This report explores the concept of Global Value Chains (GVCs) and their driving forces. The report focuses on a GVC in which Australia participates, which involves using Australian inputs to produce final products/services. A figure of the GVC is presented, and the key countries that participate in it are identified. The theoretical foundations of GVCs are also elaborated, explaining what determines each country’s participation and position along the GVC.
Global Value Chains (GVCs) have become significantly more prevalent due to globalization, which has fundamentally changed how nations conduct international trade. GVCs are the numerous phases of producing and distributing products and services in which several countries take part at various times. GVCs have become essential in global trade since they allow nations to capitalize on their comparative advantages and specialize in particular manufacturing phases. Specialization makes possible increased efficiency, lower prices, and improved access to international markets. GVCs also make it easier to transfer information and technology across national boundaries, boosting innovation and productivity. In this report, we will explore the theoretical foundations of GVCs and examine an example of a GVC in which Australia participates, specifically in the production of medical devices. This report will analyze the driving forces behind GVCs, the factors determining a country’s participation and position in a GVC, and the implications of GVCs for international trade and development.
Context of GVCs: Emergence and Driving Forces
Globalization has transformed the way countries trade with each other, and the emergence of Global Value Chains (GVCs) has played a significant role in this transformation (Gereffi, Humphrey, & Sturgeon, 2005). GVCs refer to the different stages involved in producing and distributing goods and services, with other countries participating in various stages. GVCs have become increasingly important in international trade, accounting for over 80% of global trade (WTO, 2021).
The development of technology, which has made it easier and less expensive for businesses to participate in international production, is one factor contributing to the growth of GVCs (Gereffi et al., 2005). The integration of GVCs into the global economy has also been aided by trade and investment policy adjustments, such as the removal of trade barriers and the liberalization of investment regulations (Baldwin, 2016). GVCs have also been acknowledged for their potential to spur economic growth in underdeveloped nations. Participating in GVCs gives developing nations access to international markets and new knowledge and technology, which helps advance and diversify their economies (Milberg & Winkler, 2013). However, participation in GVCs can also have negative implications for developing countries, such as the risk of being trapped in low-value-added activities and lacking control over their domestic economies (Gereffi et al., 2005).
Hence, for decision-makers, business leaders, and academics interested in global commerce, economic development, and industrial upgrading, understanding the dynamics of GVCs is essential. Furthermore, the COVID-19 pandemic has drawn attention to the weaknesses of GVCs, such as supply chain disruptions and unequal benefit distribution (WTO, 2021). For these reasons, it is crucial to analyze the effects of GVCs on trade resilience and recovery.
Example of GVC in which Australia Participates
An example of a Global Value Chain in which Australia participates in the production of iPhones by Apple Inc. Apple sources its components from various countries, including Australia, and assembles them in China before distributing the finished products worldwide (Apple Inc., 2022). The iPhone GVC involves multiple stages, with different countries specializing in different stages. Australia’s participation in this GVC is primarily in producing rare earth minerals, which are used in manufacturing iPhone batteries (Australian Government, 2022). Australia is one of the largest producers of rare earth minerals, with significant deposits of neodymium, praseodymium, and dysprosium, essential components in iPhone batteries (Australian Government, 2022).
China is crucial in the iPhone GVC as the final assembly location. This is partly due to China’s large and relatively low-cost labour force and infrastructure, which facilitates the efficient movement of components and finished products (Gereffi et al., 2005). Other countries also participate in the iPhone GVC, including Japan, South Korea, and the United States, which produce various components such as microchips, displays, and camera modules (Apple Inc., 2022). The position of each country along the GVC for iPhones is determined by its comparative advantage in producing specific components or stages of production. For example, Australia’s position in the GVC is determined by its comparative advantage in rare earth mineral production (Baldwin, 2016). China’s position as the final assembler is partly due to its low labour costs. At the same time, countries such as Japan and South Korea specialize in high-tech components due to their advanced technology capabilities (Apple Inc., 2022).
Theoretical Foundations of GVCs: Determinants of Country Participation and Position
The theoretical foundations of Global Value Chains (GVCs) can be explained through comparative advantage, factor endowments, and coordination costs. According to the theory of comparative advantage, countries participate in GVCs based on their relative strengths and weaknesses in producing specific goods or services (Ricardo, 1817). In the case of GVCs, countries specialize in producing specific components or stages of production in which they have a comparative advantage, leading to the efficient allocation of resources across borders (Gereffi & Fernandez-Stark, 2016).
In the case of Australia’s participation in the GVC for iPhones, the country’s comparative advantage in rare earth mineral production determines its position in the chain. The availability of these minerals enables Australia to participate in producing iPhone batteries, which are critical components of the final product. China’s position as the final assembler of iPhones is partly due to its low labour costs, which reduce coordination costs, and its infrastructure, which facilitates the efficient movement of components and finished products (Gereffi et al., 2005).
In conclusion, Global Value Chains (GVCs) have become integral to the global economy. Various factors, including comparative advantage, factor endowments, and coordination costs drive them. To remain competitive and benefit from GVC participation, policymakers must understand the determinants of their country’s participation and position in these chains. The analysis of GVCs has significant implications for understanding the dynamics of the global economy and the role of individual countries in it. By understanding the theoretical foundations of GVCs and the determinants of country participation and position, policymakers can create policies that promote competitiveness and growth while ensuring that the benefits of GVC participation are widely shared.
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