Over the past few decades, one of the most significant phenomena in the global economy has been the rapid growth and spread of global value chains (GVC). The emergence and development of global value chains has dramatically transformed the conventional operation and structure of international production — which had been based on comparative advantages of individual countries in terms of final goods — into a more fragmented, diffused and intertwined process of cross-border production.
The results of the chains have accompanied the rise of dispersed production, the unprecedented upsurge of trade in intermediate goods and services, the high-speed movement of capital, the extensive spillover of technologies and the astonishing development of economic interdependence among nations.
Without doubt, Taiwan’s past economic achievements are largely attributed to its active participation in the chains. According to the Organisation for Economic Co-operation and Development’s (OECD) GVC Participation Index, which highlights the extent of each country’s export production connected with other economies, Taiwan has a fairly high GVC participation rate, which makes it among a few countries at the top of global participation.
This record also reveals that Taiwan’s exports, the major engine of its economic growth, are deeply connected with and embedded in international production networks.
Specifically, the notion of GVCs is broadly regarded as the latest business model of organizing existing production processes by splitting them into various manufacturing stages across numerous economies.
Multiple suppliers in different countries specialize in their fields, produce dissimilar components and export them for final assembly.
The complex linkages among various firms across nations creates a widespread interconnected network of production chains in geographically proximate countries, which further facilitates the dispersion of economic fruition and benefits among states.
It is generally believed that the effects of GVC participation for a state are likely to be manifold and tend to induce economic growth.
Joining the chains allows local businesses to get easier accesses to overseas markets by effectively utilizing their existing specialties of producing intermediate goods; enhancing industrial capabilities by meeting international standards and requirements; encouraging production upgrades by associating with leading global firms; and intensifying related trade activities by inserting themselves into global supply chains.
On the other hand, at the national level, GVCs enable states to fully maximize their comparative advantage in the context of the global economy to foster productivity, increase competitiveness, stimulate economic growth, create jobs, improve wages and boost income, among other factors.
As a consequence, many policymakers in developing economies, while recognizing these merits, have strived to enact a wide range of policies and measures to enhance their GVC participation, in the hope of achieving the previous beneficial outcomes as well as accelerating industrial upgrades and shortening the catch-up process.
Despite the important role played by the public sector in promoting a state’s participation, the latest report by the OECD suggests that the role of governments in facilitating GVC participation is not without its limitations.
In essence, the prevalence of multinational corporations accompanying the rise of foreign direct investment has been a major driver of the chains. In other words, multinationals are dominant and leading figures in creating the contents of the chains, while the role of government tends to be as a supporting actor.
Likewise, a state’s public policies that promote participation should be viewed as secondary factors in attempts to affect multinationals’ global operation strategies and their arrangements of the chains.
Nevertheless, it would be misleading to suggest that governments play a trivial role. On the contrary, government policies regarding the chains are important in various ways. Governments are critical in terms of providing a business-friendly environment, supplying efficient public services and the rule of law, enacting appropriate policies that increase firms’ competitiveness, maintaining macroeconomic stability, removing red tape and excessive regulations that hinder business operation, and so forth.
One of the approaches that governments use is to foster the overall competitiveness of the economy by improving its supply chain connectivity.
Given that the success of modern interconnected production networks relies on connected and well-functioning supply chains, it is essential for a state to devote sufficient effort to provide robust, reliable and resilient supply chain connectivity that is eye-catching enough to draw the attention of multinational businesses.
In contrast, while the soundness of supply chain connectivity is likely to affect business decisions regarding where to invest, where to locate production bases and where to seek outsourcing partners, the arrangement of regional economic integration also exerts substantial influences on the performances of supply chain connectivity as well as the configuration of comparative advantages among states.
As different designs of regional integration provide varied incentives for multinationals to reconsider their strategies in terms of where to produce and where to sell, these emerging trading blocs also intend to utilize new trade regulations and rules to establish individual exclusive environments to improve supply chain connectivity and to amplify the benefits of trade creation in each trading bloc.
