Development and Trade Policy Implications of

Global Value Chains

ADVANCED TRADE POLICY COURSE (ATPC) - ENGLISH

9 February 2023

VICTOR STOLZENBURG
Economic Research And Statistics Division
The rise of GVCs

• The foreign value added content of exports has expanded rapidly.

Page 2
Overview

• Basics on GVCs
• Definitions and examples
• What economic principles underpin GVCs?
• What economic forces led to their rise?

• Measurement and statistics of GVCs

• What economic benefits do they confer?

• What helps to integrate and upgrade in GVCs?

• Further policy implications of GVCs?

Page 3 Overview
About GVCs…

The term Global Value Chain is increasingly used to summarise concepts that are
commonly referred to as supply chain trade, task trade, production fragmentation,
vertical specialization, outsourcing and so forth.

It describes the rise of foreign value added (imported inputs) in domestic output/exports
caused by an increasingly international organization of production structures by firms.
Stolzenburg (2016)

Page 4 Basics on GVCs

Key features of trade in GVCs

Essentially trade in stages:

✓ Intermediate goods/services: parts, raw materials, R&D, finance
✓ Assembly
✓ Post-production: marketing, accounting

Country/industry participation in GVCs is envisaged in two directions:

✓ Backward linkages: import of foreign inputs to produce goods/services for export
✓ Forward linkages: export of intermediates/inputs to GVC partners to produce their
exports of goods and services

Page 5 Basics on GVCs

Schematic presentation of trade in GVCs

1. Industrial task

Oil production Plastic production Plastic box Plastic box labelling Final consumption
manufacturing and packaging
(“Manu-services”)
2. Economy position in production chain
Upstream Downstream

3. Product type
Primary product Intermediate good Intermediate good Final good

Forward GVC linkage Backward GVC linkage

Page 6 Basics on GVCs

An illustration of GVCs
The Boeing 787 Dreamliner

Page 7 Basics on GVCs

Which economic principles underpin GVCs?

• It’s comparative advantage (CA) at work

• Instead of operating at the product or industry level, it operates at the

parts/tasks level

• An even finer division of labour:

• Parts/Tasks instead of industries
• By firms, regions (in addition to countries)

➢ Comparative advantage on steroids!

Page 8 Basics on GVCs

Sources of comparative advantage

• Technological differences

• Endowments (natural resources, skilled labour, etc.)

• Institutions

• Etc.

Page 9 Basics on GVCs

Which economic forces led to the rise of GVCs?

• Technological (ICT) revolution

• Advances in trade cost reductions

• New Production and Management Practices (“Toyota” Model)

• Policy changes
• Integration of formerly centrally planned economies into the global
economy “effectively” quadrupling the global workforce
• Trade, services and investment liberalization in many economies

Page 10 Basics on GVCs

ICT prices have been declining rapidly

Source: Byrne and Corrado (2017)

Page 11 Basics on GVCs
Trade costs have dropped considerably I

Source: Arvis at al. (2013)

Page 12 Basics on GVCs
Trade costs have dropped considerably II

Source: WTO Trade Cost index

Page 13 Basics on GVCs
How to measure GVC Participation

• Measures based on traditional statistics

• Share of intermediate imports in total imports
• Import content of exports
• FDI inflows/outflows
• Etc.

• New measures based on value added trade data

• Foreign value added in exports (backward linkages)
• Domestic value added in foreign exports (forward linkages)

Page 14 Measurement and Statistics of GVCs

What is trade in value added ?

Trade in value added is a statistical approach that estimates the sources

(by country and industry) of value that is added in the production of goods
and services for exports. It is based on input-output tables.

Page 15 Measurement and Statistics of GVCs

About value added…

Value added = Labour compensation (wages) + Profits + Taxes on production

GDP measures the additional value that is created at every stage of production in all
industries and sectors of an economy

GDP = 1$ + 1$ + 1$ + 1$ + 1$ = 5$

1$

1$
=> Same principle applied
1$ for trade in value added !
1$

1$

Page 16 Measurement and Statistics of GVCs

Gross vs Value Added measures of trade flows

Gross exports of
Gross exports of final goods/services
intermediates (50) (150 = 50 + 100)

Value added
exports (100)

Value added exports (50)

: Gross trade flows

: Value added trade flows
Page 17 Measurement and Statistics of GVCs
Advantages of value added trade measure

• Highlight the actual contribution of trade to an economy.

• Highlight the indirect contribution of different sectors to trade.

• Highlight indirect linkages between countries.

• Address the double counting observed with traditional statistics.

• Estimate trade taking place within GVCs.

