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Global Value Chains

  • Category
    Economy
  • Published
    31st Dec, 2019

Global Value Chains (GVCs) have often been in news. It is important to understand their role in trade and growth.

Context

Global Value Chains (GVCs) have often been in news. It is important to understand their role in trade and growth.

About

  • Earlier, companies used to make things primarily in one country. Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product.
  • Through GVCs, countries trade more than products; they trade know-how, and make things together. Imports of goods and services matter as much as exports to successful GVCs.
  • GVCs integrate the know-how of lead firms and suppliers of key components along stages of production and in multiple offshore locations.
    • The international, inter-firm flow of know-how is the key distinguishing feature of GVCs.
  • How countries engage with GVCs determines how much they benefit from them.
  • Example: iPhone is a good example to understand GVCs. The US prepares the iPhone design, Taiwan and South Korea produce critical inputs such as processors. Final assembly takes place in China from where they are marketed all over.

Advantages of GVC

  • Promote productivity and growth: According to WTO report, a 1% increase in GVC participation is estimated to boost per capita income levels by more than 1%—about twice as much as standard trade.
    • In Ethiopia, firms participating in GVC are more than twice as productive as similar firms that participate in standard trade.
  • Reduce poverty: Since gains in growth from GVC are larger than from trade in final products, their impact on poverty reduction is also larger.
    • Regions in Mexico and Vietnam that participated more intensively in GVCs experienced greater reductions in poverty.
  • Deliver better jobs: Firms in GVC draw people into more productive manufacturing and services activities and tend to employ more women, supporting structural transformation in developing countries.
  • Important for growth: GVCs are a powerful driver of productivity growth, job creation, and increased living standards. Countries that embrace them grow faster, import skills and technology, and boost employment.
    • With GVC-driven development, countries generate growth by moving to higher-value-added tasks and by embedding more technology and know-how in all their agriculture, manufacturing, and services production.
    • GVCs provide countries the opportunity to leap-frog their development process.
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