This section illustrates how trade policies (both restrictions and trade agreements) have prompted firm strategies that alter the geographic and organizational configurations of GVCs in three sectors: apparel, automobiles and electronics. GVCs play an important role in all these industries, which also account for a significant share of trade between the U.S. and China and are currently subject to U.S. tariff hikes. Distinct trade policy measures, facilitative and restrictive, were used in each sector at different periods, leading to varied GVC configurations over time.
Below we discuss and illustrate the evolution of these three GVCs from the 1970s to the present, focusing on the extent to which trade policies had similar or different impacts on each GVC and the ways the affected firms, both lead firms and suppliers, responded to the barriers.
The apparel industry is one of the hallmarks of economic globalization at the end of the twentieth century. As a basic consumer good rooted in labor-intensive production, apparel epitomized the fragmented and globally dispersed production networks associated with buyer-driven GVCs (Gereffi, 1994). In the late 1960s and 1970s, garment manufacturers sought low-cost suppliers for apparel products, beginning with assembly operations such as those located in the maquiladora sector along Mexico’s border with the United States (Grunwald & Flamm, 1985) and German apparel firms outsourcing assembly tasks to low-cost suppliers in Central and Eastern Europe (Fröbel, Heinrichs & Kreye, 1980). As U.S. retailers and brand marketers began to explore the advantages of offshore production for their private label (store brand) and designer clothing lines, apparel sourcing became global. There was a growing emphasis on “full-package” suppliers in Hong Kong, Taiwan and South Korea that were able to provide the textiles, design, sample making, logistics, financial and other services required by a diversified range of “big buyers” (retailers, brands, and factoryless producers) located in the large, high-income markets of North America and Western Europe (Gereffi, 1999).
At the outset, apparel production and sourcing networks were highly fragmented internationally because they were driven by the quota system defined by the Multi-Fiber Arrangement (MFA) established in the 1970s. The quota system followed by the U.S. and much of Western Europe allowed apparel-importing economies to set quantitative limits (quotas) on clothing exporters throughout the world, which led to several well-documented migrations of production in the apparel GVC. According to data for the United States, the world’s largest apparel market, in 1983 U.S. apparel imports were $9.7 billion; two-thirds (68%) of this total came from Northeast Asia (primarily Hong Kong, Taiwan and South Korea); 12% came from Southeast and South Asia; 6% from Mexico, Central America and the Caribbean; and 14% from all other countries. By 1997, as U.S. apparel imports skyrocketed more than fivefold to $48.5 billion, just one-third (33%) of these imports came from Northeast Asia (including China, the largest apparel exporter in that year); 23% came from Southeast and South Asia; 16% from Central America and the Caribbean; 11% from Mexico; and 16% from the rest of the world (Gereffi, 1999: 50).
How can we explain these significant trade shifts? Most of the major apparel exporting economies had very low wages, but this factor alone cannot account for the proliferation of new Asian and Caribbean suppliers, whose U.S. market share expanded in the 1990s even though their wage rates were often considerably higher than China’s. A more precise explanation focuses on trade policies (quotas and preferential tariffs) and exchange rates6 used to protect developed-country markets from a flood of low-cost apparel imports, especially from Asia. Despite their intent, however, the imposition of quotas and apparel tariffs produced contradictory results (Gereffi, 1999). Protectionism often heightened the competitive capabilities of apparel exporters in developing countries, who learned to make more sophisticated items that were far more profitable than simple ones.
Figure 1 illustrates the interconnected industrial upgrading trajectories in the Asian apparel value chain. First, Japan and the most advanced East Asian textile and apparel producers (Hong Kong, South Korea and Taiwan) were pushed much earlier than other countries in the region to functionally upgrade from garments to higher-value textile, fiber and machinery exports to other economies in the region.7 Second, there is a regional division of labor in the Asian apparel value chain, whereby countries at different levels of development form a multitier production hierarchy with a variety of export roles (Gereffi, 1996). This synergistic economic ecosystem applies to a number of regional value chains (e.g., East Asian apparel and electronics, North American motor vehicles, and European commercial aircraft), which helps explain why they are a stable and resilient feature of the global economy.
