Way to make China smile

By Liu Zhibiao | China Daily Global | Updated: 2019-07-23 09:07

More inclusive global value chains would provide new connections for country to realize higher-level opening-up and be the foundation for medium-to high-speed growth

Inclusive global value chains require, on the micro level, the inclusion and acception of businesses which vary in size, technology level and ownership. It is critical to build just and open channels for businesses from the Belt and Road countries, especially small and medium-sized businesses, to better integrate in the global value chains by lowering visible and invisible barriers to entry and improving the market environment. On the macro level, it is critical to face the severe challenges arising from the current anti-globalization trend, more firmly support the World Trade Organization dominated multilateral trading system, and accelerate reform, innovation and improvement of global economic governance platforms.

Such inclusive global value chains would expedite the upgrading of Chinese businesses toward the two ends of the "smile curve", the two ends of the value chain - conception and marketing - which command higher value added than the middle part of the value chain - manufacturing. Inclusive global value chains would help Chinese businesses reorient from the bottom of global value chains to higher-value adding activities, such as R&D, product design, marketing, branding and logistics. For instance, if China's Yangtze River Delta Economic Region is integrated with the Belt and Road Initiative, the Yangtze River Delta city cluster is likely to thrive as a headquarters economy while the upper and middle reaches of the Yangtze River could become a center for world-class advanced manufacturing companies and part of the manufacturing capacity could be relocated to other Belt and Road countries.

This would help China develop its innovative economy, paving the way for industrial upgrading. China's comparative advantage used to be its cost-effective production factors, but this advantage is dwindling. A new comparative advantage is emerging to replace it - China's enormous domestic market. Such a market enables Chinese businesses to gain effects of economies of scale as well as international competitiveness. It will also assist their overseas expansion by absorbing host countries' knowledge, technologies and human resources to create a new global division of labor which lifts Chinese companies from the bottom of global value chains to be an integral part of global innovation chains.

Looking ahead, China should establish headquarters economy hubs in the country's important global cities to manage such activities as production, R&D, logistics, finance and consumption. As a result, value-added activities will be included into the management and control system for the headquarters economy. In the meantime, key points of global value chains should be set up in major cities of Belt and Road countries to transfer China's competitive production capacity. This requires coordinated domestic economic policies.

For instance, China should make big strides in reforming its income distribution system to further cultivate and enlarge its domestic market. China's ever-increasing domestic demand is the foundation and premise for us to build inclusive global value chains. In an era of excess material production, increasing residential income and spending is the most reliable foundation for sustained economic growth. For instance, recognizing the value of human resources by allowing technology personnel and knowledge workers to hold stocks, increasing residents' property income while maintaining their salary income and improving social welfare to create a larger middle-income group.

In addition to an enormous, ever-growing domestic market, China should also promote mergers, acquisitions and asset reorganizations in capital markets to create Chinese mega multinationals and let them play an active role in the governance of global value chains. Multinationals are trailblazers and governors of economic globalization. Whether China has an array of multinationals that are familiar with the global rules is the key to the country's participation in the new round of economic globalization and positive outcomes from the participation. Therefore, China should encourage a number of large-sized private businesses that are familiar with the international market and have abundant capital to merge and acquire overseas businesses in global capital markets so as to use the resources of the acquired companies to increase their technology level and market competitiveness.

In a nutshell, the inclusive global value chains will provide new room, new connections and new platforms for China to realize high-level and all-around opening-up and become the foundation for China to realize mid-to high-speed growth and industrial upgrading. The global value chains built upon domestic demand under the Belt and Road Initiative will also greatly promote the revitalization and development of China's manufacturing sector by promoting innovation-driven growth. China should transform from abiding by and adapting to international economic and trading rules, to voluntarily engaging in the formulation and strict implementation of such rules, so as to promote a new pattern of world economy that's more innovative and dynamic.

The author is an economics professor and director of the Yangtze Institute of Industrial Economy at the Nanjing University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.