Page 18 Measurement and Statistics of GVCs

GVC integration across countries

Page 19 Measurement and Statistics of GVCs

The rising GVC integration of developing economies

Source: WTO (2014)

Page 20 Measurement and Statistics of GVCs

Value Added Trade Network Representation

Page 21 Measurement and Statistics of GVCs

The actual contribution of services
in gross exports

Share in global gross exports, 2018 Value added shares, 2018

Services Goods Services Goods

Source: OECD TiVA database

Page 22 Measurement and Statistics of GVCs
Recent Trends in Global Value Chains

Global Value Chain Participation Rates, World, From 1995 to 2020 for the
1995–2020 (%) world economy:

GVC participation rate:

35.2% to 44.4%;
Peak: 49.3% in 2018.

GVC’s Contribution to
GDP: 9.6% to 12.1%;
Peak: 14.6% in 2018

After a resurgence of
growth rates in 2017 and
2018, trade conflicts and
the COVID-19 pandemic
disrupted GVCs after 2018.

Source: GVC Development Report 2021

Page 23 Measurement and Statistics of GVCs
Global Value Chains in the pandemic I

GVC-intensive industries were not more affected than other industries by the
pandemic.

Page 24 Measurement and Statistics of GVCs

Global Value Chains in the pandemic II

In fact, they led the recovery while less GVC-intensive services trade
remains depressed.

Page 25 Measurement and Statistics of GVCs

 Global Value Chains in the pandemic III

As to supply shortages/delays and rising inflation, an important question is whether

they are caused by demand surges or supply disruptions.
➢ Lockdowns and surging trade costs can certainly explain a part of the issues.

Page 26 Measurement and Statistics of GVCs

 Global Value Chains in the pandemic IV

But despite these disruptions, supply is at record highs suggesting that demand surges
are the primary driver behind shortages and inflation.

Page 27 Measurement and Statistics of GVCs

 Global Value Chains in the pandemic V

Supply chains are in fact key to sustaining these high levels of demand as shown by
record trade flows
Global merchandise exports
6,000,000

5,500,000

5,000,000
USD million

4,500,000

4,000,000

3,500,000

3,000,000
2015 2016 2017 2018 2019 2020 2021

Page 28 Measurement and Statistics of GVCs

Global Value Chains in the pandemic VI

Global trade in intermediate goods

130

125

120
Index Q2 2019 = 100

115

110

105

100

95

90

85

80
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2019 2019 2019 2020 2020 2020 2020 2021 2021

Page 29 Measurement and Statistics of GVCs

What economic benefits do they confer?

• Usual gains from trade

• Productivity increases
• Lower prices
• More variety
• Etc.

• GVCs facilitate technology transfer more than traditional trade

• Gains are easier to achieve and distributed broader because entry to

international trade is less demanding

Page 30 Economic benefits of GVCs

GVC participation is positively associated
with GDP per capita
• Countries with high GVC participation (red line) tend to be richer than
those with low GVC participation (blue line)

Kernel distribution of GDP per capita by high and low participation in GVCs, 2012
Kernel Density

Log GDP per capita

Source: WTO secretariat calculations based on UN Comtrade data and Penn World Table 8.0.
Page 31 Economic benefits of GVCs
GVC participation has increased labour
productivity and GDP

• A 10% increase in GVC participation causes an increase in GDP

in the range of 1% and 6%.

• A 10% increase in GVC forward participation causes an increase

in labour productivity of around 3%.

• The gains from GVCs are present in countries at different stages

of development.

Page 32 Economic benefits of GVCs

GVC participation has increased knowledge
flows across borders
• GVCs facilitate knowledge and technology diffusion as they require a high
degree of interdependency between producers from different countries.

• High-skilled personnel often travels within multinational firms across

borders to assure technological as well as managerial cohesion across
production units in different countries.

• Smaller suppliers and suppliers from less developed economies can

especially benefit from interactions with large multinational companies
through transfer of technology and know-how.

• According to the latest research, the expansion of GVCs increased

innovation around the globe by an average of 5%.

Page 33 Economic benefits of GVCs

A number of developing countries have become
global players I
• Their industrialization was achieved • … as a result they have
through GVC integration and … become important global
players.

Share of import of parts and components, 1996-2012

Source: UN Comtrade, WTO secretariat.

Page 34 Economic benefits of GVCs
A number of developing countries have become
global players II

GVC Income Ratio Aggregate by Activity in 15 Developing Asian

Economies Relative to the OECD Average, 2000–2018
GVC participation facilitates
the catch-up process of
emerging Asia

For manufacturing activities,

the income ratio of emerging
Asia to OECD rose from 20% to
57% during the period 2000–
2018;

For knowledge intensive

activities, the income ratio rose
from 9% to 24%.

