A joint report by the WTO, OECD and UNCTAD entitled “Implications of global value chains for trade, investment, development and jobs” dated 6 August 2013 was presented to the G20 meeting of September 2013. The report is a result of research into the relationship of global value chains (GVCs) with trade, investment flows, development and jobs. Global value chains have become a significant feature of the modern global economy as production of goods and services increasingly occurs in locations where the labour and materials needed for production are available at a competitive cost. This has led to long global value chains that are important in considering patterns of trade and investment.
The paper suggests that policy reforms in G20 countries should be based on openness. The costs of protectionism and the benefits of opening up trade on a multilateral basis are much higher than previously thought. In the manufacturing process components may cross national borders a number of times and the removal of tariff and non-tariff barriers in goods and services can therefore significantly reduce business costs and increase growth.
The income from flows of trade within global value chains doubled between 1995 and 2009, and in the case of China it increased by six times. This growth in trade flows in GVCs also creates jobs; for example jobs in Germany associated with GVCs doubled (to 10 million) between 1995 and 2008. Within these trade flows services are increasingly important, accounting for more than 42% of exports from G20 in value-added terms and accounting for more than 50% of exports in some countries.
The existence of global value chains strengthens the argument in favour of multilateral action on opening up markets. Barriers between third countries upstream or downstream from a particular transaction within a GVC can be as significant as the barriers put in place by the trading partners between whom the transaction is taking place. The opening up of trade by reducing these barriers needs to be accompanied by flanking actions that would be aimed for example at overcoming obstacles for less developed countries to participate effectively in global value chains. The paper suggests that developing countries with the fastest growing GVC participation have growth rates that are 2% above the average.
The paper points out that, although GVCs coordinated by multinational enterprises account for 80% of global trade, the contribution of local firms is significant, amounting to 40% to 50% of export value added. It therefore appears that GVCs can become an important channel for developing countries to build productive capacity through local firms that can gain a significant share of the value added. This however cannot occur unless there is significant investment in technology dissemination, skill building and upgrading of resources. Countries should therefore consider the advantages of a proactive policy in this area in line with their development strategy. This could be done by creating an environment that encourages investment, building productive capacity in local firms, and creating a skilled workforce.
In this context the paper suggests that the OECD’s Policy Framework for Investment and UNCTAD’s Investment Policy Framework for Sustainable Development can provide guidance on improvement of the framework for investment. A climate that leads to sustainable growth of GVCs can be brought about with the help of multilateral cooperation.
