Wang Yanfei， CPC Party School of Chongqing Municipal Committee

Innovation of GVC Governance and the Industrial Upgrading in China

Wang Yanfei， CPC Party School of Chongqing Municipal Committee

Global Value Chain （GVC） came into being in the 1990s and has been growing fast since then on the basis of intraproduct division and global productive networks. The United Nations Industrial Development Organization （UNIDO）defines it as the global multinational enterprise network organization connecting the production， sales， recovery and other processes in realizing the value of goods and service. All participants， organizations engaged in production and sales， and the distribution of the value and profit are inseparable parts of the GVC. The governance of GVC， as the core of global value chain， refers to the actions through which the power holders coordinate and organize valueproducing activities around the world （Gereffi， 2002）. As usual， the leader， namely， the manager asks the other participants to accept or follow certain rules and standards，and organizes the activities of economic subjects by informal and non-governmental ways instead of the market. Since the birth of the GVC， the multinational enterprises of developed countries have been the GVC governors，directly or indirectly controlling thousands and thousands of industrial clusters in developing countries which are at the lower end of the value chains.

On September 21， the Organization for Economic Cooperation and Development （OECD） reported that the annual growth of global trade was only 1.3% from the year 2011. However， the growth rate kept 3.4% before the financial crisis. Moreover， Hanjin Shipping has filed for bankruptcy and the Chinese shipbuilding industry has been entrapped in trouble. All these seem to forebode that the GVC advancing global trade growth for twenty years is confronted with separation and disintegration. As a result，the global trade will be hit seriously， and the living standard and other fi elds of all countries will be faced up with serious problems if the trade fails to rebound in a timely way. As the largest trading country and the second largest economy in the world， China has the responsibility to revive world trade during the diffi cult time. However， China is still at the lower end of GVC because its participation in GVC is achieved by virtue of its cheap labor force and the international foundry on its eastern coast. Such a GVC governance framework has entrapped China in an unfavorable situation. Consequently， China is still subject to difficulties in its industrial upgrading owing to the restrictions on technology，brands and channels. The success of China's industrial upgrading， so to speak， means a lot to the advancement of its own structural reform and the sustainable development of China's trade and economy； moreover， it has a close relationship with the trade and economy of the world，and the sustainable and balanced development of global economy.

In Hangzhou G20 Summit this year， the G20 have pointed out the directions and paths for the development of world economy， including measures on the improvement of global economy and finance governance， the revival of international trade and investment， and the promotion of inclusive and coordinated development， etc. Therefore，in accordance with these directions and paths， innovation in the GVC is badly needed to revive global trade and repair the GVC. A new GVC governance framework more adaptable to the new situation of world economy willpromote the industrial upgrading of China， which in turn will drive the revival of the GVC and a strong， sustainable，balanced and inclusive growth of global trade and world economy.

I. Promoting China to Play a Greater Role in GVC Governance

In world GVC， the leading positions are held by a few multinational companies from the developed countries. Now， as the largest trading country and the second largest economy in the world， China's GDP accounts for about 14% of the world GDP. Under the new normal， the annual growth of China is more than 6.5%， which means that China will contribute almost one percentage to world economic growth. Since the world economic growth is about 3% per year now， China is contributing annually to 30% of the capacity expansion of world market. Such a market size and production capacity have undoubtedly equipped China with the ability to drive the economic growth in the world， Asia Pacifi c， Asia and Europe， and provide the conditions for China to integrate its economic development with that of surrounding countries. The array of leaders in the GVC is expanding， and the shattering of the existing GVC governance framework is inevitable in the development of world trade and economy. Moreover，the major developed economic bodies shall encourage a greater role of China in GVC governance. The cost advantage of China is gradually disappearing. Thus，more protection and restriction will go to the development of China， if it is not accessible to the new advantages，such as brands and technologies required in industrial upgrading， which in turn will influence the formation of new engines of world economy. Meanwhile， the up-going status of China in GVC governance does not mean the loss of the leading status of the United States， Europe and Japan in the most advanced technologies and industries in the world. Instead， the large-scale industrial transfer of “world factory” will lead the improvement of Pareto in global production and trade， and channel new fuel into the demands and world economic development.

