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Member of the Board, NZPECC
“Any discussion today of international trade and investment policy that fails to acknowledge the centrality of global value chains (GVCs) would be considered outmoded and of questionable relevance.”1 In this way, the editors, Deborah K. Elms and Patrick Low, introduce a valuable recent study of the most prominent feature of the modern international economy. The OECD, WTO and UNCTAD said something similar in a submission to the G20 last year: “Trade agreements have to cope with the new reality of business.”2
It is a long time since international trade was mostly an exchange of food & raw materials for manufactured goods which was how the modern study of international trade was initiated by Ricardo in the early nineteenth century – English cloth for Portuguese wine – and which was still the dominant picture for economists like Condliffe in the mid-twentieth century. But it was still the mid-twentieth century when it became obvious that much trade was intra-industry, based on specialization within conventional commodity groups such as motor-vehicles. Furthermore developing countries were increasingly exporting manufactured products rather than only food and raw materials and more was involved than the relative rigour of tariffs and greater barriers to agricultural trade than to manufactures.
Nevertheless, recent changes are still dramatic. Studies by IDE-JETRO and then by OECD have focused on how imported inputs are used in exports so as to measure participation in international trade by contributions to value added rather than to gross values. More and more imports are used for further production – that is, they are intermediate products. Intraindustry trade came to be dominated not by an exchange of different specialized products within a conventional commodity classification but by components and materials for further processing in a different economy. Items destined for retail sale pass through a series of intermediate stages in different economies becoming progressively more complex and potentially valuable, before reaching final assembly and then the ultimate customer. At the most disaggregated SITC level, 1161 industries, intraindustry trade grew from 10% of the total to about 30% from 1960 to the 1990s and then stabilized; at the 59-industry level it grew from 30% to 55% at the same period.3
NZPECC was interested in how New Zealand fits into this picture. Most accounts feature motor vehicles, electronics and textiles as the classic examples of international supply chains or production networks whereas New Zealand trade is heavily weighted to foodstuffs and beverages. New Zealand certainly ranks below the average on the January 2013 OECD Trade in Value Added (TiVA) indicators – the use of imports as inputs to exports, and the use of its exports in their destinations for further exporting.
NZPECC commissioned Coriolis Ltd, a New Zealand consultant, to study publically-available data on the supply chains of two illustrative dairy exports, a relatively simple product, UHT long-life milk, and the relatively complex infant-formula. The resulting report is available on the NZPECC website.4
The study has implications for New Zealand firms as they develop and manage their exporting strategies. New Zealand is a major dairy exporter with a robust food safety framework and staunch adherence to the rule of law, but it is not a global leader. It does not own global dairy brands in sectors such as Infant Formula and produces a limited range of high-value dairy products. The trend is very much towards the formation of industry strategies being located close to markets rather than close to sources of materials. If, as expected, food products becomes more like motor-vehicles and electronics, New Zealand exporters will be challenged.
There are also specific challenges to exporters organized as co-operatives of farmers. The Coriolis study suggests that all components of the supply chains earn their returns. Traditionally, farmers have regarded distribution costs as the imposts of urban parasites on their products. Modern dairy products are not just farm products.
As NZPECC looks towards the government arm of its stakeholders, the study has potentially significant implications for broad economic strategy and for management of trade negotiations. Participation in a world increasingly dominated by international supply chains forces is as much about investment abroad to bring the supply chain close to final consumers as it is about manufacturing in New Zealand. But successful overseas direct investment from New Zealand remains relatively small.
It is also clear that supply chains are about embedded services as well as the interoperability of manufactured components with further processing activities. The familiar structures of trade negotiations, now usually translated into standard chapter headings in trade agreements, are not well suited to the modern international economy.
NZPECC will continue to tease out the policy implications of international production networks. While this has a particular focus on New Zealand, many issues are shared with PECC partners.
1 Deborah K. Elms and Patrick Low (eds) Global value chains in a changing world (Geneva: WTO, 2013, 978-92-870-3882-1, http://www.oecd.org/trade/G20-Global-Value-Chains-2013.pdf), p. xv. The book is now the best available introduction to the topic.
2 OECD, WTO, and UNCTAD “Implications of Global Value Chains for Trade, Investment, Development and Jobs” (Prepared for the G20 Leaders’ Summit, St Petersburg, September 2013), p. 19 http://www.wto.org/english/res_e/booksp_e/aid4tradeglobalvalue13_e.pdf
3 Marc J. Melitz and Daniel Trefler “Gains from Trade when Firms Matter” Journal of Economic Perspectives 26(2) (Spring 2012), pp. 91-118