Source: GVC Development Report 2021

Page 35 Economic benefits of GVCs

 SMEs participation in GVCs
SMEs share of total domestic value added contained in exports,
2009 (%)

Business services

Motor vehicles

Source: OECD
Main obstacles to participation: Survey
evidence

Page 37 Integration and upgrading in GVCs

It’s not just about trade policy anymore

• The trade-investment-services nexus within GVCs requires countries

to pay attention to a broad range of policies

• There are important interactions across different policy areas

• GVCs require long-term investment: policy certainty is key!

Page 38 Integration and upgrading in GVCs

What determines GVC integration

• Structural factors
• Location/Distance (to hub countries CHN, DEU, JPN, USA)
• Country size
• Industrial structure
• Existing supplier network

• Policy
• Infrastructure & Connectivity
• Trade & investment policy
• Legal institutions & political environment
• Financial institutions
• Education, skills & innovation policy
• Restrictions on services trade

Page 39 Integration and upgrading in GVCs

Trade & Investment policy

• Classic trade policy matters more than ever

• Accumulation effect: Goods produced in GVCs have to cross national
borders several times and incur tariffs several times
• Magnification effect: These costs are paid out of the share of value
added

• NTMs can collide with just in time production and create regulatory
inconsistencies

• GVCs have raised the need for investment security and certainty
due to relationship-specific investments

➢(Multilateral) trade agreements remain crucial

Page 40 Integration and upgrading in GVCs

 An example: The Trade Facilitation
Agreement (TFA)

• Timeliness and predictability in delivery time matters for trade in GVCs

• Delays in delivery increase the costs of holding stocks, impede rapid

responses to changes in customers’ orders

➢TFA allows WTO members to internalize spillover effect of trade

facilitation reform and creates regulatory consistency
• Coordination function
• Commitment mechanism

Page 41 Integration and upgrading in GVCs

 10%
15%
20%
25%

0%
5%

Page 42
Country 1
Country 5
Country 9
Country 13
Country 17
Country 21
Country 25
Country 29
Country 33
Country 37
Country 41
implementation

Country 45
Country 49
Country 53
Country 57
Country 61
Country 65
Country 69
Country 73

Source: Disaggregated estimates from Moisé and Sorescu (2013).

Country 77
Country 81
Country 85
Country 89
Country 93
Country 97
Country 101
Country 105
Country 109
Country 113
Country 117
Country 121
Country 125
Country 129
Country 133
Estimated reduction in trade costs from TFA

Integration and upgrading in GVCs

Simulation results: developed and developing
countries

Increase in annual growth rate over baseline

(percentage points)

Full and immediate implementation

Exports GDP
Developed 1.80 0.25
Developing 3.50 0.90
WTO Secretariat estimates

➢ Benefits are greater for implementing countries

➢ Developing countries have the most to gain
➢ Exports in GVC sectors would increase in particular

Page 43 Integration and upgrading in GVCs

Institutions and RTAs

• GVCs are more regional than global in nature: Distance

matters!

• Legal institutions are important but can be substituted by

informal institutions:
• Migration stocks
• Ease of information exchange
• Trust

➢Regional trade agreements are central here!

Page 44 Integration and upgrading in GVCs

Structural factors

• Structural factors are harder to change but should also be taken

into account
• GVCs are more regional than global in nature: Distance matters!

➢Technological developments can help overcome structural

barriers:
• Air transport “reduces” distances
• ICT can eliminate distance altogether in certain sectors

➢Structural factors matter more for some activities than for others
(e.g. Indian call centres)

Page 45 Integration and upgrading in GVCs

Moving Up the Value Chain:
Upstream and Downstream Strategies

• Upstream: incorporating higher value added functions from the supply

side (procurement and supply chain management, design, R&D)

• Downstream: moving towards the demand side (branding, marketing,

distribution and retail, after-sale services)

Page 46 Integration and upgrading in GVCs

Which policies facilitate upgrading in GVCs

• Structural factors
• Existing supplier network

• Policy (certainty)
• Infrastructure & Connectivity
• Trade & investment policy
• Legal institutions & political environment
• Financial institutions
• Education, skills & innovation policy
• Restrictions on services trade
• Standards (quality, labour, environment)

Page 47 Integration and upgrading in GVCs

Education, skills & innovation policy

• Research shows that GVCs facilitate technology spillovers but only

if there is sufficient absorptive capacity

• GVCs raise demand for skilled labour. An adequate response on

the supply side prevents distributional problems.

• Governments can work with lead firms to identify training

opportunities (see Samsung Case Study).

• Governments can make tax or other incentives dependent on the

provision of training.

