Global Value Chains and Trade in Value-Added: New Insights, Better Policies
- The high shares of intermediate inputs in world trade in goods and services is due to the growth of global value chains
- Global value chains reduce costs and raise productivity enhancing competitiveness.
- The OECD and WTO’s new value added database reveals that trade in services play a far larger role in manufacturing trade than indicated by conventional trade statistics.
- Multilateral and regional trade and investment agreements will need to reflect the existence of global value chains to include action to increase competition and investment.
markets have become increasingly integrated, businesses are spreading their
chains of production across the globe. Instead of producing goods in locations
near major suppliers or consumers, multinational firms are benefiting from the
sharp falls in transport and communication costs over the past two decades to
establish global value chains (GVCs) across several countries.
indication of such production fragmentation is the rising share of intermediate
inputs in world trade. These inputs to the production process now represent 56
percent of trade in goods and 73 percent of services trade.
trend presents new challenges for economic analysis and policy-making in
developing and developed countries alike.
many industries, global value chains have lowered the costs of production of
the final goods and increased productivity of associated labour and capital.
This has created an opportunity for developing economies as international firms
offshore segments of their production chain to countries where labour is
cheaper or where other benefits of a location confer a competitive cost advantage.
One such advantage is speed. Every day of delay in the movement of goods in the
value chain raises the price to the final consumer and diminishes
procedures for exports and imports hamper the ability of firms to enter export
markets for the growing range of products – even in labour intensive sectors -
that are particularly time-sensitive. Many developing countries urgently need
to shorten lead times though streamlining administrative procedures and
improving logistics in order to stay competitive in these sectors.
some countries the time needed for administrative procedures related to exports
and imports prevents local manufacturers from exporting time-sensitive
products. For entrepreneurs in these countries time-consuming red tape and
inadequate logistics constitute a substantial disincentive to invest in quality
and to upgrade their products, since they cannot meet the reliability
requirements typically found in markets for new and differentiated products.
Consequently, firms are confined to the domestic market and to exporting
commodities and low value-added standard products where customers are less
demanding. Importing thus has to be as efficient as exporting, and services
have to be competitive.
in GVCs confers considerable benefits. It may allow suppliers in developing
countries to meet standards and regulations that give them access to rich
country markets; it may allow imports under privileged tariff treatment for
intra-firm trade; it may permit the utilisation of network technology that
would not otherwise be available; and it may open up new sources of capital.
These elements together with sustained improvements in policy environments help
to explain why developing countries have sharply outpaced high income countries
in economic growth over the last quarter century.
world of GVC-dominated trade where production is allocated to the location with
lowest cost, countries that try to industrialise through import-substitution
are unlikely to reduce their costs to the point of being competitive on global
markets. Quite the contrary. Tariffs and other barriers to trade are cumulative
when intermediate inputs are traded across borders multiple times. Firms pay
tariffs on their imported inputs and then face tariffs again on the full value
of their exports, including on those same inputs. Tariffs can add up to a
significant level by the time the finished good reaches customers, stifling
demand and affecting production and investment at all stages of a value chain.
in international markets today depends as much on the capacity to import world
class inputs as on the capacity to export. Protection measures against imports
of intermediate products increase costs of production and reduce a country’s
ability to compete in export markets. Policies that restrict access to foreign
intermediate goods and services also have a detrimental impact on a country’s
position in regional and global supply chains. Where foreign investment is a
driver of export capacity, the cumulative effect of a number of seemingly small
costs may discourage firms from investing, or from maintaining investment, in
the country and may lead them to establish production facilities, technologies,
and jobs elsewhere.
create opportunities for fast growth, but they also raise the penalties for
maintaining inefficient border procedures, for imposing high tariffs and
non-tariff barriers, for failing to allow information to flow smoothly or to
lift impediments to foreign direct investment and restrictions on the movement
of people. Participants in GVCs can be powerful allies for reducing trading
costs as they also share a political interest in reducing policy-induced delays
and inefficiencies in the value chain.
