China in the reconfiguration of global value chains

Editor's note: Chen Xiao, a special commentator of CGTN, is deputy director and associate research fellow in the Division of Research Organization in the Center for International Development Knowledge in China. The article reflects the author's opinions and not necessarily the views of CGTN.

Since the 1980s, global value chains (GVCs) have been important vehicles for economic development. Through GVCs, multinational companies from developed countries orchestrate their global production network and collaborate with offshore suppliers from developing countries to pursue low costs and high efficiency. Many developing countries thereby participate in the international production system, introduce foreign investment and technology, and connect with the international market, promoting national growth and global prosperity.

China is an outstanding example of this. By adopting policies of reform and opening-up and acceding to the World Trade Organization (WTO), China has leveraged its comparative advantages, gradually integrated itself with GVCs and achieved manufacturing-led development.

From 1990 to 2022, China's share of manufacturing value added in GDP increased from 15.7 percent to 28.3 percent. Its global share of manufacturing value added jumped from about 7 percent in 2000 to nearly 30 percent in 2022. China's growth injects strong impetus to the world economy. The World Bank estimates that China's contribution to global economic growth averaged 38.6 percent during 2013 and 2021. 

In the last decade, GVCs have been experiencing a series of challenges from technological revolution, climate change, the COVID-19 pandemic and geopolitical tensions. Some developed economies, such as the U.S. and its allies, conduct industrial policies which encourage manufacturing reshoring, nearshoring and friend-shoring and try to decouple or derisk from China in GVCs. The consideration for distributing suppliers is tending increasingly towards their definition of security and resilience, rather than the objective cost and efficiency.

The reconfiguration of GVCs is underway. The International Monetary Fund pointed out in the World Economic Outlook (April 2023) that the share of foreign direct investment flows among geopolitically aligned economies kept rising over the last decade, more than the share for countries that are closer geographically.

The United Nations Conference on Trade and Development reported a noticeable rise in the political proximity of trade and an overall decline in trade partner diversity since 2022. China's role and prospects in the reconfiguration has attracted global attention.

China is systemically important in GVCs. It is the second largest economy, the largest manufacturer and the largest merchandise trader in the world, which exerts significant influence on the global production system. Besides, China is a key hub for trade and investment. As the regional hub of the GVCs in Asia, it connects and interacts closely with the U.S. and Germany, forming an Asia-North America-Europe economic triangle.

Furthermore, China possesses a strong capability for creating value. Companies in China are able to use local resources for innovation and gain profits from the Chinese market. They have gradually forged the capabilities from "made in China" to "created in China" and to "intelligent manufacturing in China."

Despite the reconfiguration, China has actually accelerated its pace of industrial transformation and upgrading. Traditional industries in China, such as steel, mining and textile industries, are transformed by digitalization and greening. New industries, such as electrical vehicle and photovoltaic industries, have grown dramatically. By 2023, China's global share of electric vehicle output and sales was over 60 percent and its global share in all the manufacturing stages of solar panels exceeded 80 percent.                                   

Moreover, a series of breakthrough innovations is emerging in frontier areas, such as artificial intelligence, quantum technology and integrated circuits. These phenomena indicate China's strong industrial competitiveness and resilience.

China's competitiveness has contributed to its unique advantages for industrial development. The first is a well-developed industrial system. China is the only country in the world to possess all industrial categories as classified by the UN. It is very convenient for companies in China to specialize in certain segments and find material and component supplies within the system.

China also has a large domestic market. With a population of 1.4 billion and a middle-income group of nearly 400 million, the huge domestic market provides large demand for industrial products and many opportunities for technological applications, As well as , well-constructed infrastructure facilities. Different regions in China are well connected through comprehensive systems of transportation and communication, which facilitate the flows of people, goods and information for industrial development.

Apart from that, China has the largest number of engineers in the world. Between 2000 and 2020, the country cultivated about 60 million engineers who play indispensable roles in applying and rapidly iterating new technologies. Last but not least, is its strong coordination capability. China combines market forces with government guidance and technological platforms to mobilize and coordinate different stakeholders for collective actions of industrial progress and innovation.

Amid economic turbulence, it is necessary to enhance GVCs security and resilience. However, overemphasis on derisking from China is unrealistic, irrational and unsustainable. History shows that China is not only a beneficiary, but also a contributor of GVCs. Decoupling from China will actually increase the uncertainty and risk of GVCs, which will harm the global economy.

The WTO estimated that if the world economy decouples into two self-contained trading blocs, it would lower the long-run level of real global GDP by at least 5 percent. Looking into the future, China is willing to expand high-level opening up, share development opportunities with the world and promote further development of GVCs.

We call on the international community to rebuild trust and deepen cooperation in consolidating and strengthening GVCs. Developed countries should find a better balance between efficiency and security in industrial policies, and take into account the interests and concerns of developing countries. Developing countries should seize opportunities, take measures suited to local conditions, and enhance their industrial capabilities and international competitiveness.

The global community should work together to build inclusive, reliable and reciprocal supply chain partnerships, so as to promote resilient, unimpeded and efficient GVCs and a more inclusive and sustainable global economic development.

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