Global Value Chains Support Needed For International Trade to Thrive: World Bank

Global value chains (GVCs) are necessary for the global economy in the current age, as they have the ability to boost global trade and help the global economy thrive again, according to the World Bank's development report 2020.

GVCs are the series of stages required to produce a good or service that is sold to consumers, with each stage adding value and with at least two stages conducted in different countries.

According to the report, the scene of global trade has been transformed over the last three decades, with GVCs expanding rapidly and proving revolutionary for many poorer countries that have joined a GVC, thereby eliminating the need to build whole industries from scratch. The experience of the last three decades has proven that it pays to specialise.

Yet GVCs are at a crossroads, as their growth has levelled off since 2008, when GVCs peaked at 52 percent of global trade. This setback was due to slowing global growth and investment and the stalling of international trade liberalisation, as the report illustrated.

GVCs powered the surge of international trade after 1990 and now account for almost half of all trade. This shift enabled an unprecedented economic convergence, especially for poor and developing countries, as poor countries grew rapidly and began to catch up with richer countries. Since the 2008 global financial crisis, however, the growth of trade has been sluggish and the expansion of GVCs has stalled and serious threats have emerged to the model of trade-led growth, according to the report.

The report concluded that technological change is at this stage more a boon than a curse. GVCs can continue to boost growth, create better jobs, and reduce poverty provided that developing countries implement deeper reforms to promote GVC participation, industrial countries pursue open, predictable policies, and all countries revive multilateral cooperation.

It also found that sustaining openness to GVCs requires cooperation beyond trade policy on taxes, regulation, competition policy, and infrastructure.

"Because GVCs exacerbate the problems of tax avoidance and tax competition between potential host countries, international cooperation is necessary to enable countries to raise tax revenues and to ensure that conditions of competition are not distorted. Ultimately, a joint approach to greater use of destination-based corporate taxation could eliminate the incentive to shift profits and compete over taxes. Meanwhile, other measures against tax base erosion and income shifting could enhance domestic resource mobilization," reads the report.

Meanwhile, domestic regulation is insufficient to address international market failures, such as privacy concerns related to cross-border data transfers. Cooperation by data-destination countries to protect foreign consumer data could reassure data-source countries that their commitments to openness will not put their citizens’ data at risk.

On the other hand, anticompetitive behaviour by GVC firms can affect the distribution of gains from GVC participation. Enhanced international cooperation around competition law enforcement would enable countries to overcome jurisdictional and capacity constraints to combat anticompetitive practices, while coordination between countries on investment in transport and communication infrastructure is needed to improve international connectivity. Gains are larger when governments collaborate to expedite trade simultaneously.

For Africa, the report asserted that the African Continental Free Trade Area (AfCFTA) will likely boost trade and deepen regional integration in Africa, with positive effects on growth and poverty reduction.

"The agreement, which was ratified by 27 countries, has become legally binding and entered into force in May 2019. The first phase of negotiations will consider trade in goods and services, as well as procedures for dispute settlement. This phase will include negotiations on rules of origin, which are likely to have an important role in enabling the development of regional value chains. The second phase will cover the rules defining investment, competition, and intellectual property rights. There is widespread optimism throughout the continent that increased trade integration will strengthen the emerging regional value chains and enable firms throughout Africa to participate in GVCs. Creating an integrated and much larger market can attract market-seeking foreign direct investment, especially if some of the deeper integration ambitions are also realised," according to the report.

Similarly, the report said, a well-staffed AfCFTA secretariat with clear monitoring and enforcement capacities can help ensure that commitments are fully implemented, leading to greater policy predictability.

"Implementing trade facilitation commitments and improving border management can reduce trade costs within Africa and also reduce distances to global hubs. The impact of AfCFTA depends, then, on much more than tariff reduction; some of the largest gains would come from effectively tackling nontariff barriers (NTBs) to trade in goods and services and implementing trade facilitation measures," the report says.

"World Bank staff estimates indicate that reduction of tariffs alone is expected to increase the welfare of AfCFTA members by 0.2 percent. Reducing NTBs in goods and services by half would increase welfare gains by 1.6 percent. Full implementation of the World Trade Organization's Trade Facilitation Agreement (TFA) would bring the overall welfare gains to 5 percent by 2035 (compared with the baseline). Even though AfCFTA is expected to benefit all members, welfare gains by 2035 will range from 0.4 percent to 19 percent . Thus the impact of the agreement will depend on its depth and the extent to which it covers NTBs and services, especially in backbone sectors such as transport and logistics, and on the respective export basket and economic structure of each country," the report added.

AfCFTA will also provide an opportunity to build on efforts by the many regional economic communities to develop integrated regional value chains (RVCs) to support growth and industrial development. In the recent past, these efforts have suffered from the fragmented and piecemeal engagement of the private sector and the capacity, political economy, and coordination challenges that lead to the “implementation gap” in regional commitments.