Greetings from the Asian Infrastructure Investment Bank (AIIB). Thank you for inviting me to this very important and very interesting conference, at a time when the world is truly going through a dramatic change. I’m going to focus on an area that has seen profound change over the last 15 or 20 years and will see even more profound changes going forward. A part of the global system where China is playing an increasingly important role are the Global Value Chains (GVCs).

Infrastructure key to GVC participation

GVCs have become very significant levers for countries towards sustainable development. Those levers are now being challenged by the changes we’re seeing in the global system. GVCs have become increasingly fragmented. This fragmentation, this splitting up of the value chain, has been incredibly important for allowing emerging economies to join global production. The most striking thing since the global financial crisis is the shift of GVCs from advanced economies to emerging economies.

GVCs have been upgraded in individual countries. In some countries, they have moved further upstream, producing increasingly greater inputs into the final goods. That’s what China has done, taking on more and more intermediate goods. This is probably the single most important shift over the last 10 or 15 years in GVCs, as they increase in all of China. However, China has also managed to upgrade the final production, with more technology content, more innovative products, and more value added. Notably, in each stage of the production process of this value chain, you see maximum productivity improvement. That will depend on the context, the country, and the sector. China has been very much the center of GVCs. That is a fairly recent development. The combination of taking more intermediate production and increasing the technology content has been China’s approach. What is truly remarkable, in looking at the role of GVCs in China, has been the growth of the interior. Thanks to infrastructure, particularly the China-Europe railway, parts of the country have been able to grow both their engagement in GVCs, and their technology content. China has also been very quick at adopting robots and building 5G towers. All these have created very good conditions for further integration in GVCs.

The quality of infrastructure, especially digital infrastructure, is important for a country that wants to use GVCs as a strategy to join global production for economic growth. The more complex the exported product, the more demands there are on infrastructure, and the more important it will to be to have GVC participation.

Since the COVID-19 pandemic, we have these lockdowns, and then reopening of economies, massive dislocation, and massive shocks in the global systems. What has really been important has been the extraordinary increase in demand that comes from stimulus used to respond to the crisis. That increased demand has to go through the same GVCs, and there is strain in transportation links, this is what has really created these disruptions in GVCs. Trade tensions and technological changes may all influence GVCs. We have seen, perhaps during the pandemic, some shortening of GVCs, but overall, there is not much evidence of that.

Net zero transition

By far the most important factor influencing GVCs in the future is the net zero transition. This is going to influence what is being produced, where a specific part is being produced, and how it is being produced.

Renewable energy production is going to sustain GVCs in the net zero context. If a country can offer de-carbonization opportunities to GVC lead firms, then it could actually attract investments. This is going to be an important determinant in the future where GVC production takes place. There are two players here, there is, on the one hand, these GVC lead firms. The other side of this is for countries that want to attract GVC investments. They can compete by offering de-carbonization opportunities, having renewable energy, having an environmentally friendly and circular economy production, efficient and effective multi-model green transport systems, and even maybe some access to credit in terms of preserving biodiversity. All those things will be factors driving competition or GVC engagement. To summarize, these GVCs can offer what I would call climate-smart development, and you can offer inclusive transformation opportunities to emerging and developing economies. We’re already seeing how many new countries have joined, and how emerging economies have taken all these GVC production. They can provide us with an additional tool to achieve the net zero transition.

Ultimately, these GVCs also build large stakes in peaceful coexistence and common prosperity in Asia and beyond. Multilateral development banks can work with GVC lead firms to identify decarbonization opportunities along the value chains.

Erik Berglof is the Chief Economist from the AIIB.This article was edited from his video speech at The International Academic Forum in China 2022.