G20 2016 Trade and Investment Agenda: The contribution of Global Value Chains to an innovative, invigorated, interconnected and inclusive world economy

23 February 2016

 The single most significant unifying theme in all G20 deliberations since the Los Cabos summit in 2012, when Global Value Chains (GVCs) were first singled out for attention, is the need for GVCs to foster inclusiveness and contribute to a viable development path. All subsequent G20 summits, along with supporting prior meetings covering this topic, have called for – with more or less specificity – development-oriented policy approaches. The Turkish presidency in 2015 added considerable emphasis on supporting small and medium-sized enterprise (SME) participation in GVCs.

If GVCs are to fulfil their promise as a development vehicle, they must contribute to economic diversification, jobs, and upgrading beyond simple low value-added tasks. The ways in which this may be assured involve national governments, business, and international agreements that stabilise equitable and opportunity-creating trade and investment relationships.

Outsourcing by lead firms in GVCs is an important mechanism for fostering inclusion, providing opportunities for SMEs, building up local specialisation and creating production clusters. Governments can do much to encourage lead firms to source locally by creating an enabling environment and assisting potential domestic suppliers to prepare themselves for GVC participation. Over time, outsourced suppliers can build up expertise, find ways of upgrading, and become lead firms themselves.

Increasing attention is being paid to the role of SMEs in development processes, and the need to create favourable conditions for their participation in production and trade. SMEs account for large shares of output and jobs in virtually all economies. Oftentimes, their participation in trade is more far-reaching than generally appreciated. Much of this participation is indirect, supplying inputs to firms that export.

In the early stages of involvement in GVCs, SMEs will often be service suppliers. This is partly why the services economy deserves to receive closer attention than it has in the past.  One reason for SMEs’ relative heavy reliance on services is that barriers to entry are low in terms of start-up capital. High fixed costs associated with economies of scale are not as likely to figure as in the case of goods production. A good part of the capital requirement for higher return services operations is human capital. The degree of sophistication in the offerings of service-oriented SMEs varies from low-end unskilled work to high-end value-added.

A flourishing part of higher added value SME activities is found in the digital economy. Opportunities are considerable for direct involvement in international trade via internet-based platforms. Very small firms can have large, multi-customer and multi-destination clienteles, offering a range of services requiring differing skill attributes.

The fuller and more effective participation of SMEs in GVCs requires a multi-faceted approach. Partly it is about supporting SMEs in skill acquisition in various areas, and in exploring opportunities for innovation and productivity growth. It is also about governments creating an enabling environment through developing adequate infrastructure. Possibly an even more important focus for enablement in many economies is improving the policy environment.

Cumbersome and cost-augmenting regulations, poor administration, and various obstacles to doing business fall disproportionately on SMEs. Large firms are better able to deal with, or work around, such obstacles. Finally, with some encouragement from governments, large lead firms are likely to find it in their interests to anchor more solidly in the domestic economy and build long-term supplier relationships with SMEs.   

Trade and investment decisions are the twin pillars that shape the location, configuration, and operation of GVCs. Much else follows in terms of the underlying conditions – not least the policy environment – that determine those trade and investment decisions. The GVC lens therefore provides a useful context for understanding and promoting desirable economic and developmental outcomes in terms of international economic engagement. The GVC-related framework for policy analysis is necessarily joined up and holistic. Proposed courses of action will complement, dovetail and, in some instances, repeat various recommendations for policy action identified in the broader G20 context.

This overlap is to be expected within the G20’s overarching thematic positioning, whose focus in 2016 is to promote an “innovative, invigorated, interconnected and inclusive world economy.”[1] The challenge is to ensure coherence among the various analytical entry points giving rise to recommendations for policy action. The starting points and specific conditions facing each economy differ and will determine the emphasis and sequencing decisions of individual governments.      

As governments seek to benefit from participation in GVCs to the greatest extent possible, the following policy areas and actions suggest themselves for consideration. For convenience, the identified policy areas are divided between domestically-oriented policies and international policy cooperation, but in reality the two overlap in various ways.

Establishing a conducive domestic policy environment

 

  • Strengthen actions to nurture a supportive environment for GVC participation, especially for SMEs. Areas for action include infrastructure development (physical, virtual, and human), and coordination and support for R&D and innovation “laboratories” to enhance domestic productivity growth and competitiveness. Support should also be extended to enable SMEs to navigate and manage regulatory requirements more effectively, especially in the field of standards. All this support is fundamental to creating opportunities for upgrading on value chains.
  • Review and, as necessary, reform policies affecting factor markets. This includes regimes for foreign direct investment (FDI) and for foreign labour (visas, work permits, etc.). Policies should favour openness in order to benefit from foreign resources, technology, and expertise, but be tempered by appropriate actions, conditions, and constraints to foster domestic developmental objectives. High standards of analysis and implementation, based on good governance practices, are essential to ensure balance.
  • Review and, as necessary, reform policies affecting production. The streamlining of regulation, both in terms of design and administration is at the core of actions here, aimed at lowering trade costs and promoting competitiveness. Regulations are designed to pursue legitimate public policy objectives poorly attended to by markets, or functionally necessary for government. However, they should not serve a dual protectionist purpose (especially not for private gain), nor impose unnecessary costs. Policy failure here particularly penalises SMEs.
  • Establish mechanisms for analysing the role of services in GVCs, including at the production stage and in relation to upstream and downstream sources of added value. Value chains for both goods and services require analysis in order to acquire a better understanding of the multi-faceted contributions of services to the economy. This is important in light of the prevailing knowledge deficit; the often predominant role of services as a source of value, jobs, and innovation; and the scope that services offer for SME participation on GVCs.    

