Development and building trade capacity
Trade, value chains and labor markets in advanced economies
Trade is a major source of employment. Nevertheless trade has recently been caught in the crossfire in discussions around the decline of manufacturing employment and the polarization of labor markets in advanced economies. In this chapter we examine what the academic literature has to say on the relationship between trade and labor markets with a specific focus on studies with a value chain perspective. We find that trade has only modest effects on aggregate employment and is unlikely to have been a major contributor to the decline of manufacturing. However the effects vary considerably across regions and individuals with different skill levels. This implies that policy has a central role to play in making sure that the gains from trade are shared evenly. Our findings highlight that a value chain perspective is important for assessing the impact of trade on labor markets. The emergence of value chains has strengthened linkages between sectors magnified trade’s impact on skill demand and requires novel trade statistics. Ignoring this leads to a biased view of trade and overestimates its role in the decline of manufacturing employment.
Foreword
There are different ways to analyze the global economy. One is to view it through the lens of growth and structural change in individual economies developed and developing. A second is to use the lens of global value chains (GVCs) the complex network structure of flows of goods services capital and technology across national borders. Both are useful and they are complementary to one another.
Executive summary
More than two-thirds of world trade occurs through global value chains (GVCs) in which production crosses at least one border and typically many borders before final assembly. The phenomenal growth in GVC-related trade has translated into significant economic growth in many countries across the globe over the last two decades fueled by reductions in transportation and communication costs and declining trade barriers. But at the same time it has contributed to distributional effects that mean that the benefits of trade have not always accrued to all which has at least in part been a driver in the backlash against globalization and the rise of protectionism and threats to global and regional trade agreements. In addition new technological developments such as robotics big data and the Internet of Things (IoT) are beginning to reshape and further transform GVCs. This second GVC development report takes stock of the recent evolution of GVC trade in light of these developments.
Improving the accounting frameworks for analyses of global value chains
The use of global input-output tables and the creation of Trade in Value-Added (TiVA) statistics has greatly improved our understanding of the fragmentation of global production through value chains. However their application requires a number of assumptions that in practice typically understate the degree of interconnectedness. TiVA estimates implicitly assume identical production functions across firms within an industry when in reality production functions differ considerably. Typically larger (and foreign-owned) firms tend to be more trade oriented than smaller (and domestically-owned) firms. As a result TiVA statistics underestimate the import content of exports for the economy as a whole a key indicator characterizing global production. Moreover TiVA analyses are based on basic price concepts which provide an appropriate view of production through value chains but are less well equipped to analyse consumption particularly as they exclude significant distribution margins (in particular retail and wholesale activities often including marketing activities and brands) which add value at the end of the chain. This can distort analyses using “smile curves” which show the distance from final demand of different sectors within value chains and in turn understate the scale of jobs supported by trade.
Technological progress, diffusion, and opportunities for developing countries: lessons from China
The nature of technology used in products plays a major role in determining the governance structure of value chains and the benefits of participation for developing countries. Standardization through breaking production into modules with a high degree of functional autonomy (limited mutual interference between modules) can dramatically reduce the amount of research and development (R&D) learning by doing and the number of complementary skills needed to produce a good. This greatly increases opportunities for developing country firms to participate in formerly capital-intensive industries through reducing entry costs into global value chains. However widespread access to standardized products with little ability to modify technical features can lead to an excessive supply of homogeneous products in a local market resulting in intense price competition and limited technology transfer. By contrast technology that facilitates scope for product modification and greater interaction with technology owners can help boost technology transfer and product upgrading by developing country firms. The chapter illustrates this interaction between changes in technology and opportunities for developing countries through developments in the automotive and mobile phone handset industries with a particular reference to China’s growth experience. It also finds that automation is likely to have only a limited impact on developing countries’ opportunities to participate in value chains through the offshoring of production by high-income countries at least in the short term.
