Promoting participation of domestic firms in global value chains

Published: October 23, 2017
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With the external account deficit at an all-time high, it is crucial to consider the opportunities that would increase the exports of Pakistan. photo: file

With the external account deficit at an all-time high, it is crucial to consider the opportunities that would increase the exports of Pakistan. photo: file

KARACHI: Participation of domestic firms in global value chains, which involves fragmentation of production across international borders, is vital to increase exports.

Global value chains require coordination of production activities across regions. For instance, production of a t-shirt may involve different stages of production across several countries such as Pakistan, China, and ASEAN (Association of Southeast Asian Nations) countries as well as involve marketing and distribution activities in the destination markets, primarily the EU and the US.

According to the trend in global trade and global value chains reported in the WTO’s Global Value Chain Development Report 2017, trade in intermediate goods has an increasing contribution to total manufacturing trade since 1995. Although the level of trade in manufactured goods is determined by the various phases of business cycles in major trading centres, the contribution of global value chains is increasing. Global value chains can help improve the level of integration across economic sectors such that they increase the development process within the developing countries.

Investment and trade nexus

According to the WTO’s report, the cross-border fragmentation of production has evolved between 2000 and 2015. In 2000, global value chains involved US and European centric networks, with the latter having a core in Germany. However, a China-centric network that includes ASEAN and East Asian economies has emerged in prominence since mid-2000s. The ASEAN countries have a free-trade agreement in effect with China.

As international fragmentation of production gained prominence in the past two decades, the labour-intensive production processes are shifting out from China and into the less-developed ASEAN countries. China is becoming an important supplier of intermediate goods to its South-east Asian neighbours, which run a surplus in their net trade of final manufactured goods to the US and the European Union and to the rest of the world. In essence, several of the ASEAN countries observe a strong correlation between the imports of intermediate goods from China and the exports of final manufactured goods. Therefore, trade integration between China and ASEAN member countries has promoted opportunities to develop global value chains that may have contributed to the increase in their exports to the EU and the US.

With the external account deficit at an all-time high, it is crucial to consider the opportunities that would increase the exports of Pakistan. The analysis is conducted using data on trade patterns borrowed from UN Comtrade and Trademap.org, while product classifications on goods in different stages of production are borrowed from WITS. In 2016, Pakistan exported approximately $20.5 billion, out of which 9% was raw materials, 26% was intermediate goods, 61% was consumer goods and 3% was capital goods.  The exports to the EU and the US, the two largest export destinations, were primarily consumer goods. The textile products dominate the total export bundle from Pakistan. Approximately 70% of the total exports of consumer goods from Pakistan in 2016 were of textile products. Similarly, more than 84% and 91% of all consumer goods exported to the EU and the US respectively were textile products.

With approximately 36% of all exports from Pakistan were consumer textile products destined to the EU and the US, it is imperative to increase the involvement of global value chains between Pakistani firms and their foreign counterparts. Global value chains are likely to increase the value addition in domestic production as local firms achieve economies of scale using the most efficient mix of inputs available globally.

Considering the exports from China, 44% of the exports from China were capital goods, 38% were consumer goods and 16% were intermediate goods in 2016. Approximately 43% of all consumer goods exported from China were destined either to the EU or the US. On the other hand, $70.5 billion worth of intermediate goods was exported from China to the ASEAN member countries in 2016, which was approximately 21% of all exports of intermediate goods originating from China. A similar percentage of raw materials was also exported to the ASEAN countries from China.  The largest exports of intermediate products to the ASEAN region were of iron and steel products, textile products and chemical products. The raw materials were mostly of agricultural products and mineral products. However, less than 10% of the total consumer goods exported from China were destined for the ASEAN countries.

The exports of Thailand and Vietnam exceeded $200 billion in 2016. Vietnam reported exports of $20 billion in 2003, while Thailand reported $80 billion in the same year. Their exports in recent years were primarily in capital goods and consumer goods. Their imports in 2016 were approximately $200 billion.

Pakistan asked to find ‘pockets of excellence’

Vietnam reported a trade deficit of $32 billion with China, while Thailand reported a trade deficit of $18 billion in 2015. On the other hand, Thailand and Vietnam had positive trade balance with the US and the EU. Even though both countries maintained an overall trade surplus, they reported a relatively large trade deficit with China.  A significant proportion of the imports from China into both countries were in the form of intermediate goods and capital goods, which were primarily used as inputs to produce value added products. Their trade with China may have been an important factor in helping boost their exports.

In order to achieve the maximum benefits from CPEC, it is imperative that Pakistani firms explore production linkages with Chinese and other foreign manufacturers. Participation in global value chains will not only help increase total exports but also help curtail the burgeoning trade deficit. Investments in export-oriented industries such as textiles, leather and food products can help alleviate the trade deficit.

Export diversification across other industries as well as into higher value added products within traditional export oriented industries can help generate long-term and sustainable export growth. Further, Pakistan has a large agricultural sector that can help provide the necessary resources for the growth of agro-based industries. Therefore, imported inputs can complement domestically produced inputs to boost industrial production. With the crisis in the external sector looming, it is crucial to introduce appropriate export-oriented trade policies.

The writer is Assistant Professor of Economics and Research Fellow at CBER, IBA

Published in The Express Tribune, October 23rd, 2017.

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