Investment and trade are increasingly entwined via GVCs, report says

27 February 2013

Goods and services increasingly cross international borders multiple times as they become finished products – links in ‘value chains’ usually involve transnational corporations, a new UNCTAD study notes.

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 Global Value Chains and Development: Investment and Value Added Trade in the Global Economy.

Among other things, this increasing complexity means that statistics on trade are significantly distorted, the report says.

The relentless international zigzagging 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.

The report estimates that the value chains administered in various ways by transnational corporations (TNCs) now account for 80 per cent of global trade.

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.

  • GVCs are responsible for significant and growing instances of double counting in global trade figures. The new data shows that 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 inputs to exports is contributed by services sector activities, as most manufacturing exports require services (such as engineering work, software development, and marketing) for their production

  • 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.

  • GVC links in developing countries can play an important role in economic growth. Domestic value-added resulting from GVC trade – that is, the contribution of trade to GDP – 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..

  • 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.

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.