Global value chains are transforming world trade, but must be more inclusive if they are to deliver greater benefits to developing countries and smaller companies, according to a new report from the World Bank Group, the World Trade Organisation (WTO), the Organisation for Economic Co-operation and Development (OECD), the Institute of Developing Economies (IDE-JETRO) and the Research Center of Global Value Chains of the University of International Business and Economics (RCGVC-UIBE).

Global value chains (GVCs) create new opportunities for developing countries, increase their participation in global markets and enable them to diversify exports. But while global value chains have helped many developing countries to advance, some countries have benefitted more than others, with some countries, small- and medium-sized firms, and workers in developed and developing economies still being left out. The Global Value Chain Development Report 2017 analyzes new data to help policy makers and others understand global trade’s increasing complexity and consider policies that can make GVCs more inclusive.

“Global value chains are helping to advance the development process in many countries, including developing countries where they contribute to increased productivity, more international trade and faster growth, all of which benefit entire populations. Our report shows how countries can maximize the benefits of GVCs by moving to higher-value added activities, lowering trade costs and making GVCs more inclusive,” said Anabel Gonzalez, Senior Director for the World Bank Group’s Trade & Competitiveness Global Practice.

Several factors determine how deeply a country participates in GVCs, the report finds. Non-tariff trade costs, such as freight, insurance, fees, regulations, bureaucracy, or weak transportation links, are a significant determinant of GVC participation. According to the Global Value Chain Development Report, in some complex value chains, such as motor vehicles, computers or machinery, non-tariff trade costs are more than four times higher than tariffs.

“Addressing these trade costs is a key factor to improving participation in GVCs and maximizing the benefits from that participation,” said Nadim Ahmad, Head of the OECD’s Trade and Competitiveness Statistics Division.

“Multilateral agreements play a crucial role in lowering trade costs, and ensuring that all economies, particularly the poorest, benefit from trade cost reductions,” said Robert Koopman, Chief Economist of the World Trade Organization. “Preferential trade agreements (PTAs) can also be very helpful as they often result in deeper commitments in particular areas."

The report also finds that proximity to the world’s three major production hubs – the United States, Asia, and Europe – is highly important. It also matters who a country’s trading partners are, how far the country is from high-income markets, and the degree to which partners are integrated within regional global value chains.

Experts from across the globe gathered in Geneva on 10 July at an event hosted by the WTO, World Bank Group, and the OECD to discuss this report and its findings.

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Global Value Chain Development Report: Measuring and Analyzing the Impact of GVCs on Economic Development

Global value chains (GVCs) break up the production process so different steps can be carried out in different countries. Many smart phones and televisions, for example, are designed in the United States or Japan, incorporate sophisticated inputs – such as semiconductors and processors – produced in the Republic of Korea or Chinese Taipei, and are assembled in China.

These complex global production arrangements have transformed the nature of trade. GVCs provide new opportunities for developing countries to increase their participation in global trade and to diversify their exports. Without them, a developing country would have to be able to produce a complete product in order to expand into a new line of business.

Witnessing the potential benefits of GVCs, stakeholders in developing countries typically want to see their country more involved in value chains and moving to higher value-added activities over time. However, only a few developing economies, most notably China, are deeply involved in GVCs. The Global Value Chain Development Report examines ways developing countries can deepen their involvement in GVCs and move up the value chain.

“This report offers a superb overview... and breaks new ground on the study of the rise of GVCs,” comments Pol Antràs, Robert G. Ory Professor of Economics at Harvard University, in his foreword.

The key to building more inclusive GVCs, finds the Global Value Chain Development Report, is cutting trade costs. Although they have declined over the past decades, non-tariff trade costs related to infrastructure, transportation, and uncertainty remain relevant with the surge of fragmented supply chains and greater competition. In some complex value chains, such as motor vehicles, computers or machinery, non-tariff trade costs are more than four times higher than tariffs.

The report asserts that multilateral agreements can play a crucial role in lowering trade costs. Participating in deep trade and investment agreements can advance this agenda, and such agreements will be most powerful if they involve several neighboring countries. Preferential trade agreements are increasing in number and deepening in content, surging from 50 in 1990 to 279 in 2015. Analysis confirms that deep preferential trade agreements boost participation in GVCs, but the future of the relationship between preferential trade agreements and GVCs will depend the preservation of an open trading system.

Small firms and the informal sector also need to be included. Poor infrastructure, corruption, and red tape tend to hamstring smaller companies more than larger ones – large firms can often finance their own infrastructure and finds ways to operate in complex environments. Most job creation in the world is in small and medium-size firms and their involvement in GVCs is crucial for maximizing the positive impact from trade.

“How economies are linked, specialize, and grow (or not) is captured in the way global value chains (GVCs) are put together,” says Michael Spence, Nobel Laureate in Economics. “This report is a huge contribution to our deepening understanding of what the global economy really means and how it is changing.”