china and the transformation of value chains · 2 1. the world is more linked to china while china...

China and the transformation of value chains

Alicia Garcia Herrero

Senior Fellow, Bruegel

November, 2019

Key issues

2

1. The world is more linked to China while China becomes more vertically

integrated

2. China’s vertical integration leads to China’s reduced dependence on Asian

regional value chain

3. Europe’s value chain increasingly dependent on China at the expense of its

own regional integration

4. How do EU countries differ from Asian ones in their integration to China’s

value chain?

5. US rising dependency on Chinese intermediates while declining export of

intermediates not just to China but the world

6. North Asia reshuffling supply chain to Southeast Asia in response to China’s

vertical integration

3

Related research:

Supply chain transformation : The world is more linked to China while China

becomes more vertically integrated

1. Supply chain transformation : The world is more linked to China while China becomes more vertically integrated

https://www.research.natixis.com/Site/en/publication/-_JQUR-0gdezsHpW3oZJLosBMLm42dNjkaNv7SfiCFY%3D?from=email

China is now the center of the global value chain as 19% of global manufacturing exports are produced in China

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20

17

20

18

China’s global market share of manufacturing exports (%)

Source: Natixis, UNCTAD

13

9

15

63

Share in world total exports (%,2017)

China US EU Rest of world

Source: Natixis, WTO

Analyzing exports through a value chain (VC) approach

5

13%

32%

13%

87%

0

10

20

30

40

50

60

70

80

90

100

1 2

Breakdown of China's value added of gross exports (2018,%)

Gross:

2.2tr $

DVA

FVA

GVC:

45%

FVA

DVX

Source: UNCTAD-Eora database forecast, Natixis

Global value chain (GVC) integration has been declining since the global financial crisis

6

40

42

44

46

48

50

52

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00

20

01

20

02

20

03

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04

20

05

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06

20

07

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08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

World GVC Participation (%)

Source: UNCTAD-Eora database, Natixis

N.B. Results for 2016-2018 are forecasted by UNCTAD-Eora

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4

6

8

10

12

14

20

00

20

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07

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08

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09

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10

20

11

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13

20

14

20

15

20

16

20

17

China’s market share of global exports (%)


The drop in participation is driven by the decrease in usage of foreign inputs for exports, with China having the sharpest reduction in foreign dependency

7

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

10

20

30

40

50

60

70

Germany US China Global

GVC Participation (%)

2014 2018 Chg in level (rhs)



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

50

55

60

65

70

75

80

85

90

Germany Global US China

Domestic value added in export (%)

DVA 2018 Change in level (2018-2014)



Change in level (2018-2014,rhs)

China has not only increased its vertical integration by reducing its reliance on imports of intermediates but also sharply increased its exports of intermediate goods

8

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

-45

-35

-25

-15

-5

5

15

25

35

45

Germany Global US China

Foreign value added in export (%)

FVA 2018 Change in level (2018-2014)




-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-40

-30

-20

-10

0

10

20

30

40

50

Germany US Global China

Domestic value added in third country's export or DVX (%)

DVX 2018 Change in level (2018-2014)




9

Related research:

China’s vertical integration leads to less dependence on Asian regional value chain

2. China’s vertical integration leads to less dependence on Asian regional value chain

https://www.research.natixis.com/Site/en/publication/ASDjjMbyk61xI_Q0STMKqA%3D%3D?from=share

Global and regional: a regional value chain approach

10

13%

32%

55%

13%

87%

7%

6%

12%

19%

0

10

20

30

40

50

60

70

80

90

100

Breakdown of China's value added of gross exports (%，2018)

Gross:

2.2tr $

DVA

FVA

GVC:

0.99tr $

FVA

DVX

Source: UNCTAD-Eora database forecast, Natixis

DVA-DVX

RVC: 0.40tr $DVX Within Asia

FVA Within Asia

DVX Outside Asia

FVA Outside Asia

Value chains declining globally and at the regional level too for Asian economies