Hence, one can expect that the consequences of these integration initiatives are likely to create favorable conditions within their blocs, alter existing comparative advantages of their member economies, influence business calculations and eventually reshape regional production networks.
In the Asia-Pacific region, the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) are irrefutably the two most promising architectures of regional integration in the foreseeable future.
The final formation of these two trade blocs will profoundly reshape existing supply chain networks and revamp configuration of comparative advantage of each state in the region.
The changed landscape of comparative advantages among states in the region will lead multinationals to reconsider their GVC arrangements and then pave the way for the likely shift of entire value chains.
Against the backdrop of these massive upcoming challenges, Taiwan has too few assets to remain optimistic and apathetic.
Although the nation has been an indispensable part of global trade in some industries — such as the electronics sector — the medals of honor from the past do not guarantee victory in the future battles.
Hence, it is time for the government to thoroughly ponder the nation’s role in the global trade environment and its strategies regarding how to sustain its existing strengths, while exploring new possibilities as well as overcoming risks of being left out in the emerging trading blocs.
With regard to supply chain connectivity, in either the World Bank’s Logistic Performance Index or the World Economic Forum’s Enabling Trade Index, Taiwan’s scores are somewhat higher than the average scores of TPP and RCEP members. This result suggests that, in terms of overall performance of supply chain connectivity, the nation is not only qualified to join these trading blocs, but can also make positive contributions to improve both camps’ supply chains.
Despite Taiwan’s current absence from the two trade blocs, the government should strive to improve supply chain connectivity with TPP and RCEP members in different aspects of physical connectivity, institutional connectivity and personnel-flow connectivity. This approach will not merely build a solid foundation for Taiwan’s future entry into the trade camps, but will also substantially upgrade real links with these economies, a move that could alleviate the negative impacts on the nation in case it fails to gain entry.
On the other hand, from the perspective of comparative advantage, the government should also prepare for the possible impacts of the reconfiguration of comparative advantages among economies in the aftermath of regional trade reformation.
Given that the effects of regional integration on global value chains tend to be multifaceted, the government should at least evaluate and analyze the consequences of the TPP and the RCEP on Taiwan at both national and sectoral levels.
At the state level, a favorable business climate and policy incentives for multinationals should be highlighted and encouraged. The free economic pilot zone, with emphasis on loosening cumbersome regulations and enhancing external connectivity, might be a touchstone to revitalize the nation’s staggering foreign investment.
At the sectoral level, the government should help firms to prepare for both best and worst-case scenarios from regional integration.
In addition to helping vulnerable sectors to weather the storms, more importantly, policymakers should regard integration as a golden opportunity for industrial transformation and upgrade.
Given that the recent records of governments to pick “winners” have usually failed, Taiwan should restrain itself from making the same mistake, but put more effort into what is more achievable.
Overall, the following three points deserve more consideration: First, it is vital to reposition Taiwan’s role in global value chains and move toward higher value-added activities. Innovative creativity as well as advanced research and development capabilities will act as two legs to climb the trade ladder.
Second, facilitating the participation of small and medium-size enterprises (SMEs) is crucial, since SMEs constitute the majority of the nation’s economy. How to fully utilize the strengths and flexibility of SMEs and upgrade their positions into high valued-added and critical components suppliers is the key of success.
Third, despite the importance of Taiwan’s regional trade participation, it should not be perceived as the silver bullet to revive the economy, since regional trade tends to reinforce the strong and further weaken the weak at the sectoral level. Hence, how to strike a balance between industries and allowing economic benefits being spread broadly among local businesses should be a central task for policymakers.
In the era of intensive global competition, a passive attitude only breeds conservative policies and drags a state down.
However, a bold, aggressive and ambitious initiative is more likely to lead the economy away from the quagmire of stagnation and toward more vibrant development, which might be what Taiwan desperately needs to readjust to the upcoming changes.
Eric Chiou is an assistant professor at National Chiao Tung University.
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