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EASTERN ACADEMIC FORUM China Trade Security of Woody Forest Products Based on Global Value Chain LI Jun1, 3, YANG Xueru2 1. School of Economics, Huazhong University of Science and Technology, P.R.China, 430074 2. College of Economics & Management, South China Agricultural University, China, 510642 3. Bushiness School, Guangdong University of Technology, China, 510007 [email protected] Abstract: In this low-carbon economy, with the rapid rise of the price of forest carbon sink, the price of raw timber will rise quickly, which will pose a threat to the trade security of Chinese woody forest products. This paper indicates that, the enterprises engaging in trade of woody forest products mainly deal with processing trade in China, which lies in the manufacturing sector of the global value chain but not the whole value chain. Therefore, trade security issues of woody forest products in China are particularly special. It requires us not only to pay attention to trade security of timber, but also to focus on trade security of woody forest products, that is, security of production capacity. In this sense, we need pay close attention to the difficulties faced by the enterprises engaging in processing trade of woody forest products. Furthermore, based on a theoretical framework, this paper shows that, three different types of participation behavior in global value chain will affect enterprise earnings, thus the issues of their trade security are naturally different too. Keywords: Woody forest products, Global value chain, Woody forest products, Global value chain, Trade security 1 Introduction With the low-carbon economy moves more to policy from the public opinion, each country or region incorporates the decrease of emissions of total carbon dioxide or unit of GDP of total carbon dioxide into their national laws, regulations or policies. As the key factor of carbon reduction, the price of carbon sink will rise quickly, thus leads to the rapid rise or price of timber- as the material of woody forest products, which will ultimately affect trade security of woody forest products. A few years ago China made trade liberalization of soybean, then Chinese soybean market was quickly occupied by foreign low-cost soybean (and almost all of GM soybean). A few years later, with the expansion of soybean processing capacity and disappear of local soybean, the price of soybean in international market rose rapidly, and its volatility are becoming increasingly large. A large number of Chinese soybean processing enterprises get into trouble. Similar to the trade security of soybean, trade security of woody forest products will become more and more vulnerable if we ignore the precautions to their trade security in this low-carbon economy. China's international trade in are mainly engaged in processing trade and the raw material highly depends on foreign timber. Therefore, the markup of timber will bring a tremendous cost pressure to those forest products enterprises, which will induce a direct threat to trade security of woody forest products in China. In other words, in the global value chain (GVC) of woody forest products, Chinese enterprises are mainly located in the manufacturing sector. The existing research on trade security of woody forest products mainly take the perspective of dependence on foreign trade or economic relations etc, but ignore the difference of different sectors in the GVC. In fact, the index of dependence on foreign trade or economic relations etc can reflect the influence of international trade on import and export of woody forest products, but it cannot reflect the key security problem of woody forest products in China, that is, the processing enterprise of woody forest products in China get into trouble because of the markup of timber and other production cost. Given the enterprises engaging in trade of woody forest products mainly deal with processing trade in China, but not the whole value chain, we use GVC and its governance as a theoretical analysis tool to the problem of trade security of woody forest products. 72 EASTERN ACADEMIC FORUM 2 The Global Value Chain of Woody Forest Products and Its Governance 2.1 Overview on import and export of woody forest products in China The international trade of woody forest products grows quickly in recent years and the average annual growth of export and import has reached above 10%. Since 2004, the average annual growth of export was about 26% with import about 17%. As exports increased faster than imports, the international trade of woody forest products has become trade surplus from deficit. However, with the markup of timber in low-carbon economy, the rise of domestic labor costs and RMB appreciation, the problem of trade security of woody forest products in China has become increasingly prominent. 