One Belt One Road: Breakthrough for China’s Global Value Chain Upgrading
By Yue Lu

One Belt One Road: Breakthrough for China’s Global Value Chain Upgrading

Apr. 23, 2016  |     |  0 comments


Ever since the breakout of the global financial crisis in 2008, China has experienced severe negative growth in exports, which means that one of the three major drivers for long-term economic growth of China — consumption, investment, and exports — is unsustainable. Worse still, under the surface of rapid trade growth, China actually creates very limited added-value in the Global Value Chain (GVC). The “One Belt One Road” (OBOR) initiative proposed two years ago has been officially put in the Government Work Report with a view to exploring new trade opportunities around the world. In 2015, the Chinese government officially unveiled the action plan of the OBOR initiative (Figure 1), which has now become the focus of 13th Five-Year Plan and the new diplomatic card of the national leaders. Will the implementation of this strategy create new opportunities for the transformation and upgrading of China's trade? What new opportunities can be brought to reverse the gloomy atmosphere of trade and break the “Low-End Lock of GVC” dilemma?

Figure 1. The Belt and Road Initiative Map

Source: China maps out “One Belt, One Road” with action plan. (2015, March 31). Global Times.

The Dilemma of China’s trade

Under the Reform and Open-Door Policy, with its relatively abundant labor endowment and comparatively complete industrial system and infrastructure, China has gradually become the largest exporter and the world’s factory. However, high export growth does not commensurate with the lack of core technologies and the weak competitiveness of industry, leading to the grim “Low-End Lock of GVC” dilemma for China.

The technical structure of exports has changed significantly and vertical specialization continues to improve, but still China is confined to the lower end of the global value chain (GVC) with limited added value. According to the Trade in Value Added (TIVA) database, in 2011, the share of foreign value added in China stood at 21.6 percent of total exports, a markedly higher percentage than that of the US, Japan and the Eurozone (Figure 2). A large part of the intermediate inputs in China’s exports are imported from Japan, the US, and other developed countries, and then re-exported to foreign markets through processing and assembly. It turns out that the value added by China will be limited if the value of foreign intermediate inputs is excluded.

Figure 2. Foreign Value Added in Exports in Major Economies, as a Percentage of Total Exports

Note: The Eurozone is taken as a whole, i.e. Intra-Eurozone trade flows are eliminated.
Source: Amador, J. and di Mauro F. (2015). The Age of Global Value Chains. CEPR Press.

Further, China's export growth mainly depends on the expansion of the intensive margin, leading to its vulnerability against external risks. According to Amiti and Freund (2010), the intensive margin contributed to 74 percent of China's export growth from 1997 to 2005. Sheng and Lu (2014) point out that the main driver of China 's export growth is the expansion of quantity, rather than the upgrading of the product in terms of diversification and quality. This pattern, which will deliver great benefits in the short run, is not sustainable in the long term. What’s worse, it may even cause external risks.

The high degree of concentration of China's exports has worsened the terms of trade.
Liu (2002) found that export concentration has a negative effect on the stability of China's exports. In this paper, I use the Chain Weighted Tornqvist Index to measure the Price Index of China's exports to the US from 1992 to 2010. Chinese export prices show a downward trend after 2003. Export prices have sharply fallen with the factors of exchange rates and inflation excluded.

Deep Integration between China and Countries Along the “Belt and Road”

According to World Bank statistics, the average annual growth rate of world trade was 7.8 percent from 1990 to 2013, while the annual growth rate of the 65 countries along the “Belt and Road” (including China) reached 13.1 percent in the same period. Especially after the financial crisis, the average annual growth rate of trade for countries along the “Belt and Road” reached 13.9%, higher than the global average of 4.6 percent. Meanwhile, it is worth noting that trade liberalization in the Asian region over the past decade enjoyed unprecedented growth. The number of concluded FTAs in Asia increased from just 9 to 58 between 2000 and 2015. Of these FTAs, 47 are currently in effect. The proliferation of FTAs in Asia is likely to be sustained: another 64 are either under negotiation or are being proposed. Asia is ahead of the Americas in terms of FTAs per country — on average, Asia has 3.8 concluded FTAs per country compared with 2.9 for the Americas.

