and supply chain length
(Dietzenbacher, Romero, and Bosma 2005; Fally 2011)
14
 Complexity in Governance

• Complexity of transactions. If the lead firms demand complex or less standard products from their suppliers, it is difficult for them to exchange necessary
information of product specification with suppliers as the tacit knowledge needs to be exchanged with them.
• Ability to codify transactions. If it is possible to codify complex information needs to exchange with suppliers, lead firms can easily exchange that
information with suppliers in codify form without any fear of leakage.
• Capabilities in the supply base. If the suppliers are competent and flexible enough to produce a product as per lead firms’ requirement, lead firms require no
monitoring and supervision to suppliers’ activities. However, if the suppliers are not competent to supply the product specified by lead firms, lead 15
firms require
 Different types of Upgrading
Increasing the efficiency of internal processes to
compete with rivals both withing individual links
Moving to a new value chain (for eg. in the chains, (for eg. Increased inventory turns,
Taiwanese firms shifted from the
Process
lower scrap), and between the links in the chain
manufacturer of transistor radios to Upgrading (for eg. more frequent, smaller and on-time
calculators, TV monitors, computer deliveries
monitors, to laptops and now to WAP
phones).

Chain Product Introducing new products or

upgrading Upgrading improving old products faster than
rivals. Involving changing new
product development processes both
within individual links in the value
Increasing value added by changing the mix of chain and in the relationship between
activities conducted within a firm (for eg. different chain links.
logistics and quality functions, outsourcing Functional
accounting) or moving the locus of activities to Upgrading
different links in the value chain (for eg. from
manufacturing to design). Adapted from Humphrey and Schmitz, 2001
16
Functional Upgrading

17
 Value Chain Disaggregation
Smile Curve

Added
Value

Specialised
Standardizatio services
n Knowledgeable
services support
Innovation Manufacturing & Customer
standardised services
services
R&D
Branding
Design

Manufacture Marketing

Assembly Logistics Adapted from

Mudambi, 2007,
WTO, 2005
Manufacturing
process 18
Location 1 Location 2 Location 3 Location 4 Location 5 Location 6
3. Ways to Capture Value Addition in the
Chain

19
 Empirical analysis on GVCs
Mapping global value chains by firm business records
• Studies have illustrated the concept of value-added trade using Apple’s emblematic
devices: first the iPod (Linden et al. 2009) and then the iPhone (Xing and Detert, 2010)
and the iPad (Linden et al., 2011).
• All these hi-tech products are assembled in the People’s Republic of China, making a
significant contribution to China’s exports.
• Chinese value-added represents only a small share of the value of these electronic
devices that incorporate components from Germany, Japan, Korea and other economies
that manufacture intermediate inputs.
• Many other studies present similar evidence. For example a recent WTO report
calculated that the US-China trade balance in 2008 would be about 40 per cent lower if
estimated in value-added terms.
• Also, in a report from USITC, showed a 50 per cent reduction in the EU15-China trade
balance, and the Japan-China trade balance switching from a surplus in gross terms to a
deficit in value-added terms.

20
International Production Network of iPhone

21
Value Chain of iPhone

In terms of contribution
by China ( US$ 6.5), the
Following a gross export analysis in total export value of 11.3
2009, USA had trade deficit with China million units is just US$
of around US$ bil 1.9 due to export of 73 million
iPhone (11.3 million units)

22
 Mapping global value chains by
input-output tables
• It provides a comprehensive map of international transactions of goods and services in a massive
dataset.

• It combines the national input-output tables of various countries at a given point of time.

• It provides a possibility to identify the vertical structure of international production sharing.

• Input-output analysis covers an entire set of industries that make up an economic system, thus
enabling the measurement of cross-border value flows for a country or region.

• Theoretically, such analysis has the capacity to track the value-added generation process of every
product in every country at every production stage.

• For a comprehensive picture at the macro level of the gap between value added and gross trade, as
well as an economy’s participation in global production chains (Koopman, Wang, and Wei 2014, )—
the issue of “double-counting” is addressed.

