Navigating Complexity: The Role of Global Value Chains in Innovation

By Abu Kamat
‍Director of Strategic Initiatives

If you want to get smart in your thinking about economic policy, especially when it comes to innovation and technology, it’s good to start thinking about global value chains.

Anybody with even a passing interest in economic policy has a basic understanding of supply chains (and why would you be reading Mooseworks if you weren’t interested in economic policy?!). We live in a world of global trade, and where complex products are manufactured and shipped all over. Most of us vividly felt the importance of supply chains during the Covid pandemic, when sourcing masks and vaccines meant figuring out which countries manufactured the various component parts.

More recently, we often hear policymakers talk about supply chains when it comes to electric vehicles and semiconductors. But the supply chain of physical goods only tells part of the story.

When it comes to technology products, it’s important to take a more holistic look at things like intellectual property and domain expertise — intangible assets that allow companies to specialize and charge more money for their inputs. Understanding the whole complicated web of inputs that goes into making something like an electric car or a smartphone.

Canada’s approach to these interconnected networks will define its place in the innovation economy, shaping its broader economic prosperity. As countries recalibrate their trade policies in response to global shifts—like China’s increasing dominance in key manufacturing sectors—Canada faces a critical choice: how to secure its role in GVCs while safeguarding the future of its innovation-driven industries.

The federal government’s recent proposal to impose significant tariffs on Chinese imports in critical sectors underscores the complexity of this situation. While intended to combat unfair trade practices, such measures can have unintended consequences on industries where intellectual property and high-value-added processes are the core of economic activity.

In Canada, IP-heavy sectors like semiconductor manufacturing, digital health, and other advanced manufacturing fields depend heavily on imported components that often lack viable domestic alternatives. When these imports are subjected to broad tariffs, the costs ripple through the supply chain, increasing operational expenses and limiting Canadian firms' ability to compete internationally.

In CCI’s recent submission to the federal government consultation we highlight that in sectors reliant on complex GVCs, such as semiconductors and medical devices, a blanket surtax policy could weaken Canada’s role in these high-value industries. Imposing additional costs could push firms to offshore more production, reduce reinvestment in local R&D, or even scale down operations. Canada’s participation in GVCs is already more limited than that of its peers, and these added burdens risk further isolating Canadian firms from the very networks that drive growth and technological advancement.

The urge to embrace protectionist policies is understandable, especially when countries feel that domestic industries are being hurt by unfair competition. But countries like Germany and South Korea have recognized that over-reliance on tariffs and other forms of protectionism can backfire, especially in industries that exist as part of complex global value chains.

For example, Germany has emphasized "de-risking" in its economic strategy, aiming to reduce dependency on single-source suppliers—particularly from high-risk regions like China—without resorting to blunt protectionist measures. Germany’s policies support open global value chains while bolstering its high-tech sectors, such as machinery and automotive manufacturing, by prioritizing supply chain resilience through diversification rather than isolation. This approach has allowed German industries to continue occupying a key position within Europe’s value chains, even in the face of recent global supply chain disruptions.

Similarly, South Korea’s “Materials, Parts, and Equipment Strategy 2.0,” implemented in 2020, underscores the country’s shift toward reducing vulnerabilities within its GVCs by strengthening domestic supply chains in essential high-tech components like semiconductors. The policies in the strategy aim to protect its industries from economic coercion, such as trade restrictions from China or Japan, while enhancing self-reliance in critical sectors. The strategy has not only mitigated these vulnerabilities but also maintained South Korea’s competitive edge in global technology markets by fostering a strong domestic ecosystem that collaborates within international supply chains. South Korea’s approach, often termed “techno-economic statecraft,” is a model for balancing supply chain resilience with international cooperation, ensuring competitiveness without falling into over-securitization​.

Both countries demonstrate that a nuanced approach — focused on data, diversification, and strategic partnerships — can protect economic interests without isolating industries from the global economy. And perhaps most importantly, the most successful countries take an active approach, understanding how to play to their national strengths and maintain a strong position in global value chains.

In the Canadian context, this might look something like targeted carve-outs on tariffs for industries lacking alternative suppliers for essential inputs. This approach would reduce negative impacts on imports while ensuring Canada’s ability to compete in high-complexity sectors. In this blog we’ve talked about economic complexity before. It’s a key concept that policymakers should consider when pursuing high-value economic growth. In the context of trade policy, we should ensure a nuanced tariff policy that involves looking at the economic value created within Canada at each step of production—like innovation, design, and specialized manufacturing—rather than just the total price of an exported product. By focusing on these unique contributions, the federal government can get a clearer view of its real economic impact in global supply chains, capturing where and how Canadian industries add value.

The goal is a policy environment that encourages firms to stay, invest, and thrive within Canada—without the punitive costs that push them toward offshoring.

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