A significant proportion of trade now takes place through coordinated value chains in which lead firms play a dominant role globally and locally. The outsourcing of production by Northern buyers has stimulated the growth of manufacturing, agriculture, and service industries in the South. It has promoted regional and global production networks (GPNs) that have opened up supply opportunities in new and expanding markets, including China, India, and Brazil. Firms engaged in GPNs have opportunities for economic upgrading through engaging in higher value production or repositioning themselves within value chains. However, they also face challenges meeting buyers’ commercial demands and quality standards, which smaller and less efficient producers find hard to satisfy.

The expansion of global production in labor-intensive industries has been an important source of employment generation. Many of the new jobs have been filled by women and migrant workers who previously had difficulty accessing this type of wage employment, and they have provided new sources of income for poorer households (Raworth, 2004; Barrientos et al., 2003). Where such employment is regular and generates better rights and protection for workers, it can promote social upgrading and decent work. The demand for higher quality standards often requires skilling of at least some workers and provision of better employment conditions. But for many workers, this is not the outcome. Much GPN employment is insecure and unprotected, and ensuring decent work for more vulnerable workers poses significant problems.

Indeed, a key challenge is how to improve the position of both firms and workers within GPNs. This is particularly important in developing countries, where firms and workers are increasingly integrated into regional or global production systems involving many locations. Accordingly, this chapter explores the obstacles and opportunities for promoting decent work through economic and social upgrading in the context of GPNs. It draws on previous empirical studies in which we examined each type of upgrading/downgrading separately. Based on these insights, it aims to advance a more integrated analytical framework linking economic and social upgrading/downgrading. Rossi's (2011) case study of the Moroccan garment industry provides an early application of this framework, which can inform much-needed future research on the linkages between economic and social upgrading. This research indicates that firms’ economic upgrading can, but does not necessarily, lead to improvements for workers.

The themes covered in this book resonate with a distinction I made often between the old world of trade and the new world of trade when I was Director–General of the World Trade Organization. In the old world of trade, production was national, most trade occurred within countries, and the job of trade negotiators was to remove obstacles to trade that protected producers, such as tariffs and subsidies, so that international trade could flourish. In the new world of trade, production of both goods and services is transnational, organized in global supply chains where a product could be made in up to 10 to 12 countries, and trade increased greatly as intermediate inputs crossed borders many times in the process of making final products. This new world of trade involved value addition at every stage of the chain, and the obstacles to trade were increasingly about non-tariff barriers such as regulatory standards, consumer protection, intellectual property and data privacy, the purpose of which is to protect consumers.

A big part of my job at the WTO was to try to get people who negotiate trade agreements to make the transition from thinking about trade in traditional terms to the new realities of global supply chains. After lots of discussion with business people who were familiar with fully integrated systems of production where goods were largely produced in Asia and sold in the West, I launched the WTO's ‘Made in the World’ initiative, and shortly thereafter, we began to partner with the research unit at the OECD to elaborate ways to measure ‘trade in value added’. This helped us drive home the point that it was no longer the volume of trade per se that mattered, but rather whether and how countries were connected to increasingly pervasive global value chains.

I first learned of Gary Gereffi's pioneering work on this topic in the context of these WTO efforts to create a new narrative on global trade and development. In a couple of international conferences organized by the WTO in Geneva, such as the Global Forum on Trade Statistics in February 2011 and the Fourth Global Review of Aid for Trade on ‘Connecting to Value Chains’ in July 2013, Professor Gereffi made key presentations that illustrated how the global economy was changing and why this was relevant to policy makers.

The global economy has changed in significant ways during the past several decades, and these changes are rooted in how the global economy is organized and governed. These transformations affect not only the flows of goods and services across national borders, but also the implications of these processes for how countries move up (or down) in the international system. The development strategies of countries today are affected to an unprecedented degree by how industries are organized, and this is reflected in a shift in theoretical frameworks from those centered around the legacies and actors of nation-states to a greater concern with supranational institutions and transnational organizations. Policy makers, managers, workers, social activists, and many other stakeholders in developed as well as developing nations need a firm understanding of how the contemporary global economy works if they hope to improve their position in it, or forestall an impending decline.

The topic of the global economy is inherently interdisciplinary. No single academic field can encompass it or afford to ignore it. Because of its vast scope, pundits who focus on the global economy are likely to be classified as academic interlopers; they run the risk of being too simplistic if they advance forceful hypotheses and too eclectic if they try to capture the full complexity of their topic. Scholars in this field thus have to master what economist Albert Hirschman has popularized as ‘the art of trespassing’ (Hirschman, 1981; Foxley et al., 1986).

