ICC United Kingdom Article

Global Value Chains

Chris Southworth, Secretary General, ICC United Kingdom

In the past 10 years, global value chains (GVCs) have been evolving fast in response to developments in emerging economies where the market share of global consumption has increased over 50% – China, alone, now accounts for 20% of the global economy and 40% of global growth. Trade in services is now 50% of global trade and growing 60% faster than trade in goods. Investment in research & development and intellectual property has more than doubled as the cost of labour becomes less relevant and economies shift to higher skilled, knowledge intensive industries. With domestic demand growing fast as incomes and standards of living rise, goods producing value chains are exporting less and become more localised, closer to local consumer demand. These dynamics are accelerating regional integration initiatives particularly in regions like Africa and Asia where governments are seeking to optimise the benefits of local demand, production and distribution.

The Coronavirus outbreak has illustrated just how integrated the global economy now is with China and the region as a whole – within a few weeks of the outbreak, every global region had been impacted with stock markets down, factories and offices being closed, trade transactions delayed and commodities sitting in ports unable to be shipped. Rapid advancements in technology, climate change, trade wars and Brexit are all adding to the mix as governments and businesses grapple with how to best respond to the challenges and opportunities they are facing. Whilst there have been lessons learnt from previous disasters, such as SARS in 2003 and the 2011 earthquake in Japan, regarding how to manage and make GVCs more resilient by adopting a more diverse supply base, this recent pandemic is unprecedented.

In the last month we have seen Flybe, the regional airline, collapse into administration with the loss of over 2,000 jobs, likely tipped over the edge by falling passenger numbers from the Coronavirus pandemic. It’s not clear how many other companies are at risk of going out of business other than the general sense that many companies, particularly small businesses, may be living on the edge of survival as pressures mount on their business models and cash runs dry. It is also unclear who the winners and losers will be over time.

From a policy making point of view, the complexity of GVCs and the way they evolve and adapt is not always well understood. This is hardly surprising when you take a look at the size and scale of some GVCs – for instance, the average automobile contains approximately 30,000 parts, and one recent analysis found Toyota relied on 2,192 distinct firms (both direct and indirect suppliers) in its production process. Similarly, the AstraZeneca partner network includes over 57,000 suppliers. As a consequence, well intended policies can have unintended repercussions elsewhere in the system as we saw after the financial crisis in 2008 with SMEs in emerging markets being cut off from access to trade finance. The impacts of decisions filter down the value chain in ways that can be unpredictable and often unforeseen.

GVCs are not going away and nor should they. Afterall, about 70% of international trade today involves GVCs according to the OECD.

GVCs play a pivotal role in the trading system – sharing prosperity, cutting poverty and promoting innovation and sustainability. The challenge is to better understand them.

If you want to find out more about the impact of policy on global value chains, come to the ICC International Trade and Prosperity Conference on Monday 19 October 2020. It’s a topic we are all talking about in trade policy circles and have a great line of international experts to help companies navigate the issues, identify the opportunities and provide practical policy solutions.

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