A final dimension in the evolution of the apparel GVC is its reproduction through the mechanism of triangle manufacturing, which is a direct response to the protectionist quotas and tariffs that required production to move from countries with higher wages and capabilities to less advanced apparel suppliers (Gereffi, 1999: 60). In triangle manufacturing, which was initiated by the East Asian newly industrializing economies (NIEs) (Hong Kong, Taiwan and South Korea) in the 1970s and 1980s, U.S. buyers continued to place their orders with the NIE firms they sourced from in the past, which in turn shifted some or all of the requested production to affiliated offshore factories in less developed regions of Asia (e.g., China, Indonesia, Vietnam, Cambodia), Central America and the Caribbean, and Sub-Saharan Africa (see Frederick & Gereffi, 2011; Morris, Staritz & Barnes, 2011; Bair & Gereffi, 2014). This pattern institutionalizes a three-tiered structure that permits the East Asian NIEs to continue to upgrade their exports to higher value items, while also using FDI and exports of textile intermediate goods to the third-country exporters that have minimal quota and tariff restrictions, and retain relatively low wages.
Through the 1970s, Japanese automakers rapidly expanded their market share in the U.S. with lower-priced, small-sized cars with better fuel efficiency. This led U.S. carmakers and auto workers’ unions to petition import relief, and the Reagan administration put strong pressure on Japan. In response, Japan agreed in 1981 to comply with VERs that limited the number of autos it exported to the U.S. market each year.8 The VER agreement was renewed multiple times and maintained until 1994, despite the fact that Japan’s car exports to the U.S. had fallen below the quota level since 1986 (Benjamin, 1999).
In the face of U.S.-imposed VERs and a strong Japanese yen vis-à-vis the U.S. dollar after the Plaza Accord, Japanese carmakers took measures to circumvent trade restrictions and unfavorable export conditions, combining the strategies of upgrading and production switching. First, to maximize profitability under the constraint of quotas, they upgraded their mix of auto exports by prioritizing more expensive cars. Notable was the creation of luxury product lines with separate brands, i.e., Honda’s Acura, Nissan’s Infiniti, and Toyota’s Lexus, all launched by the late 1980s in North America.
At the same time, they used production switching strategies, first, by shipping unassembled or partially assembled vehicles to Taiwan and South Korea where they were assembled and exported to the U.S. market. More importantly, Japanese automakers heavily invested in U.S. production facilities to circumvent the VERs that regulated car imports from Japan but not domestically produced cars by Japanese carmakers (Sturgeon & Florida, 2004). This FDI-based “transplant” production, also prompted by FDI-oriented incentives by U.S. local governments,9 dramatically transformed the geography of the automotive GVC. By 1995, two thirds of the passenger vehicles sold by Japanese firms in the U.S. were domestically produced (Florida & Kenney, 1991). The strategy was emulated by European and Korean carmakers as well (Sturgeon, Van Biesebroeck & Gereffi, 2008).
However, unlike the apparel case, the automotive GVCs did not adopt full-scale global sourcing. Instead, regional production systems have become the dominant pattern of organization since the mid-1990s (Pavlínek, 2015). This was not only attributed to technical and market forces but also to regulatory and political factors. Regional trade agreements, notably NAFTA and EU regionalization in the 1990s, incentivized carmakers to invest in regional sourcing networks, at the same time moving production to lower-cost locations within a region (e.g., producing in Mexico using U.S. inputs) (Humphrey, 2000). Also, political pressure on automakers to “build where they sell” affected their locational decisions (Sturgeon & Van Biesebroeck, 2009).
The regionalization of final assembly in autos prompted the rise of global mega-suppliers, who rivaled the carmakers in profitability and technological capabilities (Foy, 2014). From the 1980s the outsourcing of parts supply continued to expand, leading automakers to spin off their parts production units,10 while regional production systems drove the consolidation of parts suppliers, promoting a two-tiered production structure within the automotive GVC. Lead firms needed established suppliers co-located in multiple regions, and suppliers with extensive international presence rose to assume an expanding role in parts production as well as R&D (Sadler, 1999; Humphrey, 2003). This mix of regional production and global sourcing in automotive GVCs was partly attributed to the fact that political sensitivity to high imports was greater in finished vehicles than in auto parts, and automakers thus adjusted their production and sourcing strategies to trade rules and restrictions as well as political pressures (Sturgeon et al., 2008).
