Global Value Chains: Overview and Issues for Congress

Global Value Chains: Overview and Issues for Congress

Global value chains (GVCs) divide production processes into discrete stages located around the globe. Using GVCs, companies can organize different parts of their value chain strategically, such as locating in a target customer’s home market or a competitor’s base. When deciding where to locate particular stages of production, firms typically consider key inputs such as raw materials and labor—along with associated accessibility, costs, and quality—and domestic policies that may encourage or discourage different types of investment. Congress, in particular, has an interest in understanding the economic and broader policy implications of the ongoing evolution of global value chains on U.S. businesses and consumers.

Since the 1990s, GVCs have shaped the global economy. More than two-thirds of world trade occurs via GVCs each year, representing a shift in how trade and commerce are conducted as trade in intermediate goods and services exceeds that of commodities and finished goods.

Unilateral trade liberalization and lower trade barriers made possible by free trade agreements (FTAs) and the creation of the World Trade Organization (WTO) have spurred GVC growth. Technology advancements and new internet-enabled services that lower costs and provide seamless connections around the world have also been a major factor. Consequently, companies and countries can focus on comparative advantages and specialize in different products and services within value chains, opening economic opportunities and new markets for small businesses and developing countries.

Despite the growing presence of GVCs in the global economy, recent events have highlighted the potential risks and vulnerabilities of GVCs, particularly those that are concentrated in a particular region or reliant on a single supplier. Worldwide natural disasters, emergencies, and other policy-driven circumstances, such as the Coronavirus Disease 2019 (COVID-19) pandemic, have shown that GVC links integrate and create interdependence between economies, which can leave companies vulnerable to external shocks, including interruptions in other countries. At the same time, interdependence can create broader economic growth and strengthened relationships among nations. After a period of rapid globalization through the 1990s and early 2000s, the growth of GVCs has slowed in recent years.

Concerns about U.S. value chains and the ongoing COVID-19 pandemic have raised questions about potential risks that GVCs may pose for particular economic sectors, the economy more generally, and, depending on the product and degree of external dependencies, national security. For example, recent events have shown that certain sectors, such as medical supplies and information technology and communications equipment, are susceptible to risks if the production of key components is concentrated in one country or controlled by one company. Some companies are seeking to diversify their supplier base across countries and regions, in part to increase their resilience and to lower their risk exposure. Some analysts foresee greater shifts in the future. To mitigate risks and vulnerabilities, companies may (1) rethink their business models and seek to build in redundancies for resilience, (2) focus more on shorter local or regional value chains, and/or (3) utilize emerging technologies to lower and diversify risks and costs. These shifts will likely vary across industry sectors, depending in part on the location and availability of suppliers and customers, as well as U.S. and foreign trade and investment policies.

In response to the risks described above, many policymakers, companies, and other stakeholders are reevaluating the role of GVCs in the economy. Several factors influence the formation and configuration of GVCs, including new and updated FTAs (e.g., the U.S.-Mexico-Canada Agreement), along with changes in import policies, rules of origin, export controls, investment regimes, and labor and manufacturing costs. These factors provide Congress with multiple levers to influence corporate decisions. Some U.S. and foreign policymakers have introduced legislation and other measures to incentivize, or in some cases force, companies or certain industries to shorten their value chains and increase domestic production. Such measures could affect the accessibility, quality, and price of goods sought by U.S. buyers.