Indeed, the correlation between economic and social upgrading through GVCs is not automatic. What type of policies are needed to promote social welfare improvements in low income countries?
There are the standard complementary policies for trade that also apply for GVCs. Labour adjustment policies are very important because of the distributional consequences. This means unemployment insurance, for example, as well as active labour market policies that help workers find new jobs. These policies are more affordable in advanced countries. But they are probably also more needed there because of the speed of disruption, due more to technology than trade, towards higher skills. For developing countries, labour mobility is very important because GVCs and growth often tend to be quite concentrated. Workers must be able to move to benefit from opportunities.
On a related note, can you share some of the findings on how participation in GVCs affects female workers in developing countries?
We find that GVCs employ female production workers more intensely than non-GVC manufacturing firms. There is a job creation effect with strong spillovers for low-skilled women and their families. But what we also find is that GVCs do not break the glass ceiling. While women are more likely to be production workers in GVCs than in similar firms, they are also less likely to be owners or managers.
If we turn our attention to the environment, are there areas where GVC-related policies can help tackle some of the urgent challenges that we face?
The transport of goods back and forth is a big concern. Carbon emissions from shipping represent roughly two percent of global emissions and are on the rise. The other concern often raised is the issue of carbon leakage where the most polluting activities migrate to countries with lax regulation. This turns out to be less of an issue because comparative advantage is driven by other factors. And the third concern – possibly the most worrisome – is around waste derived from the increased production and consumption of ever cheaper goods.
Policy considerations that exacerbate these concerns are the under-pricing of fuel and production subsidies. In a world of GVCs, a country that subsidises fuel or an industry will induce effects beyond its borders. The distortion is magnified to some extent.
However, it is important to mention that there are also beneficial environmental effects to GVCs. Consumers and producers have access to more and cheaper environmental goods – for example solar panels. We also see that lead firms tend to push for higher environmental standards in their value chains due to consumer expectations, which is another aspect of the relational dimension. Finally, trade more broadly encourages the world to use resources more efficiently – a case in point being agriculture and trade in embedded water from abundant to scarce countries.
To summarise, there are conflicting environmental effects and our recommendation is that the best way to manage them is by getting the price signal right. A first step would be to remove fuel or production subsidies that incentivise overcapacity and hydrocarbon use. Another would be to tax pollution accordingly so that environmental externalities are priced into the cost of goods. Carbon taxes for example would help reduce emissions from excess production and transport.
What role do you see for international cooperation on trade-related policies and regulation in terms of helping low income countries capture the benefits from participation in GVCs?
International cooperation is critical to ensure an open and predictable trade policy environment. GVCs thrived in the 1990s and early 2000s in part because of low tariffs that were constrained by international commitments in advanced countries and tariff reductions in developing countries. Regional trade agreements also supported the development of especially close regional ties. There is still room for further trade liberalisation in advanced countries, especially in agriculture and processed food, where relatively high tariffs prevent developing countries from entering final stages of production.
The policy response will depend on the type of GVC, which can be divided into three categories: agriculture and resource-based, simple manufacturing and more complex manufacturing. Countries engaged in agriculture and resource-based GVCs tend to have higher trade costs. Improving this situation through integration agreements like the Africa Continental Free Trade Agreement and the implementation of trade facilitation measures will help. When moving into the more complex GVCs it becomes important to enter into deeper trade agreements that tackle issues like investment and standards.
One of the newer policy areas the report focuses on is data. Future GVCs might increasingly be around platform firms. Advances in communication technologies and transport enabled the formation of existing GVCs: the next rung is platform firms and the huge amounts of data created. There is a trade-off here between innovation and privacy that needs to be considered, and there are also concerns around competition.
Another important area is tax policy. Because capital has become so easy to move around, and because a large share of profits stem from activities such as R&D and patents, it is much harder to tax firms in GVCs. Cooperation around taxation is essential, not least for developing countries that need the resources to put in place the type of labour adjustment policies discussed earlier.
To end on cooperation, how can aid for trade help equip least developed countries for the GVCs of the future?
The Trade Facilitation Agreement of the World Trade Organization provides some lessons in terms of cooperation and the distribution of gains. Developing countries can implement the agreement at their own pace and support is provided by advanced countries. This is a useful way of dealing with coordination failures that affect GVCs.
The model can be extended into other areas such as standards. Meeting technical barriers to trade or sanitary and phytosanitary standards can be a challenge for developing countries. More assistance in setting up the right bodies, accessing information, acquiring the right technology and getting products certified would help expand participation in value chains.
This policy series has been funded by the Australian Government through the Department of Foreign Affairs and Trade. The views expressed in this publication are the author’s alone and are not necessarily the views of the Australian Government.