Download China Trade Security of Woody Forest Products Based on Global

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.
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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
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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.
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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
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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).
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[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
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