Implications for Trade, Incomes and Economic Vulnerability
Edited by Benno Ferrarini and David Hummels
The organization of production has changed in the past few decades. Groundbreaking advances in transportation and communications technology have enabled firms to separate value chain tasks in space and time (Grossman and Rossi-Hansberg, 2008). Recent studies have extensively investigated how this added organizational flexibility allows firms to arbitrage factor cost and institutional differences across countries, leading to the emergence of global value chains (see Van Assche, 2012 for an overview). An additional benefit related to the slicing up of value chains, which has received less attention, is that it allows firms to more easily circumvent trade policy barriers. To avoid a country-specific trade barrier, a company no longer has to relocate its entire value chain to another country, but only a single value chain stage, often final assembly. Fung et al. (2007, pp. 58–59), for example, describe how the trading company Li & Fung scrambled to restructure its value chain in response to an unexpected trade policy shock: [O]n a Friday in early September 2006, the South African government announced that it would be imposing strict quotas on Chinese imports in two weeks. Li & Fung had orders already in production for South African retailers that would be affected by these changes. Managers began to look at contingency plans to move production to factories in different countries and even to move the last stage of existing orders to different end countries to satisfy non-China country-of-origin rules.
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