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0

10

20

30

40

50

60

70

80

GVC breakdown by region (%,2018)

GVC within Asia (RVC) GVC Outside of Asia


N.B. Results for 2018 are forecasted by UNCTAD-Eora

-8

-6

-4

-2

0

2

4

-8

-6

-4

-2

0

2

4

RVC participation within Asia (%)

Change in GVC (2018-2014) Change in RVC (2018-2014)



Integration at the sub-regional level is rising in ASEAN and to a lesser extent North Asia, while the decline of regional integration is driven by China and to a lesser extent South Asia

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0

5

10

15

20

25

30

35

40

Share in global manufacturing exports (%)

China India ASEAN North Asia

Source: UNCTAD, Natixis

-0.5

0.0

0.5

1.0

-15

-10

-5

0

5

10

15

20

25

30

Asia Asia ExChina

North Asia South Asia ASEAN

Regional and sub-regional value chain participation (%)

2014 2018 Chg (2018-2014,rhs)



Asian countries’ value chain participation with China has declined, except for Bangladesh, Singapore and Vietnam, which is driven by China’s vertical integration

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GVC RVC Sub-region With China

South Korea -1 -1 -1 -1

Taiwan 1 1 1 -1

Japan -1 -1 -1 -1

China -1 -1 -1 N/A

Singapore -1 1 1 1

Malaysia -1 1 1 -1

Philippines -1 -1 -1 -1

Viet Nam -1 -1 -1 1

Indonesia -1 1 1 -1

Thailand -1 1 1 -1

Nepal 1 1 1 -1

Pakistan 1 1 1 -1

India -1 -1 -1 -1

Sri Lanka -1 -1 -1 -1

Bangladesh -1 -1 -1 1

Table 1

Change in value chain participation (2018-2014)



-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-20

-15

-10

-5

0

5

10

15

20

RVC DVX FVA

China's value chain integration within Asia (%)

2018 Change 2018-2014 (rhs)



14

Related research:

Europe’s value chain increasingly dependent on China at the expense of its own

regional integration

3. Europe’s value chain increasingly dependent on China at the expense of its own regional integration

https://research.natixis.com/Site/en/publication/QkIYFbCpyiyXg5zyEb6a0w%3D%3D?from=share

The European Union is experiencing a sharp reduction in global value chain participation

15

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-80

-60

-40

-20

0

20

40

60

80

China US EU Asia Ex China

GVC Participation (%)

2018 Chg(2018-2014,rhs)



EU’s GVC includes individual EU economy’s integration within EU

05

101520253035404550


China EU28


And it is not because of shortening of the supply chain as EU’s regionalization of its value chain decreases

16

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-80

-60

-40

-20

0

20

40

60

80

GVC RVC GVC with rest ofthe world

EU's value chain participation (%)

RVC GVC with RoW Chg (2018-2014, rhs)



0102030405060708090

GVC breakdown by region (%,2018)

RVC (GVC within EU) GVC Outside of EU



RVC has dropped across all European Union economies. Correspondingly, share of intra-EU in EU’s gross exports also declined

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-8

-6

-4

-2

0

2

-8

-6

-4

-2

0

2

RVC participation within EU28 (%)

Chg of RVC (2018-2014) Chg of GVC with ROW (2018-2014)



6061626364656667686970

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08

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09

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10

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11

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20

14

20

15

20

16

20

17

20

18

Share of intra-EU in EU's global exports (%)


EU’s weaker regional integration coincides with increasing linkages with China’s value chain

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-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-20

-15

-10

-5

0

5

10

15

20

China-EU28Value Chain

DVX FVA

China's value chain integration with EU28 (%)

2018 Change (2018-2014,rhs)



-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-40

-30

-20

-10

0

10

20

30

40

China US EU Asia Ex China

Domestic value added in third country's export or DVX (%)