• A problem in conventional gross trade statistics, mainly caused by intermediate goods crossing
borders multiple times, approaches based on conventional trade data risk overstating domestic value-
23
added content of exports (Johnson and Noguera 2012).
 Brief Summary
Approach Level of detail Measurement type

1. Case studies : geographical decomposition of a Product level Not applicable

product value into the components and services
used for its production Bottom up
approach
o Examples: iPhone, iPod, iPad, Barbie doll…

2. Trade statistics : focus on the role of Product/sectoral / Direct measurement

intermediates in foreign trade product group level (based on raw
reported data)
o Use of BEC or BOP (e.g. business and
computer services) classifications
o Estimation of vertical specialization or shares
of parts and components in total trade
o Strengthening linkage between trade and
business statistics

3. Input-output tables : combining national

accounts with trade statistics Sectoral level Indirect measurement
(aggregated) (estimates)
o Decomposition of gross trade into its foreign Top down
and domestic value added contents approach
24
4. Trade in Value Added

25
 From Trade in goods to Trade in tasks
• Instead of trade being an exchange of goods, it “increasingly involves bits of value being added in many different locations”
(Grossman and Rossi-Hansberg (2008)). Trade in tasks is therefore a theory of offshoring – the consequence of the separation
of tasks in space and time.
• Thus, the specialization is based on the comparative advantage of “tasks” that the countries complete at a specific step along
the global value chain.

Conjunction of Several Factors Consequences

International Consumer demand Emergence of trade in tasks
Lower Applied Tariffs & trade policy World Trade Development of Intra-Firm trade
incentives governed by Predominance of trade in intermediate
GVCs goods
Development of infrastructure &
technological progress Increase of processing trade
Export Processing Zones
Outsourcing & Offshoring activities and
FDI
Impact on Policy
Impact on Statistics • New Dimension of trade analysis
• Reviewing statistical concepts of International trade • Further trade regulations to adapt in business
26
• New measures for mapping trade in value added reality
 A new measure of Trade in Value Added Terms
• Biases in the present Traditional statistics:
Multiple counting of trade flows in intermediate goods and services.
Difficult attribution of the country of origin of an imported product.

Measuring trade in value added terms allows:

To circumvent the biases observed with traditional statistics.
To take into account the specificity of trade occurring between the different actors of a production chain.

Better evaluation of the actual contribution of international trade to an economy (incl. development,
employment, environment)

Highlighting the interdependency of economies along with counter-productive effects of protectionist

measures on economies and enterprises they are supposed to protect

Better evaluation of the contribution of the services sector on trade

More realistic evaluation of bilateral trade balances and regional trade

27
 World Trend in Intermediate and Final Goods
30,000,000

25,000,000

20,000,000
US$ Million

15,000,000

10,000,000

5,000,000

0
2000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year

Gross Trade Gross Trade in Final Goods Gross Trade in Intermediate Goods

Note: Final and Intermediate goods are defined following UNCTAD’s classification
28
Source: WITS Database
Sectoral Trade Performance of final and
intermediate goods for Asia-Pacific
Countries

29
 Transport Equipment
100
90
80
70
60
50
In %

40
30
20
10
0

China
S.Korea

S.Korea

S.Korea

S.Korea

PRC

PRC

PRC

PRC
India

India

India

India

Japan

Japan

Japan

Japan

Malaysia

Malaysia

Malaysia

Malaysia

China
China

China
Republic
of Korea

Republic
Korea

Republic

Republic
of Korea

of Korea
of
2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020

Trade in intermediate goods % Gross Trade Trade in Final Goods % Gross Trade
Source: WITS Database

• Belongs to high technology-intensive category.

• The trade in parts and components has increased over time for all countries.
• S.Korea and Japan demonstrate similar trade patterns.
• In 2020, China’s trade of intermediate goods was the highest.
30
 Electrical & Optical Equipment
100

80

60
In %

40

20

China
Japan

Japan

Japan

Japan

China

China

China
Philippines

Philippines

Philippines

Philippines
Malaysia

Malaysia

Malaysia

Malaysia
India

India

India

India

PRC

PRC

PRC

PRC
ofS.Korea

S.Korea

S.Korea

S.Korea
Republic
Korea

Republic

Republic

Republic
of Korea

of Korea

of Korea
2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020

Trade in intermediate goods % Gross Trade Trade in Final Goods % Gross Trade

Source: WITS Database

• Belongs to high technology-intensive category.