During the global financial crisis of the late 1990s, demand for autos plummeted. National governments created rescue packages for ailing automakers and parts suppliers. Due to their post-crisis effort to cut costs and rationalize supply chains, lead firms increasingly preferred working with a small set of first-tier suppliers with greater financial, technological, and managerial capabilities. This strengthened the supplier consolidation trend already underway in pre-crisis GVCs (Sturgeon & Van Biesebroeck, 2009). Consolidation was also facilitated by new regulations, e.g., stricter safety and environmental standards (Barnes, 2017). At the same time, bilateral and regional trade agreements reinforced the regional configuration of the automotive GVC. Access to the U.S. and EU markets shaped the geography of the automotive GVCs by increasing the inflow of FDI into countries like Mexico as well as Slovakia and the Czech Republic, although the impact of FDI on technology spillovers and upgrading for local producers was not always positive (Pavlínek, 2015).
Finally, the development of new products, notably electric cars and autonomous vehicles, highlights the role of advanced technologies in restructuring automotive GVCs. They have facilitated the entry of new lead firms such as Tesla (the U.S.) and BYD (China) that compete with incumbent automakers. Along with technology giants like Google, novel breeds of specialized parts suppliers have emerged in the auto industry ecosystem as critical GVC actors in areas such as electric batteries and infotainment systems, creating a coevolution among suppliers and carmakers (PWC, 2019). Various trade restrictions and conflicts over advanced technology, as shown in the U.S.–China trade war, contribute to this disruptive realignment in the automotive GVC (Head & Mayer, 2019).
Historically, electronics has not been immune to trade restrictions. In the 1970s, as imports of consumer electronics from East Asia, notably Japan, Taiwan, and South Korea, surged in the U.S., trade restrictions such as orderly marketing arrangements (OMAs) were put in place by the U.S. government to limit their exports. In color televisions, for example, OMAs targeted Japan first and then expanded to Taiwan and Korea. A 3-year OMA with Japan in 1977 pushed down imports from Japan, but imports soared from Korea and Taiwan as U.S. buyers switched their offshore sourcing partners to non-Japanese firms. Restrictions over imports from Korea and Taiwan only led U.S. firms to switch again to importing unassembled TV sets (Irwin, 2019: 561–62). Overall, OMAs failed to curb consumer electronics imports from East Asia, and instead propelled the geographic dispersion of electronics manufacturing in the region.
Another notable trade dispute occurred between Japan and the U.S. over semiconductors. As Japan quickly expanded its world market share of computer chips in the early 1980s, threatened U.S. firms levelled charges of dumping and price manipulation against Japan. In 1986, the Japan–U.S. Semiconductor Agreement was established whereby Japan promised to widen market access to foreign chipmakers (Tyson, 1992; Baldwin, 1994). Although this trade agreement largely failed to expand the share of American firms in the Japanese market, it did redefine the structure of the semiconductor GVC. Many American chipmakers, who shifted their focus to chip design and sales, became “fabless” producers, while outsourcing chip fabrication to specialized manufacturers called “foundries.” This vertical disintegration was accompanied by a geographic shakeup among semiconductor producers. Taiwan became the leader of an emerging foundry market, and Korea ventured into the memory chip market to undercut Japan’s dominance. In contrast, Japanese firms failed to adapt to the end-market shift to personal computers (PC) and their prominence in the electronics GVC plummeted (Brown & Linden, 2011).
