Saturday, September 20, 2014

Realignment of Global Value Chains under TPP and RCEP

Eric Chiou

        In recent years, the significance of global values chains (GVCs) with regard to regional economic integration has drawn much attention. The rapid expansion of GVCs has broadly spread around the world and its importance has also been widely recognized. Since the initial study conducted by the collaboration work between the OECD, the WTO, and the UNCTAD, the positive effects of GVCs in terms of boosting economic growth and development, helping job creation have been highly anticipated.

        As a result, policy-makers in many economies have adopted various policies to enhance their GVC participation in hope of stimulating economic growth, fostering job creation, and facilitating industrial upgrading. They hope that through actively participating in GVCs, many promising advantages, such as accelerating the catch-up process of developing countries, facilitating convergence between different development levels of economies, and upgrading production capabilities could be fulfilled.

        Over the past decades, the Asia-Pacific region has been one of the most successful cases in harnessing GVCs. The robust economic development in the Asia-Pacific region has lied in the intertwined networks of supply chain connectivity, which allow different economies to base on each comparative advantage and partake in GVCs for mutual benefits.

        Some studies even suggest that active participations by APEC members in GVCs in the past decades have allowed most them to enjoy lasting economic growth and business resilience in the ups and downs of unpredictable global economy. As the most important regional economic forum in the Asia-Pacific region, while acknowledging the importance of GVCs, APEC has initiated several action plans to facilitate the development of GVC in this region. Specifically, APEC has launched two Trade Facilitation Action Plans (TFAPs) to lower related trade transaction costs within the region.

        While the above two plans had reached significant achievements, APEC decided to shift its focus to the broader issue of supply chain performance and launched the Supply Chain Connectivity Framework Action Plan (SCFAP). This Action Plan sets a target of a 10 percent improvement in supply chain performance in terms of time, cost and uncertainty by 2015. On the other hand, while the soundness of supply chain connectivity may affect multinational corporations' decisions on where to invest and where to locate their production bases, the arrangement of regional economic integration exerts overwhelming weight on the performances of supply chain connectivity.

        Since different designs of regional economic integration provide varied incentives for multinational corporations to reconsider their strategies of GVCs in terms of where to produce and where to sell, one can expect that the consequences of regional economic integration are likely to alter existing comparative advantages, change business calculation of multinational corporations, influence supply chain connectivity, and reshape regional production networks.

        Given that TPP and RCEP have represent the major two blueprints of regional integration in the Asia-Pacific region, it is important to explore possible impacts of TPP and RCEP on supply chain connectivity and how these influences will affect some industries. Particularly, the importance of supply chain is likely to vary by different industries, while the impacts of different regional integration on different sectors also tend to be dissimilar. Hence, the consequences of regional integration may change the existing status of comparative advantages in different sectors across economies in the region, while the changed comparative advantages among economies are likely to affect multinational corporations' calculation of GVC arrangement in the region, so as to lead to the possible shift of GVCs.

        Based on the outcomes obtained through utilizing the Global Trade Analysis Project (GTAP) analysis on three selected sectors, electronics sector, machinery sector, and automobile sector, which are heavily dependent on regional supply chain connectivity, the following findings are noteworthy.

        First, a state's increased economic welfare due to participating in regional integration and GVCs does not mean that the state's each sector will gain benefits equally. Based on the principle of international division of labor and comparative advantage, regional economic integration is likely to benefit originally competitive sectors, but to further devastate vulnerable sectors in an economy. On the other hand, while regional integration may level the playing field by eliminating tariffs, it can accelerate the speed of industrial relocation to some economies with lower labor cost or more convenient access to markets, which may further erode the existing output of industries.

        Second, different routes of regional integration initiatives will not only pose different impacts on each economy's sectors, but may also shape and alter the sectoral competitiveness of each economy. In other words, based on the assessments of its industrial interests under different regional integration initiatives, an economy may prefer one route of regional integration over the others. On the other hand, if an economy does not make a prudent assessment before participating in regional integration, it may unintentionally let its relatively competitive sectors encounter more intense competition after joining regional integration.

        Third, the findings also suggest that both trading camps, TPP and RCEP, do not have a significant gap in terms of their development of regional supply chain connectivity. Although TPP may have the upper hand now, it also means that RCEP has huge room for improvement if RCEP can be concluded as a high-quality regional integration.

        At the sectoral level, the findings do indicate that some developing economies could generate remarkable growth of output in some sectors after the implementation of either TPP or RCEP. But this is not true for some developed economies. In other words, one of consequences of the formation of TPP and RCEP is to alter industrial comparative advantages in different sector across countries in the Asia-Pacific region, while this changing configuration of comparative advantages across economies seem to be more favorable to developing economies in these selected industries in terms of their domestic industrial outputs, rather than to developed economies.

        Although these changes of domestic industrial outputs in individual economies may reveal some important signs of the possible shifts in GVCs, this indicator is hardly the only and decisive factor in suggesting the shift of GVCs, since many factors would affect multinational corporations' consideration of global strategies and production arrangements.

        Despite the limitations of sketching the picture of changing GVCs under TPP and RCEP, one of important policy implications revealed from the above analysis is that leaders of individual economies should be cautious and foresee the possible shift of regional supply chains after the formation of any regional integration initiatives. They should be prepared with prudent and welldesigned strategies to alleviate negative impacts, while maximizing positive benefits from upcoming challenges of the realignment of global value chains in the aftermath of varied versions of regional economic integration.

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