Invisible Links

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

Value chains transform manufacturing-and distort the globalization debate

 
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Commercialization
Design
Research &
Development
Manufacturing
& Standardization
Marketing &
Advertisement
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

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