Thursday, April 27, 2017

To the New Age: Global Value Chain and Circular Economy

Lin, Chih-Yi (Francine)

 I.  Global Value Chain and Taiwan's Manufacturing Industry Contribution

Taiwan has been participated deeply in global value chain since 1995. According to OECD/WTO TiVA Data, Taiwan's GVC participation Index was 49.45% in 1995, and increased to 70.99% in 2009 which was more than global average ratio of 48.5% in 2009 (Graph 1).

Graph l. GVC Participation Index in Taiwan

Source: OECD/WTO TiVA Data.
However, Taiwan's manufacturing industry has created less export added value since 1995, and also has created lower export added value that services industry has created. According to OECD/WTO TiVA Data, the VAX ratiol of Taiwan's manufacturing industry in 1995 was around 60%, and decreased to near 50% in 2009; in contrary, the VAX ratio of Taiwan's services industry in 1995 was around 80%, and increased lightly to near 90% in 2009 (Graph 2).

Graph 2. GVC Exports Value-Add in Taiwan

Source:OECD/WTO TiVA Data.

 Richard Baldwin (2013) indicated that, comparing the smile curve in 1970's with the one in 2000's, designing/R&D as well as marketing/ services account larger than manufacturing when it comes to added values (Graph 3). Considering the added-value of manufacturing industry has been shrinking, it is crucial for Taiwan to rethink our roadmap of economy development in future.
Graph 3. Smile Curves in l970's and 2000's

Source:Richard Baldwin (2013).


II.     A new model: Circular Economy

There is a brand new economic model that we could take into account for the next step: the circular economy. A circular economy, unlike the current model we produce and consume, is an industrial system that is restorative or regenerative by intention and design. It replaces the end-of-life concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, and aims for the elimination of waste through the superior design of materials, products, systems and business models. Waste does not exist, and products are designed and optimized for a cycle of disassembly and reuse. Furthermore, the energy required to fuel the circle should be renewable by nature, to decrease resource dependence and increase systems resilience2.

According to Ellen MacArthur Foundation, circularity introduces a strict differentiation between consumable and durable components of a product.
For consumable products in the circular economy, they are largely made of biological ingredients or nutrients that are at least non-toxic and possibly even beneficial, and can safely be returned to the biosphere, either directly or in a cascade of consecutive uses. For Durable products, such as metals and most plastics, they are designed from the start for reuse, and products subject to rapid technological advance are designed for upgraded. Unlike in today's buy-and-consume economy, durable products are leased, rented or shared wherever possible. If they are sold, there are incentives or agreements in place to ensure the return and thereafter the reuse of the product or its components and materials at the end of its period of primary use (Graph 4).

Graph 4. System of Circular Economy

Source:Ellen  MacArthur  Foundation  circular  economy  team  drawing  from  Braungart  & McDonough and Cradle (C2C).
Circular economy model can add up to substantial cumulative advantages over a classical linear model through following the power of the inner circle, the power of circling longer, the power of cascaded use, and the power of pure inputs. Particularly, the power of cascade use refers to diversifying reuse across the value chain, such as when cotton clothing is reused first as second-hand apparel, then crosses to the furniture industry as fiber-fill in upholstery, and the fiber-fill is later reused in stone wool insulation for construction before the cotton fibers are safely returned to the biosphere. In the process of diversifying reuse across the value chain, added value is created and economic profits are generated.
According to McKinsey, Ellen MacArthur Foundation & the World Economic Forum, circular supply chains will contribute over $1 trillion to the global economy by 2025, and are expected to create 100 thousand new jobs as well as to save $500 million material costs by 2020. Moving to circular supply chains, new business models, suppliers assessing process, and going digital are suggested. First, new business models from linear to circular are required. Second, assessing related suppliers to ensure a common vision and goal to apply renewable and non-toxic components is necessary. Finally, upgrading technology system and digitalizing to coordinate and keep track of the full process will support circular supply chains to run well.
III.        Outlook: Circular Economy in Taiwan
Indeed, there are several successful stories for circular economic models in Taiwan. For instance, recycling PET materials are used for textile and clothing industries, such as athletes' clothing in 2016 Olympics. Besides, reused coffee grounds are multi-cascaded used to a wide range of industries, such as textile and clothing industries, PU plastic materials, and essential oils as well as shampoos, etc.
Moving forward, a circular economy will reshape and upgrade Taiwan's position in global value chains. Under the new model of a circular supply chain, Taiwan can make efforts on recycling/ reused materials application R&D, as well as on recycling/reused products selling or solution services providing, which implies that Taiwan economy will transform from "Manufacturing" to "Designing" and to "Services", and thus create more added value than before according to smile curve theory.
(Francine Lin is the Manager at the Emerging Markets Development Study Center, TIER)
1 VAX ratio = added value in export / total export amount
2 Ellen MacArthur Foundation, 2014, "Towards the Circular Economy: Accelerating the scale-up across global supply chains".

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