Geopolitics, Supply Chains, and International Relations in East Asia Edited by Etel Solingen, University of California, Irvine, 350 pp, Cambridge University Press (2021), $34.99 (Paperback)

Last three decades have seen a progressive liberalisation of cross-border transactions following technological advancements, reliable and low-cost transportation and a benign trading environment. Cost reduction strategies have incentivised firms to unbundle the production processes geographically. This has created complex global supply chains (GSCs) or global value chains (GVCs) (global production networks, and international production networks) which account for about 70 per cent of international trade today (OECD, 2021). The successful implementation of policies favourable to GVCs by the East- Asian countries have led to faster growth, rise in productivity, job creation, higher living standards and technological upgradation. India’s participation in GVCs, however, has been subdued as compared to its Asian peers, such as China, South Korea, Taiwan, Vietnam, Hong Kong and Malaysia.

In this context, the book under review titled “Geopolitics, Supply Chains, and International Relations in East Asia” offers interesting insights for India as it strives to move up in the GVC participation through proactive trade policies and business-friendly trade facilitation measures. In order to hasten India’s participation in value-added trade, the Government of India introduced ‘Make in India’ and Production-Linked Incentive (PLI) schemes. Moreover, there has been a renewed focus on developing world-class logistics and port infrastructure. However, GSCs have witnessed a number of shocks in the recent times, including calls for more localised productions by advanced countries (including the US, Japan, the UK and the EU), disruptions caused by COVID-19, geopolitics and trade wars, climate risks and extreme weather events. These developments have underlined the need to further strengthen the policy support to GSCs.

The book dissects the sources and effects of contemporary disruptions of the global production networks. The editor of the book, Etel Solingen, brings together an interdisciplinary group of scholars to analyse GSCs in the context of both domestic, political and economic systems of various countries, and international cooperation and conflict. The volume presents GSCs as a unique but complex mechanism of interdependence to analyse the broader patterns in inter-state relations. The book focuses on the growing role of China and other East-Asian countries in GSCs and its implications for the global economy and international cooperation. It discusses how the East-Asian countries share a unique economic infrastructure that has resulted in the concentration of manufacturing in this region, creating what is often called as the “Factory Asia”. Interestingly, the GSCs in these countries have been a result of the outward-oriented growth models implemented by these countries over the last five decades. However, the recent turn of events in the global order with calls for inward-orientation have exposed these GSCs and outward-oriented growth models to political and economic vulnerabilities.

The second chapter in the book written by Yuqing Xing offers a critique of conventional trade statistics that focus on bilateral trade to bring out the surplus or deficit of a country with its trade partner. A persistent US trade deficit with China triggered the trade war between the two largest economies. However, the author argues that such conventional bilateral trade statistics provide an incomplete view of international trade. He claims that the conventional trade statistics exaggerate Chinese trade surplus with the US, as the trade contains a large component of imported intermediates.

Also, current metrics assume that the entire value addition of Chinese exports is created in China, though China only assembles components imported from Japan, South Korea and other Asian economies, and exports them back to the US. Furthermore, the conventional trade statistics do not record the massive earnings of the multinational enterprises that have assumed the form of “factory-less” American manufacturers enjoying a monopoly over intellectual property rights. Their products sold to foreign consumers do not cross the US borders. Also, the value-added by intellectual property is embedded in physical goods. Owing to the aforementioned arguments, the author calls for reforming the current trade statistics for a better understanding of trade imbalances.

Chapter 3 by Hongyong Zhang in the book documents the impact of trade wars on Japanese firms. He observes that the efforts to “decouple” GSCs are resulting in policy uncertainty and increasing costs due to the imposition of additional tariffs, impacting trade and investment decisions by Japanese firms. This has led to reshoring decisions and redeployment of GSCs into the Association of South East Asian Nations (ASEAN). Evidently, the trade tensions between two trading partners can also impact other countries.

In Chapter 4, Victor Shih brings forth the role of government policies in shaping the Artificial Intelligence (AI) value chain industry. He discusses the interesting case of China’s decision to control the entire AI supply chain within its national boundaries, placing a large part of the chain under the purview of its government to respond quickly in emergency situations.

