Global Value Chain Integration in Indo-Pacific: Asia, Oceania, US, and the EU

Abstract

What was thought of as an unstoppable trend – globalisation – has recently halted, and worse still, it seems to have started reversing. A centrality of this process has been the development of global value chains (GVCs), pushed by transnational corporations as a way to reduce their costs of production through efficiency gains. More specifically, GVCs refer to international production sharing, a phenomenon where production is broken into activities and tasks carried out in different countries. The fragmentation of production and input goods traveling across global supply chains before a good is finalised and sold to the consumer is a GVC.

The ability of developing economies to tap into their comparative advantages of cheap labour markets through the liberalisation of trade and investment policy – not to mention lax environmental and labour regulations – has allowed them to gain more productive jobs and sticky capital investment and to tap into GVCs to raise productivity and to generate wealth. From Eastern Europe to China – and most recently Viet Nam – the process has lifted millions out of poverty. Indeed, GVCs have shaped the world beyond trade, from the increasing importance of efficiency as a key objective of the production process – and the development of new business models to accommodate it – to the surge in foreign direct investment to set up production plants overseas to produce parts and components.

There are a number of reasons why GVCs are important for trade, however. The first is how they shape the roles that countries play in moving up the ladder of value added in production. An increasingly significant role in the supply of parts and components – especially if accompanied with supporting innovation policies – helps countries move up in the value imbedded in production. This has clearly been the case for China, but other countries are following – even if in the far distance, either because of their smaller size, lack of necessary infrastructure, or, in the case of developed countries, high wages.

There are a number of relevant regions for GVCs, such as the European Union (EU) with its single market but also the Association of Southeast Asian Nations (ASEAN), which is closely intertwined with China in the Asian supply chain. A new geographical area, which is growing its geopolitical importance, is the Indo-Pacific. This concept was introduced by Japan as the ‘Free and Open Indo-Pacific’, and endorsed by the United States (US). It is security-related and are anchored in the Quadrilateral Security Dialogue, to which Australia, India, Japan, and the US have participated since 2007.

More recently, with President Joseph Biden, Jr.’s official 2022 visit to Asia, the concept of the Indo- Pacific has been expanded in terms of the countries involved through the Indo-Pacific Economic Framework for Prosperity (IPEF)8 and towards a more economic domain – although it falls short of a trade and investment deal. The countries that have signed on to the IPEF in Asia are Australia, Brunei Darussalam, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Viet Nam, as well as the US.

This chapter aims to understand the degree of economic integration, through GVCs, of Indo-Pacific countries. Four countries – Australia, India, Japan, and the US – are first examined, as well as their relations with ASEAN, as many countries signing on to the IPEF are Members of ASEAN.
China is key when it comes to measuring countries’ integration into supply chains, especially in Asia. China has been able to massively increase its manufacturing capacity and to intertwine its production with that of other economies by liberalising access. As a result, China’s global market share in manufactured goods is more than 19%9, but foreign investors do not enjoy the same privilege for Chinese domestic markets; the liberalisation of trade and investment is only targeted towards tradeable sectors. The question, thus, is whether a new economic area – the Indo-Pacific – can be developed in Asia with growing trade and investment relations amongst its members, even if China is not part of this geography.