The value of trade

 

The emergence of global value chains in manufacturing and services has revolutionised the way the world trades. It has also provided a valuable entry point for many developing economies into the global economy. Thanks to the combined efforts of the WTO and OECD, we now have a strong data-based understanding of these impacts, which will be vital to the design of effective trade policies.

Over the last two decades, one of the most important changes in international trade has been the growing interconnectedness of production processes in vertical chains that stretch across many countries and regions. In this new division of labour, each industry specialises more and more in particular stages of goods or services production. Because industries in a given country tend to share similar characteristics, this process leads to a new international division of labour and business functions that has profound implications on the way world trade is reorganising itself.

Until very recently, we lacked proper data to fully understand the extent and implications of this structural change. This is why four years ago we at the World Trade Organisation (WTO) launched the “Made in the World” initiative and partnered with Japan’s Institute of Developing Economies- Japan External Trade Organisation (IDE-JETRO) to look into these transformations, starting with the Asian region. Since then a large coalition of organisations, research institutes and statistical offices led by the WTO and the OECD has launched a co-operative effort to gather information to bridge this statistical gap.

New international specialisation creates forms of trade that could not exist if the world economy were still dominated by the 19th century concept of comparative advantage in final goods. The possibility of specialising in limited segments of complex international production chains has allowed smaller economies to develop an industrial base, something that would have been impossible when industries had to grasp and dominate all production stages. A report from the United Nations Industrial Development Organisation (UNIDO) noted that “the main cause of the large upward leaps appears to be participation in integrated production networks, which sharply raises the share of complex products in exports”. Large emerging economies have developed their specialisation and have even become dominant players in certain market segments, creating millions of jobs and eradicating extreme poverty in the process.

Value chains may also have an unexpected productivity impact on more traditional activities. The availability of affordable mobile phone handsets creates opportunities for informal producers in remote areas to enhance their market access, better price their products and benefit from innovative online training programmes.

Indeed, insertion within value chains creates not only trade, but jobs. In less developed countries it opens up opportunities for segments of the population that were previously excluded from traditional manufacturing activities. To quote a minister of trade from one Central American country, “It has allowed many women to acquire a job in an electronic assembly line and move away from cutting sugar canes in the fields”.

Because countries tend to specialise in their comparative advantage, jobs created in developing countries are often of lower skills and value-added than those created in developed countries. But it would be misleading to compare the quality of jobs created in countries at very different stages of industrialisation in such simple terms. From a social perspective, there are two points: first, we should compare the quality of the jobs created by value chains with the situation in the rest of the domestic economy and, second, we should identify the prospects and opportunities for further economic and social upgrading.

©Reuters/Jo Yong-Hak

With regard to the first point, data gathered by the OECD show that wages paid in export-oriented industries were at least equal to, and often higher than, similar jobs in the rest of the domestic economy. Moreover, the premium for skilled workers can be significantly higher. Indeed, because jobs created by export-oriented activities are relatively attractive, they tend to induce massive internal migration, often of young adults, who tend to suffer most from unemployment. Such territorial impacts are clearly observable in the coastal territories of China and in the northern states of Mexico. To accommodate this influx of young adults, national and local authorities have had to make important investments in providing the necessary infrastructure, education and medical services, often in co-ordination with industry itself.

Obviously, value chains are not a magic bullet. They have their own fragilities. They are only an additional card in the hand of countries, and in particular poorer ones, to boost their industrial base and to increase their competitiveness. Fostering the potential for economic and social upgrading implies attracting vertical foreign direct investment, devising a virtuous circle of productivity, which implies developing new policies, including trade and transport facilitation, but also education, investment in human capital, and research and development. Upgrading also means revising labour and environment standards at the lower end of value chains and progressively adopting not only the best techniques, but also the corporate social responsibilities of the lead firms.

Eventually, value chains also mean increased interdependency among national economies that rely on their trade partners for importing the intermediate inputs required for the production of goods and services, which they will either consume domestically or export. This means that access to competitive imports affects a country’s export competitiveness and has profound implications on the way we need to reframe trade policies, hence trade negotiations.

Another issue, of critical importance in the present context of global recession, is that trade within value chains has raised questions over the relevance of traditional trade statistics. By applying the total value of imports to the last country in the value chain, traditional statistics mask the origin of the parts and components incorporated in the final goods, skewing the economic relevance of bilateral trade balances.

This issue has become particularly relevant in the wake of the 2008/2009 economic crisis. Mounting external imbalances during the 2000s have been blamed for triggering the crisis, and their persistence is often used to justify protectionist policies. New data, produced in particular thanks to close co-operation between the OECD and the WTO, will allow us to better understand the actual significance of these bilateral balances and avoid misinterpretation or inadequate policy decisions. What these new data, recently released to the wider public, tell us is that more than ever, individual nations are closely interconnected, down to the deepest sector of their productive economy.

In a situation where individual performance depends upon the behaviour of others, the international community needs to strengthen global governance in order not only to make best use of the new sources of common prosperity, but also to harness the vulnerability of our interdependence.  

 

References and recommended sources

www.wto.org

Measuring Trade in Value Added: An OECD-WTO joint initiative

United Nations Industrial Development Organisation (UNIDO) (2002), Industrial Development Report 2002/2003, Vienna.

OECD work on trade

OECD Forum 2013 Issues

More OECD Observer articles on trade & investment

Subscribe to the OECD Observer including the OECD Yearbook

 

©AFP/Eric Piermont

By Pascal Lamy, Director-General, World Trade Organisation


©OECD Yearbook 2013