Chapter 5 by Momoko Kawakami uses the example of the smartphone industry to highlight the complementary positions of the East-Asian countries in GSCs. The electronics hardware industry is driven by three major industry actors – lead firms, contract manufacturers and platform leaders. Powerful lead firms (from developed economies) set product strategy with the suppliers (from developing countries) by defining the product, production process and deciding the quantity of production.

In the smartphone industry, “platform leaders” are important players providing the highly integrated chips (semi-conductors). The author argues that the development of this industry has been path-dependent in South Korea, Taiwan and China even before the handset boom of the 1990s, although there have been differences in the industry organisations across these countries. The industrial development programmes strengthened the positions of the East- Asian economies in GSCs. Furthermore, competition and collaboration among the East-Asian firms resulted in East Asia taking a dominant position in the production network. The author argues that such high level of complementarity can help in imparting resilience to GSCs in East Asia in the face of growing political rivalries and diplomatic tensions.

In Chapter 6, Kristen Aanstoos proposes a theoretical framework to understand the effects of state actions and the international political environment on the geographical distribution of supply chains in East Asia. The author argues that the legal actions and imposition of trade barriers have increased costs and operational uncertainty in various nodes of GSCs, triggering two kinds of effects: “contractionary shifts” that reduce the overall number of nodes, and “diversionary shifts” that shift the nodes from one country to another.

Part II of the book looks at the domestic political, economic and social dimensions affecting GSC-related policies in various states. Chapter 8 by Nazim Uras Demir and Etel Solingen assesses whether GSC participation is vital to Chinese policymakers. China’s outward-oriented growth model has led to an expansion in its participation in western GSCs. This model has been portrayed as a success story by Chinese leaders. However, the Chinese GSC structure has thrown up challenges of sustainability, particularly in terms of employment generation.

In addition, China is facing external shocks of political backlash against offshoring in Western countries. These developments have led to disagreements relating to GSCs within China. Three groups with different opinions about the future of Western GSCs have been discussed in the chapter, “GSC preservers”, “GSC reformers” and “GSC replacers”. As a response to the trade war, the preservers view that China benefitted immensely from GSCs and it should not abandon them. Reformers call for rebalancing China’s participation in higher value-added sectors. Replacers, on the other hand, favour the substitution of western GSCs with those dominated by China.

In Chapter 9, authors Jieun Lee and Iain Osgood study the political activities of firms and industry associations in response to the US trade war. They find little organised support for a trade war against China among American producers. In contrast, they find robust and well-organised opposition to the tariffs imposed by the US. This shows that firms resisted policies that push reshoring and preferred existing production networks relying on imported inputs.

Pheobe W. Moon, in Chapter 11, develops a prospect theory to hypothesise a country’s response to geopolitical conflict. State’s perception of its relative position in GSCs explains its choice to de/escalate the conflict. When a state’s key industries are more dependent on the opponent within their shared GSCs, its leaders are more likely to escalate conflicts. This asymmetry in dependency makes policymakers see themselves in a strategically disadvantageous position, and the prospect of being replaced in the GSCs predisposes them towards more risk-seeking behaviour. By contrast, when a state holds relative dominance within the GSC, its leaders are less likely to risk conflict escalation.

In sum, this volume is an interesting read to understand the possible implications of geopolitical tensions for GSCs. The perception offered by the book on conventional trade statistics underlines how a deeper understanding of global value chains is necessary for formulating trade policies. The book reiterates how the trade tensions involving two nations impact not only the parties involved but also other countries having production facilities in either of these countries. It also brings out how government policies can alter the location of production chains. However, it is important to avoid firm domination, as seen in the Chinese AI industry.

In this context, the Government of India’s push for “Make in India” and PLI scheme may play a significant role in enhancing domestic production in the years to come. India could benefit from positive spillovers from GSCs, including through technology upgradations. Furthermore, India’s participation in buyer and producer-driven value chains can create a bridge for foreign consumers of Indian products.

Rashika Arora^*

^* Rashika Arora is Manager in Department of Economic and Policy Research at the Reserve Bank of India, Mumbai.