would be no GVCs without well-functioning transport, logistics, finance,
communication, and other business and professional services to move goods and coordinate
production along the value chain. A new Trade in Value-Added (TiVA) database
launched by the OECD and WTO in January 2013 reveals that services play a far
more important role in global trade than suggested by the standard measurement
of gross flows of exports and imports. The TiVA initiative shows the value added by a country in the production of any good or
service that is then exported, and offers a fuller picture of commercial
relations between nations.
value created by services as intermediate inputs represents, on average, over
30% of the total value added in manufactured goods (see Fig. 1). Liberalisation
of services trade would allow for more efficient and higher quality services,
thus enhancing the competitiveness of manufacturing firms and allowing them to
better participate in global production networks.
value chains are changing the patterns and structure of international trade. Reaping
their full benefits will require adjustments that go beyond the realm of trade
policy to include action to increase competition and investment. Multilateral
and regional trade and investment agreements will need to reflect the fact that
goods and services are now from “everywhere,” rather than, as they are defined
today, from “somewhere.”
firms can of course benefit from export opportunities, but they also depend on
reliable access to imports of world class goods and services inputs in order to
improve their productivity and their competitiveness.
the gains are even greater when more countries participate and markets are
opened on a multilateral basis. GVCs strengthen the economic case for advancing
negotiations at the multilateral level, as barriers between third countries
upstream or downstream matter as much as barriers put in place by direct trade
partners and are best addressed together. A successful illustration of this
approach is the 1997 Information Technology Agreement (ITA) which covered as
many products and as many countries involved in the IT value chain as possible.
The ITA also highlights the benefits of applying the Most Favoured Nation
principle in plurilateral agreements, which eliminates ‘red tape’ related to
rules of origin and their potential distortions on trade.
economics is one thing; political feasibility is another. While multilateral
agreements are widely accepted as the best way forward, most of the
liberalisation outside purely unilateral opening has occurred at the regional
level in the past two decades. To promote the expansion of GVCs, regional trade
agreements (RTAs) are more effective when their membership is consistent with
regional production networks. They also have a role to play in deepening
integration provisions: the convergence of standards or the recognition of
qualifications can start bilaterally or regionally. 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. More liberal rules of origin,
for example, would make regional trade agreements more GVC-friendly and
increase their impact on firms’ productivity. In the longer term, consolidating
and multilateralising RTAs would help turn the spaghetti bowl of preferential
agreements into a clearer and more efficient trading regime for all actors in
agreements have the largest impact if they cover as many dimensions of GVCs as
possible. While abolishing tariffs is a starting point to offer companies new
trade opportunities, the value chain also requires efficient services as well
as the movement of people, capital and technology across countries. Policies
should address obstacles at all points of the value chain and remain neutral
between trade and investment, letting firms decide which mode is better for
accessing foreign inputs and foreign markets. Multilateral agreements covering
not only goods but also services, investment, competition, intellectual
property and the temporary movement of workers are likely to create an
environment where firms can build efficient supply chains. Such a comprehensive
approach would amplify the impact of trade liberalisation on investment, growth
and job creation.
OECD is at the forefront of analysing what GVCs imply for government policies.
It is clear that conventional wisdom on economic globalisation risks becoming
outdated. We can no longer base policy analysis and decisions on conventional
trade statistics that report the gross value of products and services each time
they cross borders.
addition to trade policy, public and private investments to upgrade supply side
capabilities and the ability to exploit new market opportunities are also
needed. Investments in people are particularly important – education and skills
training, active labour market policies, and social safety nets are key
ingredients in an effective package of complementary policies.
will have far-reaching policy implications. They should encourage us to have a
more ambitious trade and investment agenda. And they should lead us to think
about a host of other policies that will require adjustment in the
interconnected world we live in today.