CII Partnership Summit: Changing dynamics of global value chains
14 December 2021
Dear participants,
Global value chains boosted trade and investment for over three decades and were an engine of the global economy. But the COVID-19 pandemic brought them close to breaking point. In 2020, international investment declined by 35% to one trillion US dollars, reaching its lowest level since 2005. International trade also experienced a historic fall. In 2020, merchandise trade fell by 7.3%, and services trade by 20%.
Yet, GVCs did not break. After the initial shock, global value chains have proven to be responsive and vital. Trade started recovering strongly at the end of 2020. Trade in the third quarter of 2021 even registered a record high. International investment is also recovering. Global FDI flows in the first half of 2021 reached an estimated 850 billion US dollars. That means that it has recovered more than 70% from last year’s loss.
Still, we have to remain vigilant. The investment recovery appears to be driven mostly by the push for infrastructure investment. FDI in industrial sectors and global supply chains is still stagnant. Concerns about the fragility of global value chains are thus not subsiding. We have seen the repercussions that failings in global supply chains can have, especially in health-care equipment and medicines but also in virtually all manufacturing industries.
While the crisis has further increased the challenges of international production, several other factors had already started transforming the system prior to the pandemic.
Most notably, digitalization has driven rapid change on an unprecedented global scale. It has literally changed the meaning of space. Digital technologies have offered opportunities for scaling up, and enable also small and medium sized enterprises to become global players.
In terms of FDI, there is a decline in efficiency seeking FDI. This implies a reduction of manufacturing projects from large multinational enterprises. For host countries seeking to attract FDI the implication is that they need to shift their focus towards smaller investors, developing a more structured portfolio, including investment attraction and facilitation programmes.
Technology trends, declining cross-border FDI, more protectionist international policies, and the COVID crisis have favoured shorter and more regional value chains, and in some cases reshoring.
However, restructuring GVCs is far from easy. Investment in many home countries has been slow in materializing. In some countries, home economies do not have the necessary manufacturing capacity. Reindustrialization, like industrialization processes, can be long and complex.
And we should not forget that development strategies of many of the poorest countries explicitly rely on opportunities to attract FDI and to participate in GVCs. A retreat of international production would make their development ladder certainly shakier.
Policymakers must thus prepare for the challenges arising from the expected gradual transformation of international production and be ready to capture the opportunities and attract the investment that is required.
To this end, we are pleased to see progress on Investment Facilitation in discussions at the WTO. Investment facilitation is critical for reducing uncertainty for investors. It contains many aspects and tools, such as the use of ombudspersons, dispute prevention approaches, and consultation mechanisms. In many regards, they mirror the success achieved in trade facilitation.
What we have learned from trade facilitation on the ground and from our experience with foreign investors, is the immense value of information provision and transparency, streamlining and automation of administrative procedures. These are gains that governments can quickly seize as often they do not require legislative changes; only changes in the way rules are implemented.
In this context I would like to mention our Global Enterprise Registration index - Ger.co – which rates countries’ information portals and single windows for businesses and investors. Information portals provide guidance on required procedures to invest, establish and operate a business, or obtain necessary trading licenses and permits. Single windows enable investors to create a company online. GER.co builds on our pioneering work on transparency and online single windows across developing countries. Thanks to this work, Benin and Bhutan are among the fastest places in the world to create a business, and both are Least Developed Countries.
Ladies and gentlemen,
International production is vital for the recovery, economic growth and job creation. The pandemic has clearly demonstrated how much we depend on it, but also the need to make it more resilient and sustainable.
I thank you for your attention.
