China’s vertical integration leads to less dependence on Asian regional value chain

• In this second report on global value chain, we focus on whether the decline of China’s global value chain participation is driven by the shortening of the supply chain or rising regional integration. Our first note showed that global value chain (GVC) integration has been declining since the global financial crisis (See: Supply chain transformation: The world is more linked to China while China becomes more vertically integrated). Notably, China is becoming less integrated with the world, as it relies on less foreign inputs for production of exports. However, the world is more integrated with China as other countries import more intermediate goods from China for their exports.
• Such asymmetric evolution in China’s participation in the global value chain (with China less dependent on the rest of the world but the world more dependent on China for its exports) may be behind some of the actions that the US hast taken against China on the trade front in the last year and a half.
• This second note dives deeper into the reasons for the declining global value chains focusing on the potential regionalization of such chains. To do this, we examined: a) the trends of GVC in Asia and whether they are increasing within the region or with the rest of the world; b) the importance of sub-regional value chains in Asia; c) and finally the evolution of China’s participation in Asia’s regional value chain.
• For the first question, global value chain participation declined across Asian economies except Nepal, Pakistan and Taiwan. Such decline, though, is not explained by rising regional integration, especially for the case of China whose trade participation with the rest of Asia declining faster than with the rest of the world. For the second question, integration at the sub-regional level is rising in ASEAN and to a lesser extent North Asia.
• Finally, we study whether China’s decline in regional participation is driven by an increase of integration bilateral in the region. We found that value chain participation with China has declined, except for Bangladesh, Singapore and Vietnam. When we dig deeper into China’s relationship with Asia, then we see that the reduction of its involvement in regional value chain is driven by less imports of intermediates from the region into China and a rise of Chinese exports of intermediates used by the region for exports.
• In other words, like our global analysis, China’s rapid vertical integration or moving up the ladder is also causing an asymmetrical relationship between China and the rest of Asia, favorable for China. This is the same trend we find at the global level.

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