Page 48 Integration and upgrading in GVCs

Services

• Services are (the) key input into manufacturing GVC networks

➢Services liberalization boosts manufacturing productivity

➢Bundling services with goods strengthens relationships with clients

and boosts markups

Page 49 Integration and upgrading in GVCs

Policy implications of GVCs

• GVCs have transformed policy space.

• The British debate on a soft versus a hard Brexit.
• The US debate on a border tax adjustment.

• GVCs have transformed the impact of trade on labour markets.

• Competition has moved from sectors to tasks complicating labour market
policies.
• The political backlash in advanced economies is a reaction to this change.

• GVCs have transformed the trade-development nexus.

• Unilateral trade liberalisation has spread amongst developing economies.
• Industrialisation has become easier but potentially less meaningful.

• GVCs have important implications for trade statistics and indicators.

Page 50 Policy implications of GVCs
Examples from trade policy space: trade balances
US bilateral trade deficits on gross and value added basis, selected partner economies, 2011
(Billion US$)

Source: OECD-WTO TiVA database

Page 51 Policy implications of GVCs

Examples from development: revealed
comparative advantage

ZAF CHN
INDUSTRY TRCA NRCA DIFF TRCA NRCA DIFF
AGRI 2.61 1.28 1.33 0.46 2.48 -2.02
MINING 3.01 2.04 0.97 0.09 0.45 -0.37
TEXTILE 0.26 0.33 -0.07 3.71 3.25 0.45
FAB. METAL 0.00 0.00 0.00 2.10 1.24 0.85
COMPUTER 0.04 0.05 -0.01 2.38 1.70 0.69
ELECTRONICS 0.42 0.56 -0.14 2.30 1.70 0.59
CARS 1.09 1.08 0.02 0.27 0.40 -0.13
TRANSPORT 0.63 1.12 -0.49 0.33 0.56 -0.23
TELECOMM 1.86 1.84 0.02 0.12 0.56 -0.44
FINANCE 0.36 1.09 -0.73 0.02 0.96 -0.93
BUSINESS SERV. 0.09 0.37 -0.28 0.65 0.40 0.25

Source: WTO Secretariat calculations based on TiVA data for 2008

Page 52 Policy implications of GVCs

Examples from trade policy space: the rising
interconnectedness of economies

• Exports of manufactured goods rely on imported inputs (incl. services).

• Domestic VA is present not only in exports but also in imports.

• So called “national products” may be predominantly produced in other

countries and vice versa.

➢ Currency devaluations and import substitution in a world of GVCs

might have counterintuitive effects by decreasing competitiveness.
Research shows that under certain conditions devaluations of partner
countries can even increase domestic competitiveness.

Page 53 Policy implications of GVCs

Examples from trade policy space: the rising
interconnectedness of economies
• What are my markets of final demand? Who are my suppliers?
Indonesia: Clothing and Footwear Exports, 2008. Source: OECD-WTO TiVA

➢ Countries should be aware that trade barriers between partner

countries can hurt them too through GVCs.
Page 54 Policy implications of GVCs
Questions I

• What increased more over the last three decades, domestic value
added or foreign value added in exports?

• Which two factors led to the rise of GVCs?

• Name two advantages of value added trade measures.

• Does GVC participation depend on the level of development?

• What are the three major hubs (centres) of GVCs?

Page 55 Wrap up
Questions II

• Which sector‘s contribution to exports and competitiveness is most

hidden by traditional (i.e. gross) trade statistics?

• How did GVCs perform in the pandemic?

• Name two benefits of GVC trade.

• Are bilateral gross trade deficits informative in a GVC world?

• Why and how do the effects of import substitution and currency

devaluations differ between a GVC world and a non-GVC world?

Page 56 Wrap up
Key messages

• GVCs have transformed trade policy across various dimensions.

• High quality imported inputs (incl. Services!) are key to competitiveness.

• Countries need to look at policies beyond trade and investment.

• The long-term nature of GVC relationships requires in particular

certainty across the different policy fields.

• GVCs facilitate technology transfer and thus growth in the right policy
environment.

• Gross trade statistics need to be complemented by value added trade

statistics.
Page 57 Wrap up
Limitation and Caveats

• Literature on GVCs still evolving…

• … unclear whether development successes through GVC can be replicated

in a similar fashion elsewhere.

• … unclear how differences in underlying conditions among countries affect

the nature of their GVC participation and upgrading.

Page 58 Wrap up
More Information…

Page 59 Wrap up
 THANK YOU

Contact: Victor Stolzenburg, Research Economist, WTO

victor.stolzenburg@wto.org

Page 60 Wrap up