China Moves Up the Global Supply Chain
China's economy has made huge strides since the beginning of the reform and opening up program nearly four decades ago. Over that period,China has upgraded its industrial structure and improved the composition of its foreign trade,benefiting from globalization and an expanded role for market forces in its domestic economy. Through the processing trade,China has been able to play a key role in the global value chain. For years,China has had a large share of low-end production in the global economy.
More recently,China has been exporting more sophisticated machinery and electronic products,and this is related to the nation's growing importance in the global supply chain - or global value chain. It has been shifting away from its more traditional role as a low-cost supplier and outsourcing nation. A 2012 survey by UK-based market research house IHS Markit showed that 70% of the survey respondents viewed China as a low-cost goods producer at that time. By 2016,the figure in a similar survey had fallen to less than 50%. According to the 2016 survey,China had become a hub in the global supply chain rather than just a low-cost outsourcing nation. China has been supplying some of the core technologies for some products and becoming a creator of value.
More research is needed to determine whether China is really a "hub" in the upstream segment of the value chain,however. Product development,design,marketing,services and the like are found in the upper reaches of the value chain,while manufacturing and assembling are in the lower portion. A "hub" therefore can have a variety of meanings. China is in the middle reaches of the value chain,undertaking the assembling and processing of intermediate parts. But the most important "hub" is where the headquarter services are located. It is there that multinational companies - mostly based in developed countries - make key business decisions and generate the bulk of their profits.
The trade value-added database of the Organization for Economic Cooperation and Development and the World Trade Organization contains a series of global value chain (GVC) indexes,which contain the forward and backward correlation indexes of OECD member countries and some non-member countries and regions. The correlation indexes mainly use the trade value-added accounting method. The global value chain forward correlation index represents the proportion of China's total value-added component in the total export volume of other countries. The GVC backward correlation index indicates that the proportion of foreign total trade value-added in the total exports of China. The forward and backward correlation indexes measure the distribution of the nation in upstream and downstream segments of the global value chain. The sum of the two results reflects the degree of participation of the national level in the global value chain.
China has significantly improved its standing in the overall GVC participation index over the last five years,indicating its participation in the global production system continues to deepen despite a slight decline in the two years after the financial crisis. China's participation in the GVC has surpassed that of the United States,and is close to Japan,though it lags behind South Korea and several Southeast Asian nations.
The backward correlation index of China's participation in the global value chain is higher,indicating that China's exported goods contain a greater proportion of foreign added value content. This indicates that China undertakes the downstream production in the supply chain; while the United States,Japan and other countries are the suppliers of the core components in the supply chain. However,since 2005,China's backward correlation index has begun to show an improvement in terms of the nation's dependence on processing and assembling.The forward correlated GVC participation index for Japan,the United States and the European Union is higher than the backward correlated GVC participation index,which indicates that these countries are more dominant in product research and development,design and marketing and other upstream segments.
The forward correlation index shows China's participation in the global value chain is relatively small. The nation has strong demand for intermediate products and services and is not particularly active in supplying similar items or services. This indicates China is still largely confined to the downstream segment of the supply chain.
Before 2000 the forward and backward correlation indexes showed similar results for China. But after China joined the WTO in 2001,there was a growing divergence as a result of the rapid expansion of China's foreign trade and an influx of foreign capital. This gave a huge boost to the proportion of foreign value-added content to China's exports. Meanwhile,the backward correlation index hit a record high in 2005. In the following years,with the upgrading of China's trade structure,the proportion of China's domestic value-added content in China's total exports has increased,which demonstrates that China's position i