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Thursday, October 17th, 2019

Global value chains provide new opportunities to developing countries

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by July 19, 2017 General

Global value chains provide opportunities for developing countries to diversify their exports and intensify their integration into the global economy. This is one of the key findings of the “Global Value Chain Development Report” recently published by the World Trade Organization (WTO), World Bank, and other partners. Developing countries traditionally exported unprocessed raw materials. The leap to exporting manufacture products was complicated because it required a full suite of complementary industries. Today, the rise of global value chains (GVCs) enables developing countries to slot themselves into a part of the production chain without having to produce a complete, final good. As a result, developing countries now mostly export manufacturing value-added. Developing countries deeply involved in GVCs have been able to leverage this involvement to achieve rapid productivity growth, gains in modern sector employment, and impressive rises in living standards and declines in poverty.

Witnessing this rise of GVCs, stakeholders in developing countries typically want to see their country more involved in value chains, and moving to higher-value-added activities within the chains over time. The report identifies some of the key factors associated with integration into GVCs.

Trade costs pose a key impediment

One of the most important impediments for developing countries is trade costs. Non-tariff trade costs in today’s world—freight, insurance, and other cross-border related fees—tend to be much larger than any remaining import tariffs as products travel through the various stages of production. Those trade costs have a monetary dimension (for example, transportation, insurance, and other fees), but also a more intangible dimension: information costs, nonmonetary barriers (regulation, licensing, and so on), and weak trade governance leading to uncertainty.

These various impediments to trade can be expressed as equivalent to an ad valorem tariff of a certain rate. Trade costs vary by country and by sector and are generally much higher than tariffs as impediments to trade. In sectors with complex value chains, such as motor vehicles, computers, and machinery, trade costs are more than four times higher than tariffs. Trade costs tend to be less of an impediment in traditional traded goods, such as agricultural products, minerals, and wood.

[A]dditional costs—such as poor transportation links, inefficient customs clearance, bureaucracy, and red tape—tend to impede trade, but their effects are most pernicious in sectors requiring that parts move back and forth across borders.

The general point is that additional costs—such as poor transportation links, inefficient customs clearance, bureaucracy, and red tape—tend to impede trade, but their effects are most pernicious in sectors requiring that parts move back and forth across borders. The costs of impediments cascade. Countries with very high trade costs will not be able to participate in GVCs, and any exports are thus likely to be traditional goods, often primary products. Developing countries try to address this problem through export processing zones (EPZs) that have superior logistics and customs clearance (as well as duty drawbacks on import tariffs that remain). The problem with this second-best approach is that it limits participation in GVCs to the small number of firms in the EPZs, while other domestic firms, especially small ones that might become parts suppliers, are left in a high-transactions cost world. It is preferable to improve trade facilitation for all the firms in the economy.

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