Global Value Chains

Global Value Chains (GVC — Global Value Chains) are networks of firms participating in various stages of the production of a good, from raw materials to the final consumer, located in different countries. The modern world economy is organized around these chains: the iPhone is designed in California, the screen is manufactured in Korea, assembly takes place in China. The political economy of GVC analyzes the distribution of benefits and power within these networks.

Evolution of Global Production

Traditional international trade consisted of exchanges of finished goods: England exported textiles, Brazil — coffee. Modern trade is different: countries specialize in individual stages of production, exchanging intermediate goods and services.

Reasons for the fragmentation of production:

• Reduction in transportation costs. Containerization and cheap air freight have made it possible to move components around the world.
• Information technology. Coordinating complex chains requires real-time information exchange. The internet and modern ERP systems have made this possible.
• Trade liberalization. Lowering tariffs and non-tariff barriers, as well as bilateral and regional agreements, have created the conditions for international production.
• Investment liberalization. The removal of restrictions on foreign direct investment has allowed companies to relocate production abroad.

Structure of the Chains

Gary Gereffi proposed a typology of GVC governance:

• Market. Simple transactions between independent buyers and sellers. Specifications are standardized, switching between suppliers is easy.
• Modular chain. Suppliers manufacture according to the lead firm's specifications, but have significant autonomy. Interfaces are codified.
• Relational chain. Complex interactions between buyer and supplier, requiring mutual investments and trust. Knowledge is “tacit,” difficult to transfer.
• Captive chain. Small suppliers depend on large buyers who control their activities. Power asymmetry exists.
• Hierarchy. Vertically integrated firm; all stages are controlled from the center.

Value Distribution

The “smiling curve” of value added is a graph showing that the greatest value added is created at the ends of the chain: R&D, design, and branding at one end; marketing and retail at the other. Production and assembly in the middle are the least profitable stages.

This has distributional consequences:

• Developed countries control high-income stages: Apple receives the largest share of the iPhone’s value, even though assembly occurs in China.
• Developing countries often remain stuck at low-income stages — assembly, sewing, processing. Their workers receive a small share of the final price.

"Upgrade" — moving up the value chain — is a strategic goal for developing countries. Examples: South Korea traversed the path from assembly to its own brands (Samsung, Hyundai); China strives for technological leadership.

Labor in Global Chains

GVCs have transformed the global labor market:

• Relocation of production. Labor-intensive production has shifted to countries with low wages. This has created jobs in Asia and other regions, but reduced industrial employment in developed countries.
• Working conditions. Pressure to reduce costs is transmitted along the chain to suppliers. The Rana Plaza catastrophe in Bangladesh (2013), where more than 1,100 garment factory workers died, highlighted safety issues and workers’ rights problems in the lower segments of chains.
• “Race to the bottom?” Countries compete for investment by lowering labor and environmental standards. Yet empirical evidence is mixed: some studies find a “race to the bottom,” others — a convergence of standards.

Policy and GVC

States intervene in chains in various ways:

• Trade policy. Tariffs and non-tariff barriers affect the location of production. Rules of origin determine which goods receive preferences.
• Industrial policy. States seek to promote their firms up the value chain through subsidies, education, infrastructure, technological policy.
• Standards and regulation. Environmental, labor, and sanitary standards affect market access. The EU uses standards as a tool of influence (“the Brussels effect”).
• Sanctions and export control. Geopolitical conflicts are manifested in chains. Sanctions against Huawei disrupted semiconductor supplies; the war in Ukraine — global food and energy chains.

Vulnerabilities and Resilience

The COVID-19 pandemic exposed GVC vulnerabilities:

• Shortages. The lack of semiconductors, medical equipment, and consumer goods demonstrated dependence on concentrated production.
• Concentration risks. Many critical components are manufactured in a limited number of places. Taiwan produces the majority of the world’s advanced chips — a geopolitical risk.

Responses:

• Reshoring and nearshoring. Returning production home or to neighboring countries. However, this is expensive and not always feasible.
• Diversification. Increasing the number of suppliers and locations of production. This is a trade-off between efficiency and resilience.
• Inventories. Transitioning from “just in time” to “just in case” — increasing stocks of critical components.

GVCs are a system with profound political-economic implications: the distribution of the benefits of globalization, the fate of jobs, technological sovereignty, geopolitical rivalry — all of this is connected to the organization of global production.