Ten Key Takeaways on the Rise of Global Value Chains

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South Korea – A Great Example of Wealth Creation from GVCs?

Before we dig into the key findings presented at Sida’s latest event in their “Development Talks” series, it’s worth asking the question about what we mean by Global Value Chains (or GVCs as they will have us call them) in the first place.

When we look at a manufactured good, whether it’s a car, video game or Barbie Doll, it will no doubt have the words “made in” somewhere on the packaging, followed by a specific country. But this has always been misleading, and in today’s ever more complex world it is arguably even more so.

Leonard Read’s amazing analogy of I, Pencil (written in the pre-digital world of 1958), helps us to visualise the seemingly unending chain of materials, labour and specialisation necessary to produce something as simple as the humble pencil. In this sense GVCs have been with us since the dawn of time, when the first merchants crossed the seas in sail boats and rafts with various goods to trade with their neighbours. What’s new therefore is not so much the paradigm but the reach, speed, complexity, spontaneity and sophistication of GVCs.

Couple this with the continued rise of “intermediate goods” – each of which are necessary for the production of other goods – means that countries can in today’s world now specialise down to the level of “products within products”, rather than just looking to make the end-products themselves. And with these new possibilities come a whole tangle of new opportunities and challenges.

What follows are the top ten takeaways from the recent panel discussion on this subject featuring Malin Ljunqkvist (Swedish National Board of Trade),  James Zhan (UNCTAD), Evdokia Moise (OECD), Marion Jansen (WTO), Frank Matsaert (TMEA) and Tobias Fishcer (H&M).

1. Rise of FDI in the Developing World

According to the latest World Investment Report from UNCTAD, the road to recovery for Foreign Direct Investment (FDI) remains bumpy. Levels have still to return to their pre-global recession highs, mostly due to the continued perceived fragility of the global market coupled with policy uncertainty. Despite this, 2012 did see the rise of FDI investment into the developing world, when for the first time these countries accounted for more than 50% of global FDI flows.

2. The Rise and Rise of GVCs

Today more than 60% of global trade is accounted for by trade in intermediate goods, and the majority of this trade is carried about by Transnational Corporations (TNCs), which takes place within their network of affiliates, contractual partners and arm’s length suppliers.

3. Going in the Wrong Direction?

As one of the key factors preventing countries from trading effectively is protectionism, it comes as somewhat of a concern to see that the current trend is for more protectionist polices, not less. Since 2000 there has been a steady decline in the number of liberal/trade friendly policies from a peak of 94% in 2001 to around 75% in 2012. Conversely there has been a steady rise in restrictive/regulative trade policy, rising from 6% to 25% over the same period.

4. Role of Efficient Trade

In order for a country to play a part in the growing GVC market, it needs an efficient export and import process. As the number of goods needed to manufacture a finished item steadily increases, there is also a growing need to make sure that the array of intermediate goods needed can be speedily and cheaply expedited through customs.

5. GVCs do Not Just Chase the Lowest Price

While the cost of labour is an important factor in GVC location, it is by no means the most important. Other factors – such as quality, reliability, stability and competency – are more important when considering the locations of intermediate manufacture and services. It is therefore in the interest of the TNCs themselves to see improvements on these fronts. Increasingly it is the level of “Human Capital” (the level of skills, education and competency in a society) which is the deciding factor.

6. Bringing It All Home

Developing Countries that participate in GVCs typically see a GDP per capita growth rate of 2% above the average of those developing countries that do not participate in GVCs. However it is not a given that some of the benefits of GVCs stay with the domestic market: the right policies and legislation need to be in place to ensure this happens (such as tax legislation).

7. Uphill Struggle

Developing Countries often have weak enabling environments, such as poor infrastructure, limited technology, corruption and debilitating institutions, which can severely limit their participation in GVCs. In some countries transport cartels can push up the price of products considerably, as well as slow down the delivery chains and speed to market. This in turn restricts their countries desirability as a GVC location.

8. The Hurdles are Cumulative

“Thick” Borders hinder the efficiency of trade and the movement of goods, and as many goods typically pass through several borders on their travels, the knock-on effects are cumulative, not singular. This can make cooperation at the regional level (Regional Value Chains, or RVCs) all the more important, particularly for land-locked countries. In order for this to happen, more work needs to be done on customs control, anti-corruption, port facilities (including ship-to-shore technology), standards harmonization and the reduction of NTBs (Non-Tariff Barriers), the latter of which are designed to indirectly restrict the flow of goods.

9. Wealth Generation

The benefits that TNCs can bring to the domestic markets involved in GVCs includes such things as a stable income, knowledge and technology transfer, jobs for women, and demands for improvements in local conditions. Tobias Fischer told a revealing story about the changes he has seen over the last decade alone. When he first travelled to Bangladesh, the HR “department” at the local supplier was an old man with the ability to read and write, who kept lists of employees on scraps of paper. Fast forward to 2013 and now you’ll find 23 year old Fatima, who can not only read and write very well, but who is also fluent in English, holds a graduate degree, and sits in a comfortable office operating HR software written in the local Bangladeshi language.

10. More Specialisation

By only being involved in a small part of the value chain, countries can further specialise their resources and “pick and choose” where their comparative advantage might reside. However who does this “picking and choosing”, and who and what is best placed to do it, remains a moot point.

Further Reading:

Makers of the world, unite!

The world of trade is changing dramatically. Is the WTO keeping up?

G7 DataSource: CEPR Report on WTO 2.0

We’re moving from a world where goods are simply shipped internationally, to one where goods are also made internationally.

In a fascinating article for the Centre for Economic Policy Research (CEPR), Richard Baldwin argues that while the WTO has done a good job in policing the traditional trade world where we ship goods made in one country to another, it is ill equipped to deal with the emerging world dependent on complex global supply chains (“supply-chain trade”). Before we slide further into a world of trade agreements based on mega-bilaterals and mega-regionals – that will also end up side-lining new trade giants such as China, India and Brazil – should we reconsider the role of the WTO and rebuild it for modern times? This CEPR paper calls for the countries and manufacturers of the world to unite under the common umbrella of a reconfigured WTO 2.0

Hat tip to @peraltenberg for spotting this one.