Global trade is increasingly dominated by the complex and circuitous routes followed by goods and services as they are upgraded into finished products, a new UNCTAD report says. These “global value chains” (GVCs), orchestrated for the most part by transnational corporations (TNCs), offer opportunities for poor countries to gain access to international markets, just as they offer opportunities for statistical confusion to economists.
The ever-more complicated webs of investment and trade, by which raw materials extracted in one country may be exported to a second country for processing, then exported again to a manufacturing plant in a third country, which may then export to a fourth country for final consumption, are the topic of the UNCTAD report entitled GVCs and Development: Investment and Value Added Trade in the Global Economy.
The report, released today, says that the value chains administered in various ways by TNCs now account for 80 per cent of the $20 trillion in trade each year.
It also says that the relentless zigzagging across borders of goods and services as they are upgraded means that some 28 per cent of the value of this trade – or about $5 trillion – is overstated through double counting. The export value of copper ore extracted in one country, for example, counts once as a contribution to that nation’s gross domestic product (GDP), but then is counted again – as many as several times – as it progresses from raw to upgraded to finished goods as it is exported after processing by other countries.
Among the key findings of the report:
• Global investment and trade are thoroughly entwined in international production networks. This is especially true of TNCs investing in productive assets worldwide, as they manage trading inputs and outputs in cross-border value chains that often are highly complex. Such value chains (intra-firm or inter-firm, regional or global, and commonly referred to as “global value chains, or GVCs) shaped by TNCs account for some 80 per cent of global trade.
• GVCs are responsible for significant and growing instances of double counting in global trade figures. The new data shows that some 28 per cent of gross exports consist of value added that is first imported by countries only to be incorporated into products or services that are then exported again. Thus, some $5 trillion out of the $19 trillion of recorded global gross exports in 2010 was actually double-counted.
• GVCs make extensive use of services. While the share of services in gross exports worldwide is only around 20 per cent, almost half (46 per cent) of value added in exports is contributed by services sector activities, as most manufacturing exports require services (such as engineering work, software development, and marketing) for their production. In fact, a significant part of the international production networks of TNCs is geared towards providing services inputs, with more than 60 per cent of global foreign direct investment (FDI) channelled to services activities. By comparison, 26 per cent of FDI goes to manufacturing and 7 per cent to the primary goods sector. The picture is similar for developed and developing economies.
• The majority of developing countries, including the poorest, are increasingly participating in GVCs. The developing-country share in global value-added trade increased from 20 per cent in 1990 to 30 per cent in 2000, and is over 40 per cent today. Again, the role of TNCs is critical, as countries with a higher presence of FDI relative to the size of their economies tend to have a higher level of participation in GVCs and a greater relative share in global value-added trade compared to their share of global exports.
• GVC links in developing countries can play an important role in economic growth. Domestic value-added – that is, an improved capacity of an economy to produce a broader variety of goods, and goods of greater complexity – resulting from GVC trade can be very significant relative to the size of local economies. In developing economies, value-added trade contributes some 28 per cent to countries’ GDPs on average, as compared to 18 per cent for developed economies. Furthermore, there appears to be a positive correlation between participation in GVCs and GDP per capita growth rates. The economies with the fastest-growing GVC participation have GDP per capita growth rates some 2 percentage points above average.
• There appear to be a number of GVC development paths available to developing countries, including “engaging” in GVCs, “upgrading” along GVCs, and “leapfrogging” and “competing” via GVCs. The best development outcomes may result from an increase in GVC participation and a move towards higher domestic value added in trade at the same time. Countries that, over the last 20 years, have managed to increase both their participation in GVCs and their domestic value added in exports have experienced GDP per capita growth of 3.4 per cent on average, compared to 2.2 per cent for countries that only increased their participation in GVCs without “upgrading” their domestic value addition.
These findings have important policy implications. Describing the situation, UNCTAD Secretary-General Supachai Panitchpakdi notes: “Global value chains are everywhere. They show that investment and trade are two sides of the same coin. Policymakers have to take into account both sides when thinking about economic growth and development.”
GVCs can be an important way for developing countries to build their productive capacities, including through technology dissemination and skill building, the report contends. They can also open up opportunities for longer-term industrial upgrading. However, such potential benefits of GVCs are not automatic. Governments need well-focused and mutually reinforcing strategies for trade and investment – and for development generally – that encourage upgrading of their productive capacities.
The report published today is a launch publication for a new UNCTAD database that maps the distribution of value added in global trade. The UNCTAD-EORA GVC Database – part of UNCTAD’s FDI-TNCs-GVC Information System – provides new perspectives on trade links between economies in the trade–investment nexus. Among other things, the database focuses on the distribution of value added, on income and employment resulting from trade, and on how global investment drives patterns of value-added trade. The database covers 187 countries, including nearly all developing economies. It provides statistics on a broad range of industries of relevance to developing countries.
UNCTAD intends to build on the preliminary analyses of the new data presented in this launch publication in its forthcoming World Investment Report 2013, which will examine the mechanisms through which GVCs can contribute to development (for example, through market access, employment generation, and productive capacity building), as well as the risks involved for developing countries (such as social challenges and environmental concerns, and the risk of remaining locked into low-value-added activities).
The balance of opportunities and risks associated with GVCs makes it important for governments to carry out well-informed policy debates on GVCs’ development impacts, the report says. UNCTAD intends for the GVC Database to stimulate and contribute to such debate by providing new insights into the evolving nature of globalized production networks.