2018 Chg(2018-2014,rhs)



EU’s GVC includes individual EU economy’s integration within EU

But such linkages are increasingly asymmetric in China’s favor

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Country GVC RVC W/CN

Belgium -1 -1 1

Croatia -1 -1 1

Cyprus -1 -1 1

Czech Republic -1 -1 1

Estonia -1 -1 1

Greece 1 -1 1

Hungary -1 -1 1

Ireland -1 -1 1

Italy -1 -1 1

Lithuania -1 -1 1

Luxembourg -1 -1 1

Malta -1 -1 1

Netherlands -1 -1 1

Poland -1 -1 1

Portugal -1 -1 1

Romania -1 -1 1

Slovakia -1 -1 1

Slovenia -1 -1 1

Spain -1 -1 1

Austria -1 -1 -1

Bulgaria -1 -1 -1

Denmark -1 -1 -1

Finland -1 -1 -1

France -1 -1 -1

Germany -1 -1 -1

Latvia -1 -1 -1

Sweden -1 -1 -1

UK -1 -1 -1

Table 1

Change in value chain particiaption (2018-2014)

Source: UNCTAD-Eora database, Nat ixis


20

Related research:

How do EU countries differ from Asian ones in their integration to China’s value

chain?

4. How do EU countries differ from Asian ones in their integration to China’s value chain?

https://research.natixis.com/Site/en/publication/4hn_TTTvo2g4h_z9XfenCg%3D%3D?from=share

Level of integration in China’s value chain about the same but trends are different

21

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-20

-15

-10

-5

0

5

10

15

20

China-EU28Value Chain

DVX FVA

China's value chain integration with EU28 (%)

2018 Change (2018-2014,rhs)



-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-20

-15

-10

-5

0

5

10

15

20

RVC DVX FVA

China's value chain integration within Asia (%)

2018 Change 2018-2014 (rhs)



European economies is increasing its dependence on China

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VC with China FVA from ChinaDVX to China Overall

Austria -1 1 -1

Belgium 1 1 -1

Bulgaria -1 1 -1

Croatia 1 1 -1

Cyprus 1 1 -1

Czech Republic 1 1 -1

Denmark -1 1 -1

Estonia 1 1 -1

Finland -1 1 -1

France -1 1 -1

Germany -1 -1 -1

Greece 1 1 -1

Hungary 1 1 -1

Ireland 1 1 -1

Italy 1 1 -1

Latvia -1 1 -1

Lithuania 1 1 -1

Luxembourg 1 1 -1

Malta 1 1 -1

Netherlands 1 1 -1

Poland 1 1 -1

Portugal 1 1 -1

Romania 1 1 -1

Slovakia 1 1 -1

Slovenia 1 1 -1

Spain 1 1 -1

Sweden -1 1 -1

UK -1 1 -1

stands for low er FVA from China and higher DVX to China

stands for higher FVA from China but low er DVX to China

stands for higher FVA from China and higher DVX to China

stands for low er FVA from China and low er DVX to China

Table.2




Belt & Road member economies are shaded in grey

But Asian economies are reducing it

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13.0

11.1

9.7

6.6

1.8

57.8

Total foreign value added in China's exports ( % , 2018 )

Japan South Korea US

Germany Singapore Rest of the world



VC with China FVA from China DVX to China Overall

Bangladesh 1 1 -1

India -1 -1 -1

Indonesia -1 -1 -1

Japan -1 1 -1

Malaysia -1 1 -1

Nepal -1 -1 -1

Pakistan -1 -1 1

Philippines -1 -1 -1

South Korea -1 1 -1

Singapore 1 1 -1

Sri Lanka -1 1 -1

Taiwan -1 1 -1

Thailand -1 1 -1

Viet Nam 1 1 -1





Table.1





5. US-China value chain relationship increasingly asymmetric in China’s favor

24

Related research:

US-China value chain relationship increasingly asymmetric in China’s favor

https://research.natixis.com/Site/en/publication/6ThHnFRb4ZKhgFjd1B6EXQ%3D%3D?from=share

