Presentation of the OECD-World Bank Group report, “Inclusive Global Value Chains: Policy options in trade and complementary areas for GVC integration by small and medium enterprises and low-income developing countries”, on 6 October 2015

Remarks by Angel Gurría, Secretary-General, OECD

Understanding global value chains is crucial to understanding trade and globalisation in today’s highly interconnected world, and to defining the policies that will help countries reap their full benefits in terms of growth and jobs.

I am honoured to be here today to present to you the findings of a new report prepared jointly by the OECD and the World Bank Group. Building on earlier reports that we have prepared under the Mexican, Russian and Australian G20 presidencies, this report goes deep into questions about how to strengthen the participation of small and medium sized enterprises and low-income developing countries in GVCs. I salute the wisdom and the commitment of Turkey in bringing these important issues into the limelight.

The foundation of our GVC analysis is our joint effort with the WTO to develop new trade statistics (TiVA) that identify the value added by each country along the value chain. We have just released a new version of the TiVA database, which extends coverage to 61 countries and 34 sectors. This new data shows that GVCs drive trade today, with 75% of global trade now comprised of intermediate inputs and capital goods and services. In addition, the data reveal that services are much more important in driving trade than we previously thought – over half of total trade is composed of value-added services in OECD countries, and 42% in China. These data reinforce earlier conclusions that imposing protectionist measures on imports is the trade policy equivalent of shooting yourself in the foot, causing costs of production to rise and damaging the competitiveness of exporting firms.

But not all countries, and not all firms, have had the same level of success integrating into GVCs:

• Although their participation has greatly expanded in the past two decades, low-income developing countries (LIDCs) are still hugely under-represented in GVCs – only about 11% of the total world gross exports in 2011 (up from 6% in 1995). In particular, SMEs in LIDCs tend to be concentrated in the agriculture sector, or remain in the informal economy, and so have particular difficulties.

• By the same token, SMEs, while representing the vast majority of firms in all countries, typically contribute less than half of exports. In fact, when SMEs do succeed in participating in GVCs, we are now learning that it is usually indirectly – that is, they supply firms that export, but do not export themselves. Our new TiVA database tells us that in 2009 for example, SMEs in the United States accounted for around one-third of direct US exports, but because they also sold to larger firms that export – and are thus engaged in indirect exporting – they actually accounted for closer to half of US value-added through exporting, supporting around 2 million jobs.

So what can the G20 do to help those firms, people, and countries to share in the benefits of GVCs in terms of growth, living standards, and jobs? As SMEs are relatively more impacted by the policy “eco-system” than larger companies - they have indeed less capacity to absorb policy deficiencies and shocks – their development requires a very coherent, and carefully crafted, enabling policy environment.  As presented in the report delivered to you today, the OECD and the World Bank have put together a comprehensive action plan and defined priority policy actions that can be taken by G20 countries, either individually or collectively, covering trade and investment, along with a host of complementary capacity building efforts. Let me highlight a few areas for you now.

Open trade and investment policies should be at the centre of the policy choices: in particular, priority actions must be taken to implement and ratify the WTO Trade Facilitation Agreement, alongside investment in hard and soft infrastructure that would allow goods and services to flow more easily across borders. Let’s not forget that trade costs – such as red tape, regulatory complexity and opaque clearance processes - fall disproportionally on SMEs compared to MNEs. This is a “sine qua non” for SMEs, but also for LIDCs, to be able to break into GVCs. The latest analysis from the OECD, based on 2015 data across over 160 countries, shows that implementing measures agreed to in the TFA could reduce trade costs by between 12% and 17.5%. At the same time, if rules of origin in G20 countries were simplified, nuisance tariffs eliminated, and aid for trade initiatives directed to SMEs, we believe that big improvements would follow. Finally, there is also a lot that business can do to remove constraints and foster supplier diversity, focusing on efficiency of logistics, services delivery, and MNE-SME linkages.

We also recognise the need to work with SMEs to grow to scale and strengthen their capacity to meet the requirements of globalised supply chains. The ability of SMEs to swiftly adopt new technologies, to hire a skilled workforce and develop their human capital, to learn by doing, to innovate, and to optimize their production is constrained by their small scale, limiting their ability to engage with GVCs. To help young SMEs scale up quickly and better integrate in GVCs, it is important to lower barriers to the entry, growth, and exit of firms. Ensuring a level playing field for new SMEs is particularly important; in many countries, policies still favour incumbents over new firms, reducing the potential impact of these challengers on growth, productivity and exports.

It is also important to enhance SME access to external finance, a critical enabler of their participation in GVCs. The G20-OECD High Level Principles on SME Financing, to be delivered to leaders in November, recognise the need to strengthen and diversify sources of finance for SMEs, including trade finance, to allow SMEs to seize opportunities in global markets.

The G20 could also consider establishing an action plan for universal ICT and broadband connectivity that would empower SMEs to leverage the digital economy, which can be a low-cost way for firms to engage in trade and to become “micro-multinationals”. In Korea, for example, small firms derived almost 30% of their turnover from e-commerce in 2012. All of this may be possible through global platforms for sharing best practices and e-learning, involving both public and private sectors.

Finally, to address constraints by LIDCs in particular, we need to be better equipped to identify obstacles, take remedial actions, and evaluate the efficiency of policy measures. The TiVA database has made important strides in this respect, but coverage of LIDCs needs to be strengthened. Reinforced by complementary World Bank data resources, these tools could allow valuable and more targeted policy interventions designed to meet the specific needs of highly heterogeneous firms in countries with very different problems.

Ministers, colleagues –  It has been my pleasure to present the main findings from this report. The OECD and World Bank have worked together to define a set of actions, which if taken, could vastly improve the inclusiveness of GVCs by giving LIDCs and SMEs the capacity to participate much more fully. Many of the actions proposed could be taken immediately. Some could be taken by G20 countries at their own initiative, while others require that G20 countries act together. I cannot stress enough the importance of private sector engagement; we have identified a whole series of actions that large multinational firms could undertake.

As discussed in our previous session, we are currently experiencing a slowdown in global trade. If trade – and more specifically, participation in global value chains – is to continue to create opportunities for growth and jobs, we must remove obstacles facing countries and firms that have not yet managed the process of GVC integration.

I would like to thank Turkey for the strong collaborative relationship of this past year. We look forward to continuing to work with the G20 to promote key elements of a comprehensive approach to strengthening trade and investment, which will take needed structural reforms forward, make services markets more competitive and efficient, and identify both implicit and explicit restrictions on cross-border trade and investment, with a view to removing them.

I thank you for your attention.