2.2 The global value chain of woody forest products With the development of economic globalization, the value creation links in global woody forest products industry spread around different countries and regions, forming a complex global value chain, in which China’s woody forest products manufactures are also involved. Global Value Chain (GVC) refers to such a global, cross-enterprise network organization that connects processes such as production, sale and recycling so as to realize the value of products and services. It covers the whole course from the collection and transportation of raw materials, production and distribution of semi-finished and finished products to the consumption and recycling. It includes the organizing of all participants’ production, sale and other activities as well as the distribution of value and profits. Nowadays, the related woody forest products manufactures in the GVC scatter around the world, engaging in raw materials (timber) extraction, woody forest products’ design, production, marketing, sale, after service, recycling and various other value-added activities (Gereffi, 2003). Among them, woody forest products firms in China play different roles due to their different GVC participation behavior. However, any industry’s GVC does not innately exist, nor naturally well-function. It calls forth the governance of GVC to keep its smooth operation. Governance over the GVC refers to the coordinated management to main participants. In international market of woody forest products, firms have to make a choice with limited sense between manufacturing or trading in the market with high uncertainty, also have to deal with frequent, complicated and specific requirements from customers as well as opponents’ tendency of opportunism when it’s lack of vertical integration. Moreover, they have to decide which way they should take, direct purchasing or manufacturing high-quality and complex products, or just manufacturing those totally specific products. In a word, all these factors make the governance over GVC necessary. On the other hand, the governance over GVC restricts the products, craftwork and participants’ qualification, whereas different manners and conditions determine the added-value available for each participant, and then further determine the distribution of gains in the GVC. In a word, in global woody forest products industry, the commercial capital is the driving force in GVC, while the expansion of products’ distribution channels and economics of scope is the key to succeed in the industry’s global value chain. As a result, governance over GVC often separates the manufacturing from the whole industry chain, purchasing from all over the world, which makes the cost of transform for small-scale suppliers is too much high, then highly dependent on large-scale buyers. Throughout the GVC, core competencies focus on market, research and development, design, advertising and high-efficient control system, whereas the gains, such as profits, core knowledge, the fame, are mainly distributed to raw materials, design, sale, marketing and financial services. However, in this GVC, governance over OEM of different international GVC participation behavior is different, which is mainly embodied in the following four aspects: the driver of the governance, the type of governance, the governor and the industry cluster under the GVC. 2.3 Overview on woody forest products enterprises in China At present, the participation behavior of woody forest products enterprises show two features in China: (1) two outside and highly dependent on the international market; (2) fragmentation of production with low level of large-scale. Meanwhile, the Chinese woody forest products enterprise face the pressure of rapidly rising labor costs, as well as the continued markup of timber in the long run. Song Weiming, Yin Zhonghua (2009) measured the degree of industrial concentration of China's 73 EASTERN ACADEMIC FORUM forestry industry and found the corresponding index of timber processing industry, furniture, paper & its products are 15.92%, 30.83% and 33.47% respectively, not exceeding 40%. This data reflects that the market structure of woody forest products enterprises is highly competitive in China, without large enterprises or leading enterprise which can control the whole market. Therefore, Chinese woody forest products enterprises often become passively governed by the global value chain, but not the driver. Moreover, the style of ‘two outside’ means that the raw timber of China mainly relies on import, with increasing dependence on foreign trade which has reached above 40% (Song Weiming, Yin Zhonghua , 2009). On the other hand, the export of woody forest products in China is heavily dependent on several foreign countries such as the United States. Take wooden furniture as an example, dependence on foreign exports has reached up to 60%. 