Trade Facilitation and Supply Chains: Mechanics of Production Networks and Its Policy Implication

Transcription

1 UNESCAP Emerging Trade Issues for Policymakers in Developing Countries of Asia and Pacific: New Era for Trade Governance In Manila, The Philippines on March 4 6, 2009 Trade Facilitation and Supply Chains: Mechanics of Production Networks and Its Policy Implication Fukunari Kimura ERIA and Keio University F.K. 1

2 1. Production networks in East Asia The unprecedented formation of international production/distribution networks in East Asia Production process wise division of labor Intra firm vs. arm s length transactions Fragmentation and agglomeration Technology transfers and spillovers Presenting a new development strategy Trade and FDI liberalization/facilitation Cf. Traditional development strategies F.K. 2

3 2. The original fragmentation theory Seminal work: Jones and Kierzkowski (1990) Production process wise division of labor Taking advantage of (i) production cost saving per se in production blocks and (ii) low service link costs (i) is due to differences in location advantages (e.g., differences in wage levels, development stages) (ii) depends on trade facilitation, logistic infrastructure/services, and others Flexibility in forming production networks MNEs: degree of freedom in how to cut out production blocks Host countries: could provide niches in local location advantages and specific service links F.K. 3

4 The fragmentation theory: production blocks and service links Before fragmentation Large integrated factory After fragmentation SL PB SL PB SL PB SL PB F.K. 4 SL PB PB: production blocks SL: service links

5 3. The two dimensional fragmentation theory US Mexico vs. East Asia Two dimensions (Kimura and Ando (2005)): geographical distance and disintegration (intra firm vs. arm s length) Disintegration type fragmentation in geographical proximity, forming industrial agglomeration F.K. 5

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8 4. The spatial structure of transactions In the case of machinery industries working in production networks, there are four layers of transactions, in terms of lead time (Kimura (2009)). Transactions between MNEs and small local firms are predominantly in the 1 st layer. Lead time of less than 2.5 hours; high frequency just in time system; day trip length; a circle of 100km diameter (BKK, Pearl River Delta, Shanghai+) Aggressive tech. transfers by MNEs in some cases (e.g., Toyota and Denso in automobiles, Canon in ink jet printers, Uniqlo in China, Intel in Penang) Transactions in the 2 nd layer consists of both intra firm and arm s length (mainly between MNEs) transactions. Cf. garment and footwear, software outsourcing F.K. 8

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10 Transactions in the 1 st layer: high-frequency just-in-time system within 2.5hours is in the geographical boundary of 100km diameter. Arm s length transactions In vertical division of labor prevail. Major transport mode is trucks; urban/semi-urban transport infrastructure is needed. Corresponds to the boundary of industrial agglomeration. e.g., Bangkok metropolitan area F.K. 10

11 Transactions in the 2 nd layer: Lead time between Bangkok and Singapore Is 1-7 days, covering 1,500km. Both intra-firm and arm s length transactions exist. Transport modes are ships, airplanes, and trucks; trade facilitation at the border and large transport infrastructure are needed F.K. 11

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13 5. Policies supporting production networks Two dimensional fragmentation framework infers a set of policies for production networks Network set up, service link, production cost Logistics is one of the key elements of service link. Need to find a bottleneck in the whole link Three criteria: cost, time, and reliability/consistency Trade facilitation is often effective in reducing service link costs F.K. 13

14 Table 1 Two-dimensional fragmentation and improvement in investment climate Reduction in fixed costs to develop production/distribution networks Reduction in service link costs connecting production blocks Furthercostreductionin production costpersein production blocks Fragmention along the distanceaxis Various policiesto reduce investment costs Various policiesto overcome geographical distance and bordereffects Varioous policies to strengthen location advantages Examples:(i)improvementin stability, transparecy, and predictability ofinvestmentrelated policies, (ii)investmentfacilitation in FDI-hosting agenciesand industrialestates, (iii)liberalization and developmentinfinancial services relatedto capitalinvestment Examples: (i)reduction/removaloftrade barriers such as tariffs,(ii)trade facilitation including simplification and improved efficiency in custom clearance/procedures,(iii)development of transportinfrastractureand improved efficiency in transportand distibution services,(iv) development oftelecommunication infrastructure, (v)improved efficiency infinancialservices relatedto operation and capital movements,(vi) reduction incostsofcoordination between remote places by facilitation ofthe movement ofnatural persons Examples:(i)establishment of educational/occupationalinstitutions for personnel training to secure various types of human resources,(ii)establishment ofstable and elastic labor-relatedlaws and institutions,(iii) establishment of efficientinternationaland domestic financialservices,(iv) reduction in costs of intrastructure services such as electricity and other energy,industrialestates services,(v) development ofagglomeration tofacilitatevertical production chains,(vi)establishment of economic institutionssuch as investmentruleand intellectual propertyrights,(vii)varioustrade and investment faciliation Fragmentation along the disintegration axis Establishment of econo mic environ m entto reduce set-up costsofarm'slengthtransactions Development ofinstitutionalenvironmentto reducethe costofimplementing arm's length transactions Various policiesto strengthen competitiveness of potentialbusiness partners Examples:(i)establishemnt ofeconomic system to allow co-existance of various business partnersas wellasmaking varioustypes of contracts,(ii)various policiestoreduce costsof information gathering on potencialbusiness partners, (iii)securing fairness,stability,and efficiency incontracts,(iv)establishment of stableand effectiveinstitutionstosecure intellectualproperty rights Examples:(i)policiestoreduce monitoring costof Examples: (i)hosting and fostering various business partners,(ii)improvementin legal system types of business partnersincluding foreign and and economic institutionstoactivatedispute indigenous firms,(ii)strengthening supporting settlement mechanism,(iii)policiesto promote industries,(iii)various policiesto promote the technicalinnovationsin modulation to further formation ofagglomeration facilitate outsourcing F.K. 14

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16 An example: automobile parts from Thailand (thru Laem Chabang Port) to Shah Alam (thru Port Klang via Singapore) by 40ft container twice a week. Source: JETRO (2007) F.K. 16

17 An example: electric parts from Bangi (thru KLIA) to Samutprakarn (thru Bangkok Airport) by case once a month. Source: JETRO (2007) F.K. 17

18 6. Concluding remarks International production networks in East Asia provide a novel role of trade facilitation in effectively utilizing differences in location advantages. Important to pinpoint bottlenecks in (potential) production networks and remove them. Development stages matter for the extent and priority of trade facilitation F.K. 18

19 References JETRO. (2007) ASEAN Logistics Network Map 2006, Tokyo: JETRO. Jones, Ronald W. and Kierzkowski, Henryk. (1990) The Role of Services in Production and International Trade: A Theoretical Framework. In Ronald W. Jones and Anne O. Krueger, eds., The Political Economy of International Trade: Essays in Honor of Robert E. Baldwin, Oxford: Basil Blackwell: Kimura, Fukunari. (2009) The Spatial Structure of Production/Distribution Networks and Its Implication for Technology Transfers and Spillovers. Forthcoming in the ERIA Discussion Paper Series ( Kimura, Fukunari and Ando, Mitsuyo. (2005b) Two dimensional Fragmentation in East Asia: Conceptual Framework and Empirics. International Review of Economics and Finance (special issue on Outsourcing and Fragmentation: Blessing or Threat edited by Henryk Kierzkowski), 14, Issue 3: F.K. 19