The digital economy, GVCs and SMEs
Although small and medium-sized enterprises (SMEs) represent the vast majority of firms worldwide their participation in international trade remains limited relative to their share of overall economic activity and employment as compared to large firms. The rise of the digital economy could however open a range of new opportunities for small firms to play a more active role in global value chains (GVCs). This chapter reviews evidence of SME participation in international trade and production networks and looks at how the digitalization of our economies is already affecting or could affect future SME contributions to GVCs. New research by Lanz et al. (2018) finds evidence that digitally-connected SMEs in developing countries tend to import a higher share of their inputs than non-digitally-connected firms. Additionally it is shown that this positive digital effect is greater for SMEs than it is for large firms. The chapter reviews the various opportunities that the digital economy opens for SMEs especially in terms of cost reductions and the emergence of new business models but also discusses policy measures that could be taken to promote SME participation in GVCs. Indeed significant challenges remain for SMEs to enter GVCs some of which are exacerbated by the new digital economy. A holistic approach that combines investment in ICT infrastructure and human capital with trade policy measures and measures to improve the business environment access to finance and logistics and promote innovation and R&D is necessary. Improving the availability of data would also help to better understand and integrate SMEs in GVCs.
Acknowledgments
The Global Value Chains Development Report is a joint publication of the World Trade Organization (WTO) the Institute of Developing Economies (IDE–JETRO) the Organisation for Economic Co-operation and Development (OECD) the Research Center of Global Value Chains (RCGVC-UIBE) the World Bank Group and the China Development Research Foundation based on joint research efforts to better understand the ongoing development and evolution of global value chains and their implications for economic development.
Should high domestic value added in exports be an objective of policy?
Global value chains make it easier for developing countries to move away from export reliance on unprocessed primary products to become exporters of manufactures and services. Global value chains (GVCs) allow countries to specialize in a particular activity and join a global production network. As a developing country moves from export of primary products to export of manufactures and services via GVCs the ratio of domestic value added to gross export value tends to fall. Many developing country policy-makers worry about this trend and aspire to increase their value added contribution to exports. There are a number of reasons why this objective is not good policy. It may seem like simple math that a higher domestic value added share means more total value added exported and hence more GDP. But that simple idea ignores the reality that imported goods and services are a key support to a country’s competitiveness. The chapter documents this via the history of the successful East Asian industrializers as well as more recent evidence from Association of Southeast Asian Nations (ASEAN) economies. If a country artificially replaces key inputs with inferior domestic versions the end result is likely to be fewer gross exports and less not more total value added exports.
Global value chains and employment in developing economies
The emergence of global value chains – whereby goods that used to be produced within one country are now fragmented and distributed across global networks of production – has offered developing countries new opportunities to integrate into the global economy. This has also had fundamental impacts for workers in developing countries. The chapter shows that higher earnings and employment within sectors and firms is associated with GVC integration which also supports other spillovers that operate through labor markets. But it has also had distributional implications of where jobs go and the types of jobs they are. Jobs growth has occurred directly in the export sector as well as indirectly through linkages of exporting firms to domestic input-supplying firms. Employment creation and wage gains have been biased towards more skilled workers in developing countries which contrasts with the predictions of trade theory. The skill-biased nature of GVC trade is associated with increased complexity of global supply chains as well as increased use of skill-intensive inputs notably services. New emerging trends including automation and digitization may further determine how employment in developing countries will be affected by GVC trade in the future. The findings point to education as well as trade and labor policies as important factors for strengthening the GVC-labor relationship.
Recent patterns of global production and GVC participation
Taking advantage of a new accounting method to decompose GDP production into pure domestic production traditional trade simple and complex GVC activities this chapter examines recent trends in global value chain (GVC) activities across the world. Our main findings show that the pace of GVC activities picked up in 2017 after a period of slow down since 2012; intra-North American and intra-European GVC activities declined relative to inter-regional transactions due to higher penetration via Factory Asia but value chains still remain largely regional; China is increasingly playing an important role as both a supply and demand hub in traditional trade and simple GVC networks although the US and Germany are still the most important hubs in complex GVC networks; bilateral trade balances are significantly affected by the supply and demand of third countries; and net imports are no longer a proper measure of the impact of international trade on the domestic economy in the age of GVCs.
Global Value Chain Development Report 2019
This report takes stock of the evolution of global value chains (GVCs) in light of technological developments such as robotics big data and the Internet of Things. It discusses how these technologies are reshaping GVCs and examines the effect of these changes on labor markets in developed and developing economies and on supply chain management. The report discusses how technological developments are creating new opportunities for the participation of small and medium-sized enterprises in global value chains and reviews issues related to GVC measurement. The report is a follow-up to the first Global Value Chain Development Report which revealed the changing nature of international trade when analyzed in terms of value chains and value-added trade.