In addition to the deep integration of countries along the “Belt and Road,” trade between China and these countries has been increasing annually (Figure 3). From the point of view of total exports, trade volume between China and the countries along the “Belt and Road” totaled almost USD 98 billion in 2004, and this increased by almost four times by 2013.  Meanwhile, the proportion of China-OBOR exports to China’s total exports has increased steadily, rising from 16.52 percent in 2004 to 25.76 percent in 2013. From a regional perspective, the trade volume between China and Southeast Asia reached USD 244 billion, accounting for 42.89 percent of China-OBOR exports, and exports to West Asia and North Africa totaled USD 123.2 billion, accounting for 21.65 percent of China-OBOR exports. From the country’s perspective, China 's exports to Russia totaled USD 49.591 billion in 2013, accounting for 8.7 percent of China-OBOR exports, making Russia China's largest exporter along the OBOR, followed by Vietnam, India, Malaysia, and Singapore.

Figure 3. Exports between China and OBOR Countries

Source: UN Comtrade, calculations by the author.

One Belt One Road Strategy Promotes Global Value Chain Upgrading

The National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce, with the State Council’s authorization, jointly issued the “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road” on March 28, 2015, clearly emphasizing the key role of the “One Belt One Road” strategy in strengthening China's industrial upgrading in GVC.

Facilities connectivity promotes technology and equipment exports, and speeds up the upgrading of China's export product quality and the Global Value Chain. The connectivity project will make solid efforts in implementing the OBOR countries’ development strategies, explore the potential of regional markets, further increase investment and consumption, and create demand and employment. ASEAN countries (except Singapore) and Central Asia are still at a low level of industrialization and are stuck with poor infrastructure. These countries have huge demand in areas such as pipelines, railways, ports, airports, telecommunications, nuclear power, and other infrastructure and energy equipment. Therefore, through the introduction of capital to digest its own excess capacity, China can expand exports of technology and equipment products to the OBOR countries, improving the added value of its export structure, and enhancing China's position in the global value chain.

Infrastructure construction offers the possibility of transferring downstream industries, which will reconstruct the Asian value chain and stimulate the “flying geese” model to take shape anew. The construction of transport infrastructure, energy infrastructure, and cross-border fiber optic cable will have a positive external effect on OBOR countries’ economic growth and create an important foundation for undertaking the transfer of low value-added labor-intensive industries from China and promoting the formation of an Asian value chain.

Overseas aid and investment in OBOR countries can improve the demand for downstream products by opening up new target markets, and increase the extensive margin in China’s trade. After the global financial crisis, export markets in developed countries as the main target markets have been impacted unprecedentedly, which has prompted China to seek more diversified trade markets. Thus, foreign investment and aid will not only consolidate and expand on the basis of traditional trade, but also establish a sound system to promote trade in services and the development of new points of growth.

The implementation of the OBOR strategy further promotes the Asia-Pacific Free Trade Zone by eliminating barriers to trade and accelerating the progress and deep integration of different regions. On one hand, through the exchange of information, bilateral and multilateral mutual recognition of regulatory cooperation, customs cooperation and mutual assistance in law enforcement as well as inspection and quarantine, certification and accreditation standards, meteorology, statistical information, and other aspects between the member countries, the OBOR strategy promotes the implementation of the WTO’s Trade Facilitation Agreement and bilateral trade agreements. On the other, via the joint establishment of Free Trade Zones, the OBOR strategy eliminates trade and investment barriers, and makes the participating regions favorable business environments with comprehensive, multi-level, and complex interconnections networks, to achieve these countries’ diverse, independent, balanced, and sustainable development.

References

Amiti, M and Freund, C. (2010). The anatomy of China’s export growth. In Feenstra. R.C. and Wei, S. (eds.), China’s Growing Role in World Trade. University of Chicago Press, pp. 35–56.

Sheng, B. and Lu, Y. (2014). Re-estimation of dual margins of China's trade based on micro-trade data during 2001-2010. [Dui zhongguo chukou eryuanbianji de zaicesuan: jiyu 2001-2010nian zhongguo weiguan maoyi shuju]. Journal of International Trade [Guoji maoyi wenti], 3, 25–36.

Liu, W. (2002). An empirical study of the cause of instability in export earnings. [Zhongguo chukou shouru buwending chengyin de shizhengfenxi]. World Economic Forum [Shijie jingji wenhui], 2, 37–41.

Vision and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. (2015, March 28). National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People's Republic of China.


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