3 The GVC Participation Behavior and Enterprise Gains 3.1 Three kinds of GVC participation behavior Similar to most researches on Global value chain, under the situation that woody forest products manufactures with OEM, ODM and OBM in China are involved in the international cooperation and competition in manufacture, R & D and design, and own-brand, we hold that it can be classified into three GVC participation behavior: Low-cost manufacturing, Difference, Niche. Entrepreneurship is recognition and creation of opportunity, while international entrepreneurship is to find, set, evaluate and create international opportunities, so the three sorts of GVC participation behavior are three different kinds of exploitation international entrepreneurship opportunity. When the woody forest products manufactures find the opportunity of Low-cost manufacturing, then OEM is newly set up. Original Equipment Manufacturer (OEM) always is a manufacture mode that the firms as the consignees process and manufacture products commissioned by the firms as consigners. Products produced are marked with consigner’s brand and are sold and marketed by the consigners. Most firms whose GVC participation behavior is Difference are ODM. ODM (Original Design Manufactures) focus on the design, that’s to say, in addition to production and assembly, they can also design the products in accordance with consigners’ requirements, yet they neither use their own brand nor deal with the sale. While OBM (Original Brand Manufactures) refers to that the firms set up their own product brand in a niche, manufacture and sell the own-brand products, so we call the firms’ GVC participation behavior like OBM as Niche. Although a few of OEM firms may develop into ODM or OBM firms, it is a litter, so this classification standard is appropriate. 3.2 Governance of GVC and distribution of Gains As for these woody forest products firms whose GVC participation behavior are the Low-cost manufacturing in China, for the absence of core competencies and key resources in the global woody forest products industry, as well as the low access barriers (almost no restrictions), the cost of transform is very high, without any bargaining power. So they are unfortunately to be leaded by others in the governance of Captive Value Chains (Gereffi, 2003). Furthermore, due to the low-level and cruel price competition among these woody forest products firms, it’s hard for the industry clusters to keep interactive and sound development, resulting in the lack of overall bargaining power. In short, these woody forest products firms in China should make great efforts and investment to meet the requirements of global value chain, but even so, they can only get little from the distribution of the GVC. Regarding to these woody forest products firms whose GVC participation behavior are the Difference, owing to the complicated dealing with buyers, they form highly specific capital and interdependence on each other; thereby they can keep a stable trading relationship maintained by the reputation and other strong relations. This is named Relational governance mode. Moreover, the capabilities of R&D and design of these woody forest products firms can be developed and improved through learning and communicating between different international entrepreneurship corporations, thus leading to sound development of the industry cluster and further enhance their overall bargaining power. Anyway, on account of mastering certain core competencies in R&D and design, these firms in China get a relatively equal status in market, so generally they can profit more from the GVC. 74 EASTERN ACADEMIC FORUM Finally, for these woody forest products firms whose GVC participation behavior are Niche, the cost of transform with buyers is comparatively low, always forming a Market-oriented governance mode. Some successful firms have even held powerful energy of market channel and became the drivers and governors of GVC through their brand’s rallying point. It can be further seen that the market ability of these firms can attract the supply of R&D, design, manufacture and facilities from the up-stream enterprises, so as to lead a sound-developed industry cluster, then promote the overall competitive advantage. All in all, these firms can always get rich and generous profits in the GVC. The previous analysis pointed out that different international GVC participation behavior of the international subcontracting manufacturers in China’s woody forest products industry have different influence upon the governance of GVC, which results in their different distribution of gains. These woody forest products manufacturers whose GVC participation behavior is the Low-cost manufacturing, as OEM, often confront fierce competition and huge payout but can only get meager gains; while these woody forest products firms whose GVC participation behavior are the Difference and Niche, as ODM and OBM, can get comparatively better profits. Although OEM can upgrade themselves to ODM or OBM in a certain situation, yet it is not an easy task. Unfortunately, most OEM can only lie in the unfavorable position in the GVC all the while, struggling to survive. It’s natural that the differences of survival situations among the three international GVC participation behavior in the GVC may induce different participation behavior. In general, due to the poor profits and hard survival situation, the Low-cost manufacturing firms under the fierce competition can not afford to engage in the creation of brand, construction of market channels, and investment of R&D and design, which can get profits at the cost of consuming large amount of resources and time. So they have to commit to saving cost in raw materials, labor and daily operations and accordingly step into the resource-saving. Naturally, such kind of firms devote little to the labors rights, quality control, choice of high-quality suppliers and