The mid-1990s to late 2000s was characterized by trade liberalization with lowered tariffs in the electronics and information technology (IT) sector. Under the WTO’s multilateral Information Technology Agreement (ITA), created in 1997, many electronic products became duty-free between major trading nations, facilitating cross-border trade of both finished and intermediate products.11 This pushed the evolution of the outsourcing model into a modular relationship between branded buyers and specialized suppliers, which was supported by industry-wide standards associated with the rise of “Wintelism” (Windows software plus Intel’s semiconductors) in the PC value chain (Borrus & Zysman, 1997). In this modular shift, value chain functions outside manufacturing were relegated by lead firms to so-called contract manufacturers. In response, suppliers gradually upgraded from OEM to ODM and electronics manufacturing service (EMS) roles in the electronics GVC, which included product design and other supporting functions (e.g., sourcing and logistics) to serve a wide range of buyers.12
The trade regulatory environment of the electronics/IT sector has continued to evolve over the last decade due to increasingly complicated cross-border digital trade (Daza Jaller, Gaillard & Molinuevo, 2020). Meanwhile, China’s approach to Internet governance, featured by cyber-nationalism, the dominance of the state (Wu & Gereffi, 2019), and its emphasis on indigenous innovation, exemplified in the Made in China 2025 initiative, has raised tensions with foreign governments and multinational enterprises (MNEs) (Grimes & Du, 2020). In recent years, the electronics GVC has become vulnerable to trade frictions and disputes over intellectual property rights (IPR)-related intangible assets such as software and algorithms. Supply chain security is a major concern for governments and firms as more infrastructure relies on complex IT and telecom systems that contain foreign value-added products and technologies (The Economist, 2019).
The Apple-Foxconn model, based on a partnership between the world’s most innovative and valuable IT brand and the world’s largest China-based contract manufacturer, has become a template for electronics manufacturing since the late 2000s (Grimes & Sun, 2016). At the same time, Chinese lead firms emerged to challenge Western MNEs in China and increasingly worldwide, notably Huawei (hardware), Alibaba (e-commerce), and Tencent (IT service and platforms). Their rise was attributed, on one hand, to the robust growth of the Chinese domestic market as well as other emerging-economy markets, which have facilitated a more polycentric international trade structure in the post-crisis world (Horner & Nadvi, 2018). On the other hand, China’s nationalistic and protectionist approach to the Internet facilitated the growth of its domestic lead firms (Wu and Gereffi, 2019). Against this background, the China–U.S. trade war not only threatens to undermine the Apple-Foxconn model, but also deals a significant blow to Chinese lead firms’ growth prospects (Grimes & Du, 2020).
At the same time, the trade war is prompting China-based firms in the electronics GVC to pursue switching and upgrading strategies in order to mitigate fallout from the trade war and potentially undermine the effectiveness of restrictive trade measures imposed by the U.S. and other nations. Many electronics brands and their suppliers are pondering production shifts from mainland China. Foxconn, the world’s largest EMS provider and the primary producer of Apple’s iPhone, has increased its investment and production in Vietnam, India and Brazil as well as switching some production back to Taiwan (Li & Cheng, 2019). Chinese firms also began to use locations like Taiwan and Vietnam for the final assembly of imported semi-assembled kits for U.S.-bound products, while setting up factories in offshore locations as a longer-term response (Guilford & Kopf, 2019). They employ market and supplier switching strategies as well. Huawei, for instance, has diverted resources to the Chinese domestic market to offset its overseas slowdown, while ramping up sourcing from non-U.S. firms. Simultaneously, it has reinforced its upgrading effort by developing its own operating system called HarmonyOS and internalizing chip development to reduce its reliance on U.S. technology (Fitch & Strumpf, 2019).
As a result of these trends, the complex and fragmented nature of the electronics GVCs can undermine the measures imposed by the U.S. government to curb technology exports to China. For instance, U.S. follow-up measures in 2020 to restrict both American and foreign firms from exporting semiconductors made using U.S. software and equipment to Huawei have not been effective thus far. This is mainly because alternative routes for technology exports to circumvent U.S. restrictions remain available to Taiwanese, Japanese, and Korean firms, which play key roles in the upstream (semiconductor design and equipment manufacturing) and midstream (fabrication, assembly and testing) segments of the semiconductor value chains (Bown, 2020).13