The US participation has declined, mirroring its reduction in global manufacturing share

25

02468

101214161820


China US


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-80

-60

-40

-20

0

20

40

GVC DVX FVA

US global value chain participation (%)

DVX FVA Chg (2018-2014,rhs)



The US sees declining export of intermediates but rise of import of Chinese intermediates for exports

26

-

1,000

2,000

3,000

EX IM

US' trade in goods with the world( by stage of production, USD bn)

Consumption goods Intermediate goods

Capital goods Unclassified


N.B.: Product classified under the Broad Economic Categories (BEC). Unclassified product consists mainly of food

& live animals

0

5

10

15

20

25

0

5

10

15

20

25

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Share of China in US total imports (%)

Total Intermediate


N.B.: Product classified under the Broad Economic Categories (BEC). Unclassified product consists mainly

of food & live animals

The US is losing grounds to China in terms of bilateral value chain relationship

27

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

-3

-2

-1

0

1

2

3

Value Chain withChina

DVX FVA

US value chain integration with China (%)

2018 Change 2018-2014



0

5

10

15

20

25

0

5

10

15

20

25

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Share of China in US total imports (%)

Total Intermediate


N.B.: Product classified under the Broad Economic Categories (BEC). Unclassified product consists

mainly of food & live animals

The US is also reducing its participation with neighboring Latin America, Asia ex China and Europe

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Region US China

Asia Ex CN -1 -1

CN 1 N/A

EU28 -1 1

LATAM -1 1

Table 1

Value chain integration with key regions



Note that most bilateral value chains between the US and China are for final consumption so the BVC is small

29

0

200

400

600

800

1,000

1,200

US CN

Bilateral VC for US and China (USD bn, as of 2018)

W/China or US W/RoW



The trade-war zeros in on this bilateral intermediate relationship

30

- 200 400 600

US Import from CN

US Export to CN

US trade with China (USD bn)

Intermediate goods Capital goods Consumption goods Unclassified


Tariffed Untariffed

Tariffed

6. North Asia reshuffling supply chain to Southeast Asia in response to China’s vertical integration

31

Related research:

North Asia reshuffling supply chain to Southeast Asia in response to China’s vertical

integration

https://research.natixis.com/Site/en/publication/bAPYMpWIxG0Ywh7lfKuYwA%3D%3D?from=share

The Asia Pacific region has become less integrated with China via the value chain while still importing more Chinese intermediates for exports.

32

GVCVC with

China

FVA from

China

DVX to

China

Overall

with China

China -1 N/A N/A N/A

Japan -1 -1 1 -1

South Korea -1 -1 1 -1

Taiwan 1 -1 1 -1

Indonesia -1 -1 -1 -1

Malaysia -1 -1 1 -1

Philippines -1 -1 -1 -1

Singapore -1 1 1 -1

Thailand -1 -1 1 -1

Viet Nam -1 1 1 -1

Bangladesh -1 1 1 -1

India -1 -1 -1 -1

Nepal 1 -1 -1 -1

Pakistan 1 -1 -1 1

Sri Lanka -1 -1 1 -1









Table.1

North Asian economies are not standing by idly, with a rise of foreign direct investment into Southeast Asia

33

012345678910

0123456789

10

Foreign direct investment into ASEAN (USD bn)

South Korea Taiwan Japan

Source: Natixis, CEIC

RVC Sub-region

China -1 -1

Japan -1 -1

South Korea -1 -1

Taiwan 1 1

Indonesia 1 1

Malaysia 1 1

Philippines -1 -1

Singapore 1 1

Thailand 1 1

Viet Nam -1 -1

Bangladesh -1 -1

India -1 -1

Nepal 1 1

Pakistan 1 1

Sri Lanka -1 -1

Table.2




That process of North Asian economies, and increasingly China too, deploying FDI into Southeast Asia has resulted in a surge of FDI in the region

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(5)

-

5

10

15

20

25

30

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

Change of share in global exports (%, 2018)

Chg of share in global export Mfg FDI growth (rhs)



If FDI supports regional supply chain, this is good news for investors (North Asia) and recipients (ASEAN)

35

(3.0)

(2.0)

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Change of share in global exports (%, 2018)

Chg of share in global exports (%) Chg of DVX to GDP (rhs)



- 100 200 300

Philippines

Indonesia

VietNam

Malaysia

Thailand

Gross export to the world (USD bn)

2018 2011


Vietnam retains its number 1 in 2019 ranking and Thailand jumped from third to second most attractive relocation in Asia.

