An Ideas-Based Online Magazine of the Global Network for Advanced Management

Future of Globalization: The Global Value Chain

To coincide with the fifth anniversary of the Global Network for Advanced Management in April 2017, Global Network Perspectives asked faculty across the 29 schools in the network: "What do you think the future of globalization looks like? How will this affect the economy in your country or region? How is your school preparing students for this world?" Read all of the responses. Also, in a session at the anniversary symposium, a panel of experts—including former U.S. Secretary of State John Kerry—led a discussion of the future of globalization and its implications for business and management education. Watch the video.

I would like to give an account of an important type of globalization—the global value chain—and how developing countries’ participation helps their growth.

China’s participation in globalization is most conspicuous in trade globalization—the global value chain. And the global value chain is intimately related to a rapidly developing phenomenon called “international fragmentation of production.” International fragmentation of production, which refers to the phenomenon that different tasks in the process of producing a good are carried out in different countries, has become widespread. The most well-known example of this production and trade pattern is the iPhone and iPad, designed by Apple Inc. of the U.S. Apple purchases sophisticated parts, such as touchscreens, cameras, processors, display, and memory, from all over the world (many of them from the more advanced countries such as the U.S., Germany, Japan, South Korea, and Taiwan) and ships them to Foxconn's factories in Southern China. These parts are further processed, assembled, and tested before the final product is ready and shipped to destinations all over the world. This is an example of "processing trade" in China, and it is a vivid demonstration of international fragmentation.

Developing countries such as China—especially in the early stage of China’s reform in the 1980s and ’90s—benefit a lot from participating in the global value chain. They do not have to be able to produce a product from the first stage to the last stage. They only need to participate in the most labor-intensive stage of production, which is usually the final assembly stage. China’s processing trade is a typical example. Historically, China’s processing trade helped the country to engage in export-oriented growth by importing intermediate goods from the West, assemble the final good using unskilled labor, and then export to the rest of the world. Workers who migrate from rural areas enjoy higher income by working in industries. Moreover, the country gradually learns how to produce in all stages of production through “learning by doing.” In 2007, 51% of China's total exports were attributed to processing trade, though it dropped to 34% in 2016. To be sure, other developing countries like Vietnam are following the footsteps of China. 

But China’s massive engagement in globalization all over the world has led to resentment. First, it displaced workers or lowered their wages in the countries that import a lot of Chinese goods and services. However, many of the complaints about China are unfair. The rhetoric in the U.S. presidential election about China’s “unfair” trade practice distorts the facts, e.g., saying that China is a currency manipulator. Moreover, using the U.S.-China gross trade deficit as a measure of the trade deficit is misleading. Moreover, trade with China has benefited U.S. consumers a great deal, especially low-income people. For example, Walmart was able to provide Americans with many low-cost goods because it sourced a lot of its goods from China. Other examples abound. One just needs to visit any retail store in the U.S. and find out how many items are made in China. 

Therefore, on the one hand, these countries benefit from China’s engagement in globalization; on the other hand, they complain about people losing their jobs or suffering from stagnant wages. But they cannot expect to have the best of both worlds. It is clear that they benefit more than they lose from globalization in general, and from trade with China in particular. It is therefore the responsibility of the governments of these countries to implement policies to retrain their displaced workers and to redistribute income to those who lose from trade. 

The recent emergence of a protectionist sentiment in developed countries may threaten fragmentation and the participation of developing countries in global production. Unless leaders in the developed world embrace free trade again, the future of globalization for developing countries through participation in the global production chain will be endangered.