Supply chains and trade policy

Supply chains and trade policy are tightly linked to each other. Trade distorting effects of tariff and non-tariff barriers (which are levied on the gross value of imported goods, rather than value-added) are magnified in global supply chains; it takes many more cross-border transactions to provide a single unit of a final good than before. Global supply chains create new forms of cross-border spillover effects and have therefore generated a demand for deep forms of integration, which could make productionsharing activities less vulnerable to disruptions or restrictions. For instance, it is not possible to disentangle merchandise trade from services trade, and standards may need to be stipulated to make each stage of production compatible with the other. At present, “deep” provisions in international trade agreements – covering the areas of services, investment, competition policy and intellectual property, among others – are largely found at the regional level. “Deep” RTAs, in turn, may stimulate the further proliferation of global supply chains if they cover a sufficient number of economies and do not introduce distortions with third countries. However, the wild and tangled growth of RTAs and stringent rules of origin have created problems (“spaghetti bowl” trade). To the extent that RTAs are consolidated and gradually multilateralised, they might prove a useful step to achieving the first-best solution of multilateral trade liberalisation that goes beyond tariff reduction. Examples can be found in the field of technical barriers to trade, trade facilitation, the opening of markets for trade in services and the presence of contingency measures within trade commitments. The multilateral trading system faces the challenge of addressing the need for trade integration between countries while preserving non-discrimination between regulatory regimes.