*Senior Economics at ECIPE in Brussels (firstname.lastname@example.org). The author wishes to thank Maria Salfi for excellent research assistance.
In recent years the concept of trade has changed from a final good crossing from one country to another to complex and sophisticated structures of trade in inputs across national borders before they become a final good. This is the world of global supply chains or, as they have recently become known, global value chains. Importantly, it requires a new paradigm of trade policy, one where the cost and benefits of trade policy are assessed differently than in the past.
Worldwide flows of goods and services have vastly increased in the past decades and enabled an ever-larger number of countries to participate in trade. For instance, global trade in goods increased by a factor of 10 between 1980 and 2011, whereas this figure for services is 3 and that of financial flows 1.5. At the same time Foreign Direct Investment (FDI) has increased by a factor of 6 since 1990. These numbers reflect the high degree of internationalisation of entire production processes. In great part this is due to a significant decrease of trade costs that has taken place over the last several decades. Not only have tariffs and quotas gone down, other trade costs such as transportation and information and communication technology have also been reduced massively, allowing many countries to join global value chains (GVCs).
Therefore almost all countries participate in global supply chains through various industry activities in which they specialise. However, where exactly countries are positioned within the GVC space remains unclear. Are countries really taking part in these value chains in different ways? If so, where are countries located within the overall spectrum of supply chains with respect to production and trade? And, what do the GVCs in which they participate look like? More importantly, what does the location within the GVC mean for the set of policies each country is advised to pursue in order to take optimal advantage of GVCs? These are questions this paper tries to explore for a wide variety of countries, covering both developed and developing economies but with a special focus on the economies of the European Union (EU) and their relative positions.
Uncovering a country’s location in the GVC map is important as it can provide important policy guidance, especially within the EU where members are creating a common internal market and converging policies that are relevant to this new reality of trade. With the rise of GVCs in recent years, various so-called ‘new’ policy measures, going beyond traditional trade policy, have become important factors of trade. Examples include investment barriers, labour market inefficiencies, or obstacles to innovation. All these barriers are key to production and trade within GVCs, but their scale and scope including the applicability for each country remains unclear. As a result, in addition to developing a GVC map for countries this paper also tries to set out the relevance of each of the new and traditional trade policy measures related to GVCs for a set of countries, including some emerging countries.
Moreover, once we know the relative position of each country in the overall range of GVCs, it is possible to drill down into the specifics of sectors in which each of the economies specialise. Although analysing policy requirements at an aggregate level may be useful from a country-wide perspective, it could mask great differences in terms of policy needs for each sector specifically in which a country is trading. Therefore, based on a country’s relative location in the overall GVC map this paper will furthermore analyse some case studies in an attempt to reveal which policy measures are most important for a sector in which a country has a comparative advantage so it could optimise the gains from trade within GVCs.
The conclusion of this paper confirms to a large extent the previous literature on GVCs, but there are important differences. One example is that larger markets such as France, Italy or even China do indeed show lower participation figures in GVCs than smaller countries, which is explained by their higher domestic production of inputs. In other words, smaller countries just trade more in GVCs. Yet, the relative position within GVCs of each of these countries diverges greatly and therefore requires a different set of policies in order to benefit from trade. For instance, based on our analysis the overall participation of Spain and Italy in GVCs could be further enhanced by implementing the more traditional trade measures such as a smooth customs operations system or regulations in product markets whereas France’s position is most likely to be caused by a lack of focus on measures such as ICT-related capital and intangible capital stock formation in addition to their high barriers in services. Again, this paper will furthermore refine such policy conclusion by going deeper into the specific industry sectors of some of the countries.
The remainder of this paper is organised as follows. It begins by evaluating the importance of global supply chains for every country and their relative position in the GVC space with a particular focus on EU economies. It then explores and assesses which policy measures are most important to explain each of these countries’ position in the GVC diagram. The next section examines the sector-specific policies based on the specialisation patterns that countries have in GVCs. Hence, it identifies possible barriers to production and trade in GVCs and discusses the effect of reforms of these barriers for reaching higher gains from GVC trade. The final section concludes this paper with a discussion of additional policy options.