The growth of international trade and the expansion of global value chains (GVCs) over the last 30 years have had remarkable effects on development. Incomes have risen, productivity has gone up—particularly in developing countries—and poverty has fallen. The fragmentation of production and knowledge transfer inherent in GVCs are in no small part responsible for these advances. Hyper-specialization by firms at different stages of value chains enhances efficiency and productivity, and durable firm-to-firm relationships foster technology transfer and access to capital and inputs along value chains. GVCs account for around half of world trade today.
At this moment, however, there is reason to worry that this trade-led path to development is under threat. Although trade bounced back after the global financial crisis of 2008, the high growth rates of the 1990s and 2000s have remained elusive. GVC trade—trade in intermediate products—also stalled in 2008, with only modest, intermittent periods of growth since. There are many reasons for this shift, but one is that trade reform has languished and in some cases is even being reversed.
Countries can do much on their own to reinvigorate world trade and GVC expansion. With that in mind, this Report sets out a comprehensive domestic agenda for governments: investments in connectivity, improvements in business climate, and unilateral reductions in trade and investment barriers.
But there is much that countries need to do together to improve the current system. Coordinated trade liberalization is overdue in agriculture and services, the rules applied to foreign investment are uneven, and subsidies and state-owned enterprises are distorting competition. Unfortunately, international cooperation, too, has begun to falter. Many people are disenchanted with free trade. Some communities have experienced declining wages and unemployment. Businesses are complaining about the limitations of the current multilateral system in dealing with their concerns about lack of access to large markets, the increasing use of “behind-the-border” measures, and “unfair” competition. Governments are inclined to respond by using trade policy as a tool for social protection and to address inadequacies in the current trade rules.
This Report argues that reinvigorating the international trade system will require governments in certain advanced countries to first look inward to address the discontent and inequality associated with openness. More generally, advanced economies need to rethink the priorities of the welfare state to better help workers adjust to structural change.
Developing countries as well need to expand social assistance and improve compliance with labor regulations in order to extend the jobs and earnings gains from participation in GVCs to more people across society. They also need to take steps to ensure that their domestic firms benefit from knowledge transfer from lead global firms. Finally, all countries need to ensure that the growth associated with trade does not lead to environmental degradation.
To view the original report, please click here