The global economy can be studied at different levels of analysis. At the macro level are international organizations and regimes that establish rules and norms for the global community. These include institutions like the World Bank, the International Monetary Fund, the World Trade Organization, and the International Labor Organization, as well as regional integration schemes like the European Union and the North American Free Trade Agreement. These regimes combine both rules and resources, and hence they establish the broadest parameters within which the global economy operates.

At the meso level, the key building blocks for the global economy are countries and firms. Those scholars who take countries as their main analytical unit (as in the varieties of capitalism literature) provide an institutional perspective on the main, enduring features of national economies. The global economy is seen as the arena in which countries compete in different product markets.

Global industrialization is the result of an integrated system of production and trade. Open international trade has encouraged nations to specialize in different branches of manufacturing and even in different stages of production within a specific industry. This process, fueled by the explosion of new products and new technologies since World War II, has led to the emergence of a global manufacturing system in which production capacity is dispersed to an unprecedented number of developing as well as industrialized countries (Harris, 1987; Gereffi, 1989b). The revolution in transportation and communications technology has permitted manufacturers and retailers alike to establish international production and trade networks that cover vast geographical distances. While considerable attention has been given to the involvement of industrial capital in international contracting, the key role played by commercial capital (i.e., large retailers and brand-named companies that buy but don't make the goods they sell) in the expansion of manufactured exports from developing countries has been relatively ignored.

This chapter will show how these ‘big buyers’ have shaped the production networks established in the world's most dynamic exporting countries, especially the newly industrialized countries (NICs) of East Asia. The argument proceeds in several stages. First, a distinction is made between producer-driven and buyer-driven commodity chains, which represent alternative modes of organizing international industries. These commodity chains, though primarily controlled by private economic agents, are also influenced by state policies in both the producing (exporting) and consuming (importing) countries.

Second, the main organizational features of buyer-driven commodity chains are identified, using the apparel industry as a case study. The apparel commodity chain contains two very different segments. The companies that make and sell standardized clothing have production patterns and sourcing strategies that contrast with firms in the fashion segment of the industry, which has been the most actively committed to global sourcing. Recent changes within the retail sector of the United States are analyzed in this chapter to identify the emergence of new types of big buyers and to show why they have distinct strategies of global sourcing.

Third, the locational patterns of global sourcing in apparel are charted, with an emphasis on the production frontiers favored by different kinds of US buyers. Several of the primary mechanisms used by big buyers to source products from overseas are outlined in order to demonstrate how transnational production systems are sustained and altered by American retailers and branded apparel companies.

Introduction

The decade of the 1980s witnessed the widespread adoption of export-led growth strategies and neoliberal policies prescribing open markets and privatization programs in much of the developing world. Development research in the 1990s focused primarily on the implications of these trends for the industrializing countries that are increasingly integrated into global markets. The abandonment of import-substituting strategies, which were influenced by the neo-marxist and dependency theories of the 1960s and 1970s, and the implementation of far-reaching reforms corresponding to a new economic model have led to a watershed in development studies. Researchers and policy makers alike confront the challenge of how to analyze the link between the global and the local. Latin America is a case in point. Spirited debates have arisen about the local development outcomes associated with the adoption of neoliberal reforms in the region and what theories and paradigms can best explain these outcomes (Dussel Peters, 2000; Reinhardt and Peres, 2000).

Our chapter contributes to this debate by focusing on one dynamic exporting cluster in Mexico, a country that has undergone a rapid and radical economic restructuring over the past decade. Across a wide variety of sectors, Mexico's exports have been booming since the implementation of the North American Free Trade Agreement (NAFTA) in 1994, increasing from $51.8 billion in 1993 to $166.4 billion in 2000 (SECOFI, 2001). Aside from impressive export growth, Mexico has also managed to achieve many of the other objectives associated with Latin America's new economic model: a stable currency, modest inflation, and plentiful direct foreign investment. Perhaps most important, the presidential election of July 2000, which saw the historic victory of opposition candidate Vicente Fox, provided evidence that Mexico's decades long transition to genuine democracy from one-party rule has been consolidated.

Despite the seeming abundance of good news, there is a growing sense that all is not well in Mexico. While the liberalization strategy that Mexico enthusiastically embraced in the 1990s has been successful in its own terms, critics have pointed out that Mexico's shift from an import-substituting industrialization strategy to an export-led growth model has been associated with a more unequal income distribution and falling real wages for the majority of the country's workers (De la Garza, 1994; Dussel Peters, 2000; Robinson, 1998–99).

