In 2013, the World Trade Organization (WTO) released a publication on global value chains (GVCs). In 2016, the World Bank did the same thing. In 2017, the WTO and the World Bank together released the Global Value Chain Development Report. Why have these two organizations, the lead global entities in trade policy and international development policy, suddenly become so interested in what was at one time an obscure subject in international business? The answer is that international commerce and policy have become more relevant than ever. And the international development community has woken up to this fact.
Skeptical? Consider Richard Baldwin, one of the world’s foremost international economists. He contributed a chapter to the 2013 WTO volume and wrote a forward to the 2016 World Bank volume. But he also wrote his own book on the subject, The Great Convergence: Information Technology and the New Globalization. In this book, he said that international trade should really be called “international commerce.” Why? For two reasons.
First, trade “involves far more than trade in goods.” It also includes trade in services, including many different types of business services. These include not just container ships but telecoms, air cargo, trade finance, logistics, trade compliance and others. This reflects a process that researchers in international economics call “servicification.” Trade in goods and trade in services are now inseparable from one another.
Second, “when production processes straddle borders” as they do in GVCs, “the nature of international commerce changes fundamentally.” It involves the exchange of parts and components, the movement of production facilities through FDI, the movement of corporate personnel from one country to another, and the flow of know-how. According to Baldwin, international commerce is now “multifaceted” in that involves “flows of goods, services, intellectual property, capital and people.”
Let’s get back to GVCs. They are complex. They break production processes down into tasks, and then distribute these tasks across different countries. Apple’s CEO Tim Cook is a GVC expert, and Apple’s GVC is an iconic example of the new realm of international commerce. GVCs involve multiple types of commercial relationships, including open-market buyer-seller, contractual, and foreign direct investment (FDI).
Further, as international economists have recognized, the trade patterns of GVCs can be different than in the past. They involve a lot of trade in intermediate goods (rather than final products) that can cross national borders multiple times. This is a type of what international economists call intra-industry trade and can even involve intra-firm trade, trade that takes place within multinational enterprises (MNEs). An underappreciated fact is that approximately one-third of world trade takes place inside of MNEs.
These new realities have forced international economists to begin thinking in new terms. Along with the GVC concept, there is also a recognition of the importance of trade in value added (TiVA). This looks not at gross dollar amounts of trade but at the trade in just value added with intermediate inputs subtracted out. This is now recognized as so important that the WTO and OECD have a joint project to develop data on TiVA. This represents a new frontier in international economic data and analysis.
GVCs have important implications for development policy and industrialization strategies. To put it simply, there is an ongoing shift of focus from sectors to tasks. The 2016 World Bank report introduced the notion of task-based development strategies. It explored the ways that low- and middle-income countries (LMICs) can try to become part of GVCs to generate employment and reduce poverty. It set out an analytical agenda for trade and development that draws on TiVA data.
GVCs and TiVA has important implications for high-income countries as well. Currently, the United States is increasing tariffs implicitly assuming that trade is all in final goods. In truth, however, much of the protected trade is in intermediate goods, raising the costs of production in the United States and interrupting GVCs. Indeed, in some instances, the tariff protection is on imports undertaken by US firms through contractual or subsidiary relationships. While not everyone in the current US administration is fully aware of this, the global finance and business press certainly is.
GVCs are a new important reality of international commerce and policy. They have important implications for international business, public policy, and even international relations. And guess what? GVCs involve just the realms of international economics relations examined by the Schar School’s International Commerce and Policy Program since 1990. International Commerce and Policy, along with international business and international development, is now more relevant than ever.