Trade Facilitation and Global Value Chains: What Role in Sustainable Development?

25 November 2016

Global value chains are an important new reality in the world economy. But can increased GVC activity in developing countries generated by trade facilitation help promote economic, social, and environmental sustainability, as embodied in the UN Sustainable Development Goals? This blog post argues that the answer lies less in trade policy than in a broad set of complementary policies covering environmental and social regulation, as well as human capital development. It also suggests that there are a number of key points for policymakers in designing trade facilitation programmes to promote sustainable development through GVC engagement.

 

Trade is an important means of implementation for the UN Sustainable Development Goals (SDGs), adopted in September 2015. The SDGs take a holistic view of development, including economic, social, and environmental aspects. Although there is no trade goal, and treatment of trade in the accompanying targets and indicators is limited, it remains important for the trade community to look at ways in which sensible trade policy can help promote sustainable development objectives.

A key reality of the current trade agenda is the rise of global value chains (GVCs). This new business model relies on narrow niches of specialisation and trading in tasks to fragment the production process across numerous countries. Free flows of goods, investment, knowledge, and technology are crucial to GVCs. Trade costs are therefore an important determinant of lead firms’ decisions to source from particular countries, or to locate production and assembly facilities there. Empirical evidence shows, for example, that processing trade activity in China is closely related to upstream and downstream trade costs.

Trade facilitation can be understood broadly, as in the Asia-Pacific Economic Cooperation (APEC) definition, as the set of policies designed to reduce trade costs. As such, trade facilitation is the lifeblood of GVCs. Those developing countries that have done well in terms of linking to GVCs have worked hard on different areas of trade facilitation. Vietnam, for example, which is enjoying considerable success in electronic goods, has invested heavily in improving connectivity, both in terms of upgraded international gateways (investments in ports and airports), and improved links between those gateways and the hinterland (investments in road links, and regulatory changes to facilitate quicker, safer, and more reliable movements of goods).

Can GVCs help promote the SDGs? A new paper seeks to provide some answers to this complex question. On the economic side, there is strong evidence that GVC participation boosts incomes and employment, even when a country specialises in low value-added activities like assembly. In China, for instance, involvement in light manufacturing GVCs like apparel and consumer electronics provided employment and wage income for millions of new workers emigrating to the coastal cities from the agricultural heartland. Although wages in low value-added activities in developing countries can seem low by the standards of developed countries, there is a wealth of empirical evidence showing that foreign invested firms and exporters employ more workers, and pay higher average wages, than domestically owned firms that only serve local markets.

Over the medium to long term, the crucial question is whether or not a developing country can “move up” the value chain to higher value added activities. Sound trade policy is a necessary condition for that move to take place, but it is not sufficient. On the one hand, surplus labour needs to be absorbed by the manufacturing sector, so that the labour market can tighten, and wages can start moving up. At the same time, there needs to be a stock of well qualified technical employees to move into more productive tasks. As a result, education and training policies are crucial. Similarly, the business environment needs to be conducive to new, long-term investments, which implies macroeconomic stability and a certain ease of doing business. This moving-up process is currently underway in countries like China: labour costs are increasing, and low value-added assembly activity is starting to migrate to countries like Vietnam, while Chinese GVC participation is moving into higher value-added activities like component production, and even some design and development.

On the social and environmental side, GVCs come with potential, but also risks. In both areas, there are fears of a competitive “race to the bottom”—an effort to attract investment by lowering regulations meant to ensure an appropriate level of social and environmental protection. But a dynamic that is empirically more important is the potential for developed country consumers to demand better environmental and social standards in buyer-driven value chains. In apparel, for example, major fast fashion retailers like Zara and H&M have adopted important traceability and sustainability initiatives, covering social as well as environmental aspects.

These policies have had profound implications on conditions in factories in countries like Bangladesh. Although monitoring remains far from perfect, the combination of consumer pressure and transparency has potential to help ensure GVCs promote social and environmental sustainability. Of course, from a governance point of view, it is not unproblematic for Northern consumers to be influencing social and environmental standards in the South. But on balance, the need to avoid a race to the bottom, and ensure some basic norms are respected all around the world, means that this is one mechanism among many that can be leveraged.

Another aspect of sustainable development relates to gender and inclusion. In many developing countries, GVCs have been positive for female employment—indeed, industries like apparel often offer women an entry point into the formal labour market, and provide them with a first source of independent income, which has the potential to alter power relations within the household. Despite this largely positive dynamic, other problems remain, in particular the gender wage gap, whereby women are paid less than men for doing the same work. This gap exists in every country on earth, and comprehensive efforts are required to address it. Dissemination of best practice within buyer-led GVCs has the potential to positively influence suppliers.

The SDGs set out an ambitious framework for development post-2015. They engage developed and developing countries alike, and recognise the common nature of the challenges facing the world in terms of economic, social, and environmental sustainability. GVCs are not a development panacea, but they represent a new way of looking at the world economy, and provide significant perspectives for developing countries in all aspects of development. Of course, the policy dimension is crucial, both to attract GVC activity in the first place, and to maximise dynamic benefits for the population.

Experience around the developing world suggests that there are a number of key points for policymakers in designing trade facilitation programmes to promote sustainable development through GVC engagement. First, a broad-based approach is necessary, covering all sources of trade costs, not just traditional measures like tariffs. Second, GVCs often have a regional dimension, which means that countries can gain by moving forward with regional partners on key initiatives, as East African countries have done with the assistance of TradeMark East Africa. Third, hard capital investments in infrastructure are important, but not more so than soft investments in regulatory reform to ensure markets function properly. Finally, GVCs make the question of complementary policies, like non-discrimination and the social safety net, as well as environmental protections, even more salient—developing countries need to move forward on them at the same time as they increase GVC integration if the process is to support achievement of the SDGs as much as it can.

 

This post draws on the paper Trade Facilitation and Global Value Chains: Opportunities for Sustainable Development published by ICTSD and authored by Ben Shepherd.

Ben Shepherd is the Principal of Developing Trade Consultants.