Viewing the Global Economy Through a Value-Chain Lens

Globalization has given rise to a new era of international competition that is reshaping global production and trade and altering the organization of industries (Gereffi, 2011). Since the 1960s, international companies have been slicing up their supply chains in search of low-cost and capable suppliers offshore. The literature on ‘the new international division of labor’ traced the surge of manufactured exports from the Third World to the establishment of labor-intensive export platforms set up by multinational firms in low-wage areas (Fröbel et al., 1981). This was typified by the American production-sharing or ‘twin plant’ program with Mexico and the German export-processing zones for apparel assembly in Central and Eastern Europe. The pace of offshore production soon accelerated dramatically and took new organizational forms (Dicken, 2011). In the 1970s and 1980s, US retailers and brand-name companies joined manufacturers in the search for offshore suppliers of most categories of consumer goods, which led to a fundamental shift from what had been ‘producer-driven’ commodity chains to ‘buyer-driven’ chains. The geography of these chains expanded from regional production-sharing arrangements to full-fledged global supply chains, with a growing emphasis on East Asia (Gereffi, 1994, 1996).

In the 1990s and 2000s, the industries and activities encompassed by global supply chains grew exponentially, covering not only finished goods, but also components and sub-assemblies, and affecting not just manufacturing industries, but also energy, food production, and all kinds of services, from call centers and accounting to medical procedures and research and development (R&D) activities of the world's leading transnational corporations (Engardio et al., 2003; Engardio and Einhorn, 2005; Wadhwa et al., 2008). Since the early 2000s, the global value chain (GVC) and global production network (GPN) concepts gained popularity as ways to analyze the international expansion and geographical fragmentation of contemporary supply chains (Gereffi et al., 2001; Dicken et al., 2001; Henderson et al., 2002; Gereffi, 2005).

There are numerous reviews of the distinctive features of the global commodity chain (GCC) and the GVC and GPN approaches to analyzing global supply chains. In general, they all characterize the global economy as consisting of complex and dynamic economic networks made up of inter-firm and intra-firm relationships. However, it is equally true that there are national and international political underpinnings to the shifts in global supply chains that have taken place over the past four decades.

Introduction

The last two decades have witnessed a remarkable burst of innovation in ‘private governance’, i.e., non-governmental institutions that ‘govern—that is they enable and constrain—a broad range of economic activities in the world economy’. These institutions serve functions that have historically been the task of governments, most notably that of regulating the negative externalities of economic activity. Private governance takes many forms: standards governing a vast array of environmental, labor, health, product safety, and other matters; codes of conduct promulgated by corporations, industry associations, and non-governmental organizations (NGOs); labels that rely on consumer demand for ‘green’ and ‘fair trade’ products; and even self-regulation by corporations under the banner of corporate social responsibility (CSR).

The move towards private governance is best seen as a response to societal pressures spawned by economic globalization and by the inadequacy of public governance institutions in addressing them. As firms, production networks, and markets transcended national boundaries, public (governmental) systems of economic governance built on the unit of the nation-state proved inadequate for regulating an increasingly fragmented and footloose global economy. In the language of Polanyi, markets became ‘dis-embedded’ from societal and state institutions (Polanyi, 1944. See also Evans, 1985; Ruggie, 1982). Logically, economic globalization demands global regulation, but at the international level regulatory standards are generally weak and there is little capacity to enforce them. In the developing world, where production is increasingly concentrated, many states lack the capacities of law, monitoring, and enforcement needed to regulate industry, even when they have strongly worded legislation on the books. The failure of public governance institutions to keep pace with economic globalization has, therefore, created a global ‘governance deficit’.

As Polanyi would predict, workers, environmentalists, human rights activists, and others in civil society have mobilized to demand new forms of governance. Part of this response focused on attempting to alter public policies—i.e., pushing back against neoliberal economic prescriptions or demanding that market opening be accompanied by regulatory measures. Frustrated with the perceived inability of governmental institutions to respond to the governance challenge, however, many social activists and labor groups also turned to pressure campaigns targeted at corporations and to other strategies designed to use market pressure to regulate the behavior of producers.

Globalization has altered the competitive dynamics of nations, firms, and industries. This is most clearly seen in changing patterns of international trade, where the explosive growth of imports in developed countries indicates that the center of gravity for the production and export of many manufactures has moved to an ever expanding array of newly industrializing economies (NIEs) in the Third World. This shift is central to the ‘East Asian Miracle’, which refers to the handful of high-performing Asian economies that have attained lofty per capita growth rates, relatively low income inequality, high educational attainment, record levels of domestic saving and investment, and booming exports from the 1960s to the mid-1990s (World Bank, 1993). Regardless of whether the growth is due to productivity gains or to capital accumulation (Krugman, 1994; Young, 1994, 1995), their economic achievement is largely attributed to the adoption of export-oriented industrialization as the region's main development strategy.