social accountability, thus often resulting in problems on guarantee of labor rights, product quality, suppliers’ raw materials and social accountability. On the other hand, for the Low-cost manufacturing firms which pay out great efforts but only get poor return, there usually exists a remarkable fall between the identity to their own value and the evaluation by the governance of global value chain (manifested by the bargaining in dealings). In particular, the fall will be enlarged in different state systems and cultural backgrounds, thereby causing these firms’ sense of injustice (Lyles, Flynn, Frohlich, 2008). GVC participation behavior Low-cost Difference Niche Governance of Global Value Chain Driver of GVC Governance of GVC Governor of GVC Industrial Cluster with GVC Gains from GVC Little Considerable Great Are the manufactures’ resources / capablity sufficient? Do the manufactures feel fair? Influence No Short-term Behavior Yes Long-term Behavior Figure 3.1 GVC participation behavior and Distribution of Gains The Difference and Niche manufacturers lie in a comparatively favorable position in the governance of global value chain, so they can get m and relatively adequate resources. The major differences between the two modes lie in that the Difference manufacturers hold the core competencies in R&D and design so that they have to keep investing more in this area to maintain their advantage, while the Niche firms 75 EASTERN ACADEMIC FORUM hold the core competencies in the own-brand rallying point, the construction of market channels so that they have to increase investment in this aspect. Therefore, we can see that the former mainly advocates the technological progress and design conceptual renovation, while the latter emphasizes more on the cultural infiltration and the propaganda of corporate image. Obviously, the latter focuses more on the product quality, labor rights and social accountability than the former. However, the differences in quality and safety laws and regulations and social cultures are partly responsible for the flaws in designs. To sum up, compared to Difference and Niche manufacturers, the behavior of Low-cost manufacturing firms is much more short-term, as it’s illustrated in Figure 3.1. Of course, the relationship between international entrepreneurial strategy which embedded in GVC and firm behavior is affected by environment factors, such as RMB appreciation and economic recession in USA. 4 Conclusion The problem of trade security of woody forest products in China has become increasingly prominent in this low-carbon economy. This paper argues that, we have to consider the specialty of international trade of Chinese woody forest products. Both the export and import dependence on foreign trade are high. At the same time, most small-scale and fragmented production enterprises are located in the manufacturing sector of the global value chain. This specialty highlights the value of view from global value chain. Based on the theory of global value chain, this paper points out that, there are three kinds of GVC participation behavior for Chinese woody forest products: Low-cost manufacturing, Difference and Niche. They stand for three kinds of strategic behavior in recognizing and creating international opportunities. On this basis, this paper constructs a theoretical analysis structure on GVC participation behavior and enterprise earnings. We put forward that, woody forest products enterprises with Low-cost manufacturing are more influenced by the rising cost of raw material caused by carbon sink. Thus it will lead to a series of trade security problems in international trade of woody forest products. The conclusion of this paper means that, while considering the trade security of Chinese woody forest products, we have to concern not only the trade security of raw timber but also the production security faced by manufacturers. The latter may dear the brunt in this low-carbon economy. Author in brief or Acknowledgment: LI Jun(1981-) is a PhD Candidate of School of Economics Huazhong University of Science and Technology, and is a lecturer of Bushiness School Guangdong University of Technology in China. Corresponding author, YANG Xueru(1980-) is a PhD of management, a lecturer of College of Economics & Management South China Agricultural University in China, and his Email is [email protected]. YANG Xueru would like to express his gratitude to Guangdong Social Science Fund “Family involvement and creation and growth of agricultural firms” (No. GD10XGL09) and South China Agricultural University Principal Fund (No. 4700-K10058). References [1]. Song Weiming, Yin Zhonghua. Consideration on the Scale Business of Chinese Forestry Industry: Based on Scale Economy Trade Theory. Issues in Agricultural Economy, 1(2009), p70~6(in Chinese) [2]. Gereffi, the Global Apparel Value Chain: What Prospects for Upgrading by Developing Countries, Austria: UNIDO: 2003 [3]. Humphrey J., and Schmitz H., Governance in Global Value Chains[R]. IDS Bulletin, 2001, 32(3):p19~29. [4]. Lyles M. A., Flynn B. B., Frohlich M.T. All Supply Chains Don’t Flow Through: Understanding Supply Chain Issues in Product Recalls [J]. Management and Organization Review, 2008, 4(2):p167~182. 76