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How Global Supply Chains now dominant cross-border trade

Such are the complexities of global supply chains that the idea that any product, other than the most basic, is actually “Made in Germany”, or the United States, or in any particular country, is no longer true. Products produced in this way are said to use the global value chain (”GVC”). In fact it has been said that “Global Value Chains (GVCs) represent the dominant form of cross-border economic organisation for the production and delivery of goods and services.”[1] As a result in many developing countries many exported products have a large percentage of foreign content, in China and South Korea in 2009 the foreign content of electronic products that were exported was about 40%.[2]

When a highly complex product like an aircraft is produced the components that are used to manufacture it will be produced around the world. Airbus describes itself as “a truly global enterprise with an active workforce of approximately 55,000 around the world”, it adds that it Airbus also “relies on industrial co-operation and partnerships with major companies all over the world, and a network of some 7,700 suppliers.”[3] Airbus subsidiaries in the United States, China, Japan, India and the Middle East, and spare parts centres in Hamburg, Frankfurt, Washington, Dubai, Beijing and Singapore, training centres in Toulouse, Miami, Hamburg, Bangalore and Beijing and more than 150 field service offices around the world.” It assembles aircraft in France, and China and plans to also do so in the United States.[4] The same process takes place in the motor industry and in electronics, a smart phone or laptop will contain components from all over the world, with final assembly sub-contracted to a firm like Foxconn, often taking place on assembly-lines in Shenzhen, China. Managing such supply chains is difficult and sophisticated IT is used to track and control the process. It’s no longer possible to ask people to “Buy American”, or “Buy British”, that option disappeared in the 1960s. The global economy is therefore a far more integrated than ever before, and the degree of mutual dependence has increased significantly.

The transfer prices adopted between different branches of international corporations involved in GVCs are a complication when calculating the value of international trade flows and national balance of payments. According to the OECD, “there is evidence that intra-firm trade accounts for a large share of world trade. In the case of the United States, intra-firm transactions represent 48% of imports and 30% of exports in 2009 (on the basis of trade statistics).”[5] Transfer prices within companies will be determined by corporate policies, including tax efficiency, that is minimizing tax payments. It is therefore difficult for official trade statistics to track the actual value of intra-firm trade.

As a result, governments have really lost the power to manage their manufacturing economies, the large multi-national corporation, or even the smaller company using the supply-chain tools that are available on the Internet, treats production as a virtual operation. National boundaries have become less and less important, politicians still want to appear to control the flow of labour, even though they have had to give up controlling the flow of products, legal and illegal, a long time ago.[6]

[1] Bhatia, Ujal Singh – “The globalization of supply chains – policy challenges for developing countries”, in “Global Value Chains in a Changing World”, Elms, Deborah K and Low, Patrick (editors), World Trade Organization, Fung Global Institute and the Temasek Foundation Centre for Trade & Negotiations, Geneva, 2013, p.313

[2] Ahmad, Nadim – “Estimating trade in value-added: why and how?” – “in “Global Value Chains in a Changing World”, Elms, Deborah K and Low, Patrick (editors), World Trade Organization, Fung Global Institute and the Temasek Foundation Centre for Trade & Negotiations, Geneva, 2013, p.94

[3] http://www.airbus.com/company/worldwide-presence/ accessed 7 September 2015

[4] ibid

[5] Lanz, Rainer and Miroudot, Sébatien – “Intra-Firm Trade: Patterns, Determinants and Policy Implications, OECD Trade Policy Working Paper No 114, Trade and Agriculture Directorate, Trade Committee, Paris, 24 May 2011, TAD/TC/WP(2010)27/FINAL, p.17

[6] Frittelli, J. F., et al. “Port and Maritime Security: Background and Issues”, Novinka Books, New York, 2003. Only about 2% of containers entering the USA are physically inspected.

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