This view of international trade as the fulcrum for sustained economic growth in East Asia, while unassailable in its macroeconomic basics, nonetheless leaves a number of critical questions unanswered in terms of the microinstitutional foundations supporting East Asian development. Why were Japan and the East Asian NIEs (South Korea, Taiwan, Hong Kong, and Singapore) so successful in exporting to distant Western markets, given the formidable spatial and cultural distances that had to be bridged? How were these East Asian nations able to sustain their high rates of export-oriented growth over three to four decades, in the face of a variety of adverse economic factors such as oil price hikes, rising wage rates, labor shortages, currency appreciations, a global recession, and spreading protectionism in their major export markets? Under what conditions can trade-based growth become a vehicle for genuine industrial upgrading, given the frequent criticisms made of low-wage, low-skill, assembly-oriented export activities? Do Asia's accomplishments in trade-led industrialization contain significant lessons for other regions of the world?

This chapter will address these questions using a global commodity chains framework. A commodity chain refers to the whole range of activities involved in the design, production, and marketing of a product. A critical distinction in this approach is between buyer-driven and producer-driven commodity chains.

Importance of Global Value Chains

The global economy is increasingly structured around global value chains (GVCs) that account for a rising share of international trade, global gross domestic product, and employment. The evolution of GVCs in diverse sectors, such as commodities, apparel, electronics, tourism, and business service outsourcing, has significant implications in terms of global trade, production and employment, and how developing country firms, producers and workers integrate in the global economy. GVCs link firms, workers, and consumers around the world and often provide a stepping-stone for firms and workers in developing countries to participate in the global economy. For many countries, especially low-income countries, the ability to effectively insert into GVCs is a vital condition for development. This supposes an ability to access GVCs, to compete successfully and to ‘capture the gains’ in terms of national economic development, capability building and generating more and better jobs to reduce unemployment and poverty. Thus, it is not only a matter of whether to participate in the global economy, but how to do so gainfully.

The GVC framework allows one to understand how global industries are organized by examining the structure and dynamics of different actors involved in a given industry. In today's globalized economy with very complex industry interactions, the GVC methodology is a useful tool to trace the shifting patterns of global production, link geographically dispersed activities and actors within a single industry, and determine the roles they play in developed and developing countries alike. The GVC framework focuses on the sequences of value added within an industry, from conception to production and end use. It examines the job descriptions, technologies, standards, regulations, products, processes, and markets in specific industries and places, thus providing a holistic view of global industries both from the top-down and the bottom-up.

The comprehensive nature of the framework allows policy makers to answer questions regarding development issues that have not been addressed by previous paradigms. Additionally, it provides a means to explain the changed global-local dynamics that have emerged within the past 20 years (Gereffi and Korzeniewicz, 1994).

Global Value Chains and International Competition

Globalization has given rise to a new era of international competition that is best understood by looking at the global organization of industries and the ways in which countries rise and fall within these industries (Gereffi, 2011). Using core concepts like ‘governance’ and ‘upgrading’, global value chains (GVCs) highlight the ways in which new patterns of international trade, production, and employment shape prospects for development and competitiveness. GVC analysis documents the international expansion and geographic fragmentation of contemporary production networks and focuses primarily on the issues of industry (re)organization, coordination, governance, and power in the chain (Gereffi and Lee, 2012). Its concern is to understand the causes and consequences of the organizational reconfiguration taking place in global industries. The GVC approach also explores the broader institutional context of these linkages, including trade policy, regulation, and standards.

In the past two decades, profound changes in the structure of the global economy have reshaped global production and trade and have altered the organization of industries and national economies (Gereffi, 2014). As supply chains became global in scope, more intermediate goods were traded across borders, and more imported parts and components were integrated into exports (Krugman, 1995; Feenstra, 1998). In 2009, world exports of intermediate goods exceeded the combined export values of final and capital goods for the first time, representing 51% of non-fuel merchandise exports (WTO and IDE- JETRO, 2011: 81). Because of the unique ability of the GVC framework to show how international supply chains link economic activities at global, regional, national, and local levels within particular industries, international organizations such as the United Nations Conference on Trade and Development (UNCTAD), the Organisation for Economic Co-operation and Development (OECD), the World Bank, and the World Economic Forum are utilizing the GVC approach to structure new donor initiatives and data collection programs on global trade and development (UNCTAD, 2013; OECD, 2013; Cattaneo et al., 2010; World Economic Forum, 2013).

Emerging economies are playing significant and diverse roles in GVCs (Gereffi and Sturgeon, 2013). During the 2000s, they became major exporters of intermediate and final manufactured goods (China, South Korea, and Mexico) and primary products (Brazil, Russia, and South Africa).