36

Related research:

Impact of trade war on emerging Asia: No short-term winner but Vietnam, India and

Thailand to gain in the medium-term

Table 3. A summary of our relocation metrics and ranking

InvestmentWage ( $ per

month)

Electricity ( $ per

liter)

Doing Biz

Ranking

Infrastructure

Ranking Mfg/Total FDI (%)

CN -1 493 1 31 26 30 9 4 4

ID 6 296 1 73 46 35 9 5 5

IN 7 265 1 63 44 61 10 6 2

ML 7 413 1 12 41 30 6 3 6

PH 9 220 1 95 60 14 6 7 7

TH -2 413 1 21 32 37 9 2 3

VN 1 227 1 70 39 36 9 1 1

Country Demographics (%)Input Institution/Infrastructure Overall Rankings

2018

Source: Natixis, UNCTAD, Jetro, UN Population Statistics, World Bank, Global Petrol

Import tariff on Mfg

goods (%)

Overall Rankings

2019

https://www.research.natixis.com/Site/en/publication/ssj0E9tB4sz94CA2ica1Gw%3D%3D?from=website

Vietnam tops the table again for labor intensive but is fourth for medium-tech. Thailand tops our relocation index for medium-tech and China retains second place.

37

Table 4. Country rank by Manufacturing Group (2019)

Medium-tech capital-intensive Labor-intensive

CN 2 7

ID 6 2

IN 5 4

ML 3 5

PH 7 3

TH 1 6

VN 4 1

Source: Natixis, UNCTAD, Jetro, UN Population Statistics, World Bank, Global Petrol

All in all

38

• Global value chains are going through a very rapid transformation, in particular their size is shrinking since the global financial crisis.

• At first sight, one could imagine that the reason is the regionalization of global value chains but this is not what we find in our analysis.

• In the case of Asia, further regionalization of the value chain is happening within ASEAN and, to a lesser extent, North Asia but not in the rest of Asia and, most importantly, not so much with China.

• This is even more the case for the European Union where its regional value chain is losing ground while its linkages with China are growing.

• In any case, both for Asia and the EU, their integration with China’s value chain is becoming more asymmetric in China’s favor. In other words, while the EU and Asia are reducing their exports of intermediate goods for China’s own exports, China is increasing its exports of such intermediate goods.

• The US declining participation in the global value chain is driven by both its reduction in exporting of high-tech intermediates used for inputs in others’ exports and its reliance on foreign inputs for its production. At the same time, the US is increasingly dependent on Chinese intermediates for exports.

• While China has clearly benefited from its vertical integration of the value chain, regional counterparts are not standing by idly, especially North Asian economies by raising foreign direct investment into Southeast Asia.

• In other words, China is less dependent on the rest of the world, as it continues to vertically integrate its production, but the rest of the world is increasingly dependent on China’s exports.

Thanks!

39

Appendix:

40

The UNCTAD-Eora Global Value Chain (GVC) database offers global coverage (189 countries

and a “Rest of World” region) and a timeseries from 1990 to 2018 of the key GVC indicators:

foreign value added (FVA), domestic value added (DVA) and indirect value added (DVX). Results

from 1990 to 2015 are generated from EORA Multi-Region Input-Output tables (MRIOs). Results

for 2016 -2018 are nowcasted based on the IMF World Economic Outlook.

china and the transformation of value chains · 2 1. the world is more linked to china while china...

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