II. Advancing Regional Expansion of GVC Governance

The world economic growth has never been balanced since the industrial revolution， and the countries that have achieved a balanced and stable growth are but a few. This is also true to the population they hold. In the large map of world economy， the developed countries（especially the OECD members） account for only a small part. The emerging market countries are accelerating their industrialization， but most of them have failed to complete their economic transformation. “The Belt and Road Initiative” proposed by China is the longest economic corridor in the world， which connects the East Asia， Central Asia， Southeast Asia， South Asia， West Asia and parts of Europe. It covers more than 50 countries with 4.4 billion people. The total regional economic output mounts up to 21 trillion and accounts for 63% of that of the world. Along it are mostly emerging economies and developing countries with huge potential in development. Now that the GVC is confronted with the risk of separation and disintegration and the global trade is hit seriously，an effective implementation of “the Belt and Road Initiative” will greatly help the regional expansion of GVC governance， advance the formation and growth of a new GVC， and channel new impetus to the world trade and economy. More support and attention shall be paid to “The Belt and Road Initiative”， which is effective and important to both China's industrial upgrading and the regional expansion of GVC governance. It is also an important pathway to engage more countries and regions into the GVC. It will play an important role in strengthening the economic ties between Europe and the world， advancing the regional economic integration， achieving common development， and bridging the gaps in development.

On September 4, 2016, B20 Summit with agenda having been completed comes to an end in Hangzhou, Zhejiang province. In the picture, President Zuma of South African is delivering a speech at B20 Summit.(Photograph by Wang Jianhua, Journalist from Xinhua News Agency, Image from Xinhuanet)

III. Propelling the Flat Reform of GVC Governance Mode

There are about five models concerning GVC governance： the market mode， the module mode，the relationship mode， the leadership mode， and the hierarchical model （Gereffi et al， 2005）. According to the sequence of these five models， the complexity of transactions increases， the ability of suppliers reduces，and the coordination and asymmetry degree increases. In terms of the types of industries， the consumption industries belong to the market mode and the module mode， while most capital intensive industries belong to the leadership mode and the hierarchical model. Relationship mode usually depends on the credibility，the neighboring of spaces， and family， ethnic and other ties. The higher the governance model rank is， the stronger the plunder is. The current problem that needs to be addressed in the industrial upgrading of China is to develop on the basis of the technological innovation in the high-end equipment manufacturing industry， and resolve the traditional low-end overcapacity. Therefore， the problems China needs to address in industrial upgrading mostly concentrate on the relevant industries managed by the leadership model and the hierarchical mode with obvious grade and asymmetry power. At present， the flat reform of GVC governance is inevitable. On the one hand， China has been strengthening the supply capacity and improving the ability to adapt to complex transactions， so China will be able to promote the dynamic transformation of GVC governance mode from the top level to the lower level. On the other hand， the economy of the western countries enjoys a swaying development， so they are required to make profi ts and make up for the losses by transferring part of their technologies and loosening their control channels. In promoting its industrial upgrading， China should seize the opportunity to get adapted to such a trend， bridge the level gap on GVC governance compared to the developed countries， and transform its participation in GVC from “obtaining benefi ts” to “obtaining intellect”.

IV. Pushing Forward the Establishment of a More Inclusive and Open Technology and Intellectual Property System

In order to maintain the leading position in GVC， the developed countries have set up strict protection of technical and intellectual properties. In the current GVC governance framework， it remains as the most powerful tool and the greatest obstacle in the industrial upgrading of developing countries. What's more， certain technical and intellectual property system has become significant rules of conduct in international trade. WTO and the Agreement on Trade-Related Aspects of Intellectual Property Rights （TRIPS） have played a great role in coordinating the problems concerning technical and intellectual property in the trade activities of all countries. Among the 193 members of the United Nations， 187 countries have joined the World Intellectual Property Organization （IPO）， and China did this in 1980. This fully indicates that the intellectual property system has already become a global legal system. As is suggested by Stieglitz， the intellectual property system has intensifi ed inequality in the world. In view of GVC， the number of developed countries in the leading positions is smaller than that of the developing countries at the lower end. Therefore， the unified intellectual property system in the world is unequal. In developing and improving world technical and intellectual property system， we should take into consideration this fact without merely maintaining the interests of technological innovators and technology leaders. Moreover， we should be more inclusive and open to the interests of the developing countries at the lower end of the chain under the GVC governance framework， for they are in urgent need of industrial upgrading and economic development. Providing that all these changes take place， the international trade and economy with better signs may rebound again under the new system and mechanism.