International production, trade and investments are increasingly organised within so-called global value chains (GVCs) where the different stages of the production process are located across different countries. Globalisation motivates companies to restructure their operations internationally through outsourcing and offshoring of activities. Firms try to optimise their production processes by locating the various stages across different sites according to the most optimal location factors across countries. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc.
This emergence of GVCs challenges our conventional wisdom on how we look at economic globalisation and in particular, the policies that we develop around it. The OECD is preparing a broad range of work to help policy makers to understand the effects of GVCs on a number of policy domains:
Trade policy. Tariff barriers as well as the burden of non‑tariff measures (including administrative and customs procedures but also standards) are rapidly magnified within GVCs; despite low nominal rates, tariffs can add up to significant trade costs when goods cross borders multiple times. Protectionist policies risk having a negative impact on the integration of production processes across borders, which may directly hurt the competitiveness of domestic industries within GVCs.
Investment policy. Governments might be tempted into a new generation of investment incentives aimed at specific sections of GVCs that are deemed more value-adding, which could give rise to incentive wars for ‘prized’ parts of certain value chains. In addition, transfer pricing has always been a challenge for governments in their dealings with international investors. As GVCs become more prevalent and more complex, MNEs will have more opportunities to adjust their accounting of value-added in order to maximize earnings in the lowest-cost tax jurisdictions within their international investment framework.
Development policy. In order to become integrated in international production networks, countries need to adjust their border (trade and investment) as well as ‘behind the border’ policies, in areas such as innovation, skills and infrastructure. But since integration into GVCs often occurs through affiliates of foreign MNEs, this path to economic development may also entail risks for host economies given the increasingly footloose character of MNE activities.
Competitiveness policy. GVCs increasingly challenge the policy thinking on national competitiveness as companies and countries have become embedded in international networks of production. Countries’ exports increasingly rely on technology, labour and capital embodied in intermediate goods imported from other countries. The drivers of competitiveness therefore increasingly include factors outside the scope of national policies, limiting the direct influence of policy makers on growth and job creation within their national borders.
Risk management. The increased connectivity within GVCs has led to greater interdependencies between economies, which has increased the risk of breakdowns in the system.Global value chains (GVCs) can facilitate the spread of local risks into global risks, as was demonstrated in 2011 following the earthquake/tsunami in Japan and more recently after the floodings in Thailand.