 

Areas for international cooperation

 

  • Urge and support actions by governments and international organisations to improve data collection and techniques for analysis. The paucity of data prevailing today inhibits sound and well-informed policymaking.
  • Build on the Antalya initiatives to support and nurture SME participation in GVCs and the international economy. Support and strengthen the World SME Forum as an international focal point for actions to strengthen and empower SMEs in the marketplace.
  • Support and strengthen existing work undertaken by international agencies to facilitate access to trade finance for firms, especially SMEs, in developing and emerging economies.
  • Engage business, through the International Chamber of Commerce and the B20, in analysis and dialogue on ways of facilitating the participation of SMEs in GVCs. Establish for this purpose a mechanism and work programme that will draw on business experience.
  • Support the re-invigoration of the WTO as the primary forum for international trade cooperation, and the integration of preferential trade agreements into the broader framework of inclusive, non-discriminatory trade cooperation.
  • Promote work to build an international investment agreement that would establish multilateral rules on investment and render coherent the current network of thousands of bilateral investment agreements.  
  • Launch a work programme aimed at fusing the currently disparate elements of international trade and investment rules into a more coherent and integrated system of rules. Existing policy silos dealing with goods and services, trade and investment, competition policy, intellectual policy rights, and multiple aspects of regulation should be brought together and rendered mutually consistent and supportive.

 

Annex: Excerpts from past G20 Declarations and Reports

 

G20 Leaders’ Communiqué (Los Cabos, Mexico 2012)

“We value the discussion held by our Trade Ministers in Puerto Vallarta on the relevance of regional and global value chains to world trade, recognizing their role in fostering economic growth, employment and development and emphasizing the need to enhance the participation of developing countries in such value chains. We encourage a deepening of these discussions in the WTO, UNCTAD and OECD within their respective mandates, and we call on them to accelerate their work on analyzing the functioning of global value chains and their relationship with trade and investment flows, development and jobs, as well as on how to measure trade flows, to better understand how our actions affect our countries and others, and to report on progress under Russia's Presidency.”

G20 Leaders’ Declaration (St. Petersburg, Russia 2013)

“We recognize the importance of better understanding the rapid expansion of global value chains (GVCs) and impacts of participation in GVCs for growth, industrial structure, development and job creation. In this regard, we welcome the work done by the OECD, the WTO and the UNCTAD and ask them to seek the views of governments and continue their research on the impact of GVCs, particularly in relation to the influence of GVCs on trade, economic growth, development, job creation and distribution of value-added along GVCs. Identifying the opportunities and challenges of participation in GVCs and making available value-added trade statistics may help countries in due course to decide upon appropriate policymaking options to benefit from GVCs. We call for the OECD in cooperation with the WTO and the UNCTAD to deliver a report in the first half of 2014.”

G20 Leaders’ Communiqué (Brisbane, Australia 2014)

“Trade and competition are powerful drivers of growth, increased living standards and job creation. In today’s world we don’t just trade final products. We work together to make things by importing and exporting components and services. We need policies that take full advantage of global value chains and encourage greater participation and value addition by developing countries.”

Chairman’s Summary of Meeting of G20 Trade Ministers (Sydney, Australia July 2014)

“We discussed global supply chain barriers and how domestic reform and liberalising services will generate particularly large economic gains because there is a compound effect on international competitiveness. We agreed that barriers to trade in services hamper economic growth and need to be addressed through both domestic reform and international cooperation.”

G20 Leaders' Communiqué (Antalya, Turkey 2015)

“Inclusive Global Value Chains (GVCs) are important drivers of world trade. We support policies that allow firms of all sizes, particularly SMEs, in countries at all levels of economic development to participate in and take full advantage of GVCs and encourage greater participation and value addition by developing countries.”

Chairman's Summary Meeting of G20 Trade Ministers (Istanbul, October 2015)

“In order to achieve strong global trade growth, Global Value Chains (GVCs) should be more inclusive. Better integrating SMEs at the national and Low Income Developing Countries at the global level are key to achieve this goal. Recognizing that GVCs of the developed regions have matured, the income elasticity of trade started to diminish. Therefore, we stressed the importance of expanding them to regions and countries that have missed out these opportunities in the past.

Accepting the crucial role of GVC participation for economic development and growth, we also noted the importance of identifying and implementing policies that allow firms of all sizes, especially SMEs, in countries at all levels of economic development, to take full advantage of GVCs.

We noted that costs imposed unnecessarily on firms place the heaviest burden on SMEs. We agreed that it is pivotal to provide a conducive environment for investment and trade. We also stressed the importance of infrastructural prerequisites, including policies addressing financial constraints faced by SMEs' in starting ups.

We welcomed the launch of the World SME Forum in co-operation with the International Chamber of Commerce and B20 as a platform to provide advocacy to enable SMEs to better integrate GVCs and to improve their financing and investment environment.”

Patrick Low is a Visiting Professor at the Faculty of Business and Economics, University of Hong Kong, and a Fellow at the Asia Global Institute.


[1] “Remarks by H.E. Xi Jinping President of the People's Republic of China On the 2016 G20 Summit in China At the Working Lunch of the G20 Summit”, Antalya, 16 November 2015, http://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1315774.shtml