• Except for China, other major Asian countries have become manufacturing hub of parts &
components for electronics sector.
• China majorly deals with assembling of the final goods.
• Malaysia and S.Korea witnessed maximum trade of intermediate goods in 2020.
31
 Textile & Textile Products

90
80
70
60
50
In %

40
30
20
10
0

Viet Nam

Viet Nam

Viet Nam

Viet Nam
Japan

Japan

Japan

Japan

Veitnam

Veitnam

Veitnam

Veitnam
India

India

India

India

PRC

PRC

PRC

PRC
S.Korea

S.Korea

S.Korea

S.Korea
Republic

Republic
of Korea

of Korea

Republic
of Korea

China
China

China

China
Republic
of Korea
2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020

Trade in intermediate goods % Gross Trade Trade in Final Goods % Gross Trade

Source: WITS Database

• Belongs to low technology-intensive category.
• China, India and Vietnam have become the hub for production and distribution of textile and
clothing.
• The trend shows that S.Korea and Japan trade intermediate textile and clothing products the
maximum
32
 Chemicals & Chemical Products

100
90
80
70
60
In %

50
40
30
20
10
0

China

China

China

China
India

India

India

India

Thailand

Thailand

Thailand

Thailand

PRC

PRC

PRC

PRC
Japan

Japan

Japan

Japan

Singapore

Singapore

Singapore

Singapore
2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020 2000 2010 2015 2020

Trade in intermediate goods % Gross Trade Trade in Final Goods % Gross Trade

Source: WITS Database

• Belongs to high technology-intensive category.
• A highly fragmented sector of all.
• For all these countries, almost 90% of trade is of the intermediate products.

33
5. Current Developments

34
 Covid-19 and GVCs
1. COVID-19 has reignited an old discussion regarding the risks of global production's supply chain.
Government lockdowns have also influenced the availability of domestic inputs.
2. There is no evidence that economies would have fared better without GVCs.

• Before COVID-19 crisis, there was evidence of a decline in fragmentation of production across
borders. Since 2011, the expansion of GVCs had declined (OECD, 2020).

• Reducing the use of foreign inputs led to less trade in intermediate goods and services.

• Indicators measuring the length of value chains confirm that GVCs have become shorter (Miroudot
and Nordström, 2019). This was also due to trade tensions and rising protectionism.

• Additional economic vulnerabilities during a pandemic and the closure of factories in China have
resulted in a GVC ‘concussion’ (Baldwin, 2020) and reignited a debate on the risks associated with
international production.

• Thus, a need to rethink GVCs and make them more resilient, for example by diversifying supplier
base or by reshoring some activities (Javorcik, 2020) is the need of the time.

35
 Covid-19 and GVCs

Direct Impact Demand Impact Trade &

Indirect Impact
Investment

1. Due to health concerns, 1. Supply Chain disruption- 1. Volatility in demand. 1. During the covid period
enterprises operating in when one location’s Example- surge in demand for there was an export ban
GVCs cease production. functioning gets hampered by medical supplies or a shift in on certain medical
second location( while it gets demand of food due to hotels supplies by few
2. This direct effect is not directly impacted). being shut. countries. This led to
limited to GVCs, but rather protectionism of
to areas where the virus has 2. Example-natural disasters, 2. Demand for inputs produced production to promote
propagated. COVID-19 has Disruption in international in other nations falls as greater security of
had a direct impact on the transport networks, demand for final goods falls supply.
majority of countries and restrictions on the movement in a given country.
businesses. of people, custom and 2. Some uncertainty about
logistics issues. 3. When a worldwide crisis future trade &
occurs, this phenomena might investment environment
occur in numerous areas at the impacts the organisation
same time (simultaneous of value chains.
reduction in demand in many
countries, as observed with
COVID-19). 36
 Examination of GVCs resilience

• Despite the disruptions, several GVCs continued to operate (although with lesser
output) during the COVID-19 crisis.
• IT and electronics value chain, with the production of smartphones grew
manifolds.
• Food supplies (a critical activity) have proven to be quite resilient.
• International supply chain disruptions have been modest so far. With the most
substantial bottlenecks occurring in domestic processing and retail distribution (i.e.
the domestic portion of value chains) (OECD 2020b).
• During the COVID-19 crisis, the medical supplies and equipment business fuelled
certain GVC-related tensions.
• Supply shortages in face masks and, personal protection equipment (PPE), as
well as important respiratory medical devices like ventilators, raised concerns about
the industry's strong trade interdependencies (OECD, 2020c).

37
 Way Forward
• Through better risk management at firm-level, more resilient production networks
can be achieved.
• Putting greater emphasis on risk awareness, greater transparency in the value
chain and promoting agility is the need.
• With supplier diversification and ‘just in case’ processes, sourcing strategies may
be modified according to the level of acceptable risk.
• Governments can support efforts of firms to build more resilient GVCs by
collecting and sharing information on potential concentration and bottlenecks
upstream.
• By developing stress tests for essential supply chains and by creating a conducive
regulatory environment, even policy uncertainties can be avoided.

38
39