EP01 What is the Global Value Chain and Why is it important to be on top

Summary:

In this episode, we discuss the concept of the Global Value Chain (GVC) and its importance in the global economy. We explain that the GVC refers to the different stages of production and distribution of a product, with the "top" of the chain representing activities like research and development, design, and marketing. We discuss and emphasize that these top-level or highest value add activities generate the highest value and control over the chain, often concentrated in developed economies. We explore the importance of AI chip technology in securing a country's position at the top of the GCV, as controlling this critical technology would grant significant economic and political power. But we also discuss and acknowledge the growing trend of economic decoupling, which could lead to the formation of regional value chains, potentially disrupting the traditional global model and ending the concept of the GVC and the concept of the top of the GVC.

Questions to consider as you read/listen:

1. What are the economic advantages of a country being at the top of the global value chain?
2. How does the development of AI technology change the nature of the global value chain?
3. What are the potential consequences of a single country dominating the production of AI chips?

Long format:

What do we mean by being at the top of the global value chain and why is it important?

The "top" of a global value chain refers to the stage where the highest value-added activities occur, typically involving advanced technology, research and development, design, marketing, and branding, usually concentrated in developed economies; it's important because it represents the most profitable and influential part of the production process, allowing countries and companies participating at this level to capture greater economic benefits and exert more control over the overall value chain.

• High-value activities: This stage includes activities like complex product design, intellectual property development, sophisticated manufacturing processes, and high-end marketing strategies.
• Knowledge-intensive: Companies at the top of the value chain often possess advanced technological knowledge and expertise, which gives them a competitive advantage.
• Greater profit margins: Due to the high value-added nature of these activities, companies operating at the top of the chain tend to have higher profit margins.
• Economic impact: Countries that can successfully position themselves at the top of global value chains tend to experience higher economic growth, increased employment in high-skilled jobs, and greater technological advancement

“Winning” the AI chip war would secure a country's position at the top of the global value chain by giving them control over a critical technology that powers the future of many industries, including healthcare, finance, and defense, essentially allowing them to dictate the pace of innovation and influence the global economy through their access to the most advanced AI capabilities, while potentially limiting other nations' access to these technologies.

Sources:

https://www.globalvaluechains.org/about/gvc-intro/#:~:text=This%20is%20much%20more%20extensive,be%20a%20critical%20entry%20barrier

https://www.worldbank.org/en/topic/global-value-chains#:~:text=The%20international%2C%20inter%2Dfirm%20flow,bad%E2%80%9D%20jobs%20in%20the%20South

https://www.freedomlab.com/posts/the-ai-chips-race-part-i#:~:text=The%20ability%20to%20develop%2C%20produce%2C%20and%20control,hawkish%20on%20owning%20their%20own%20AI%20chips

https://www.aei.org/economics/waging-the-high-stakes-chip-war-my-long-read-qa-with-chris-miller/#:~:text=Enterprise%20Institute%20%2D%20AEI-,Waging%20the%20High%2DStakes%20%E2%80%9CChip%20War%E2%80%9D:%20My%20Long,Read%20Q&A%20with%20Chris%20Miller&text=Computer%20chips%20are%20the%20driving,the%20Foreign%20Policy%20Research%20Institute

The key words for me in the above is "global", and a global value chain is only guaranteed if there is a monopoly somewhere along the chain is where all global trade has to pass through a single step, otherwise we can by definition create completing "regional" value chains.

Applying the same logic to AI chips, we see that there is only a guaranteed global value chain if someone "wins" the chip war and corners the market.

But "global" is no longer the world we are living. Economic decoupling is the trend at present and AI will accelerate that, particularly in IT, but also across the top level of value chains. A lot of the reason companies/countries have remained at top so long is because it wasn't possible to replace them with low-cost alternatives, and a large amount of that is from the from the education of your workforce. AI is unique in its possibility of replacing a college degree, it's going to significantly reduce the barrier to entry that has traditionally existed; or at least it would if allowed run unchecked.