Preferential Trade Agreements in Africa: Lessons from the Tripartite Free Trade Agreements and an African Continent-Wide FTA
Economic transformation is an important pre-requisite for African countries to maximize the benefits of globalization. The development outcomes of the transformation process are conditioned on the one hand by the level of inclusiveness and on the other by the sustainability of the development pathways among other factors. Building on experiences since the new millennium in which Africa has witnessed rapid and sustained high levels of economic growth and informed by the policy discourse that accompanied the formulation of the Common African Position on Sustainable Development Goals African countries have charted a transformation path in which they aspire to play to their comparative advantages.
WTO Accession Reforms and Competitiveness – Lessons for Africa
This chapter evaluates the impact on competitiveness of reforms undertaken by recently acceded countries and draws lessons for African countries pursuing the goal of becoming emerging economies. By comparing reform outcomes before and after accessions relative to control groups using the difference-in-difference evaluation method the chapter concludes that the recently acceded members improved their international competitiveness although the overall impact was relatively small and differed substantially across economies economic sectors and time. African economies aspiring to become emerging economies could build on the experience of recently acceded countries by designing long-term reform agendas similar to the accession reform packages locking them into a credible policy framework through a series of domestic and international agreements frontloading reforms to gain credibility and persisting in their implementation balancing short-term costs with long-term benefits and learning from Article XII peers who have gained substantial experience in managing complex reforms.
African Perspectives on Trade and the WTO
Twenty-first century Africa is in a process of economic transformation but challenges remain in areas such as structural reform governance commodity pricing and geopolitics. This book looks into key questions facing the continent such as how Africa can achieve deeper integration into the rules-based multilateral trading system and the global economy. It provides a range of perspectives on the future of the multilateral trading system and Africa’s participation in global trade. It also underlines the supportive roles that can be played by multilateral and regional institutions during such a rapid and uncertain transition.
Introduction and Overview
This volume the work of more than twenty authors grew out of the Fourth China Round Table and the WTO’s Tenth Ministerial Conference two seminal events held back-to-back in Nairobi Kenya in December 2015. The work presented here provides comprehensive substantive insights of the African trade policy and development context in which these two meetings took place.
Economic Diversification in Africa’s Number One Economy
Nigeria is the largest economy in Africa with a GDP in excess of US$ 500 billion dependent on oil and gas exports for the bulk of government revenues as well as foreign exchange. Its growth – which averaged about 7 per cent in the decade between 2005 and 2014 – has in recent years been driven by the non-oil sectors: services agriculture and manufacturing. The principal challenge for the President Buhari administration which took office in May 2015 is to build on this trend by diversifying export income and the sources of government revenues as well as kickstarting the long-overdue task of industrializing the Nigerian economy. One of the goals of this approach is to achieve robust stable and predictable growth free from short-to-medium-term cycles of boom and bust.
Deepening African Integration: Intra-African Trade for Development and Poverty Reduction
The obstacles to deeper African integration are great but the potential gains for development and poverty reduction warrant a sustained effort to overcome these challenges. High trade barriers between countries have been reflected in trade that is more oriented toward distant markets than neighbouring African countries – it is often easier for Africans to trade with the rest of the world than with each other. The potential exists for greater intra-African trade in ways that would have significant positive impacts on the lives of millions living in poverty. Barriers to intra-regional trade need to be tackled along with complementary efforts to ensure that the poorest people can access the opportunities created. The World Bank Group is working in a number of different areas to support this effort and is ready to do more.
African Trade Integration and International Production Networks
African trade is heavily concentrated in agricultural and natural resourcebased commodities sectors that are highly embedded in international value chains. There has been significant trade dynamism in recent years driven by greater participation by African firms and communities in value chains especially in products like fresh produce and flowers. Much of this trade and production is for end markets in Europe but there is also increasing trade of this type within Africa in some manufacturing sectors as well as within services such as tourism. Intra-regional trade remains well below potential however and the challenge to diversify trade and increase the value-added share of African trade continues to confront most African economies. There are improving prospects for this as a result of intra-African policy changes ranging from a greater focus on trade facilitation to the ambition of creating a continental free trade area. A steep increase in supply chain trade in Africa is possible in coming decades if efforts continue to put in place a supporting policy environment. This must centre on substantially lowering trade costs for African firms by implementing trade facilitation measures especially for intra-regional trade flows and improving the productivity of transport logistics and related services that determine the feasibility of efficiently operating regional value chains.