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Trade Effects of Global Value Chains Examined in Joint Report

Friday, September 06, 2013
Sandler, Travis & Rosenberg Trade Report

A report issued this week finds that the rise of global value chains – the growing fragmentation of production across borders – has significant implications for trade and investment patterns and policies and offers new prospects for growth, development and jobs. The report, a joint effort of the Organization for Economic Cooperation and Development, the World Trade Organization and the United Nations Conference on Trade and Development, states that in today’s “more interconnected world” both the costs of protectionism and the benefits of multilateral opening “are much higher than previously thought.” The three organizations plan to strengthen their collaboration to further clarify the implications of value chains for countries at different stages of development and for firms of various sizes and structures.

Highlights of the report include the following.

- Between 30% and 60% of G-20 countries’ exports consist of intermediate inputs traded within GVCs. GVC participation increased in almost all G-20 economies between 1995 and 2009, particularly China, India, Japan and Korea. Developing economies with the fastest growing GVC participation have GDP per capita growth rates 2% above average.

- All manufacturing activities and an increasing number of services sectors rely on imported inputs. In industries such as mining, textiles and apparel, or machinery, more than one-third of imported intermediate inputs are used to product exports. Some services sectors, such as distribution, transport and telecommunications, also have high shares.

- Services play a far more significant role than suggested by gross trade statistics and in fact account for 42% of exports (in value-added terms) from G-20 economies, including more than 50% for some countries.

- The income from trade flows within GVCs doubled between 1995 and 2009 and rose even more for emerging economies such as China (six-fold), India (five-fold) and Brazil (three-fold). However, regions such as Africa and Latin America (excluding G-20 members) still account for a limited share of world GVC income.

- Between 1995 and 2008, a higher share of employment in most G-20 economies consisted of jobs sustained by foreign final demand; e.g., this figure nearly doubled in Germany, to 10 million jobs, and increased by about two-thirds in China, from 89 million to 146 million.

- Trade agreements need to reflect GVCs, and the view of market access as a concession to be granted in exchange for access to a partner’s market is “clearly counterproductive.” Regional trade agreements are more effective when their membership is consistent with regional production networks, but “the RTAs of the future should be careful to avoid the pitfalls of distorting firms’ choices and losing the connection with the rest of the value chain.”

- GVCs strengthen the case for multilateral market opening, as barriers between third countries, upstream or downstream, can matter as much as barriers put in place by direct trade partners. Among the most problematic are quality and safety standards, whose complexity and heterogeneity has made them one of the main barriers to insertion into GVCs, in particular for small and medium-sized enterprises.

- Trade facilitating measures are vital to successful participation in GVCs, and comprehensive trade facilitation reform is more effective than isolated or piecemeal measures. Total trade cost reductions from practical and relatively inexpensive actions, including harmonizing documents, streamlining procedures, automating processes, and advance rulings on customs matters, could be as high as 16% for some developing countries.

- GVCs can be an important avenue for developing countries to build productive capacity where local firms can capture a significant share of the value added, but technology dissemination, skill building and upgrading are not automatic and require significant investment.

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