Invisible Links

• Author: David Dollar
• Position: Senior fellow at the Brookings Institution's John L. Thornton China Center
• Pages: 50-53

Commercialization

Design

Research &

Development

Manufacturing

& Standardization

Marketing &

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Logistics &

Services

Walk into a Toyota dealership in New

York or Munich, and you might think

you are looking at cars made i n Japan.

You would be mistaken. In fact, the

15,000 components that make up a modern car

are often produced by different firms i n different

locations. ere are three main hubs for auto

production—North America , Europe, and east

Asia . Research and development and design most ly

take place in Germa ny, Japan, and the United

States, with China st arting to play a significant role

as well, given the 5 mill ion STEM (science, tech-

nology, engineering, and mathematics) graduate s

it trains each yea r. Each of these hubs combines

production in high-wage economies with pa rts and

components from lower-wage, emerging market

economies. Parts and components crisscross mu l-

tiple borders during the production process.

From smartphones and autos to TVs and com-

puters, more than two-thi rds of international trade

now takes place within such global value cha ins.

at’s up from 60 percent in 2001. e rise of

value chains ha s reshaped the world economy,

fueling dramatic advances in livi ng standards in

emerging-market economies like China and

Vietnam, where labor costs are relatively low, while

widening income inequalit y in advanced economies,

including the United States. Yet decades-old meth-

ods of gathering trade data, developed in the pre-

value-chain world, fai l to reflect this transformat ion,

giving rise to a skewed pictu re of the movement of

goods and service s around the world. e result:

acrimonious debates over job losses blamed on trade

are rooted in inadequate data , amplifying misg uided

call s for protectionism.

Take the case of a smartphone exported by China.

When it is shipped to the United States, official

trade statistics record its full value as an import

from China. But research on value chains, such as

the Global Value Chain Development Reports, pub-

lished by the World Trade Organization and the

World Bank, shows that it would be more accurate

to say the United States imports different types of

value added from different partners, including labor-

intensive assembly from China and more sophis-

ticated manufacturing inputs from South Korea.

at is because official trade statistics measure the

gross value of trade, not the value added at each link

in the chain. What is more, official statistics don’t

capture the growing importance of services, such

as computer coding, logistics, and marketing, that

are contained in the value of manufactured goods.

Value chains transform manufacturing—and distort the globalization debate

David Dollar

INVISIBLE LINKS

50 FINANCE & DEVELOPMENT | June 2019