Global Value Chains and challenges to trade

In the wake of the financial crisis, the topic of Global Value Chains (GVCs) – the way in which different business processes are spread out around the world, from designing a product to making it and selling it – has captured growing attention in policy circles. Indeed, the World Economic Forum itself has published a significant study on the subject.

The newfound focus on GVCs reflects in many ways a fundamental change in how companies seek to innovate, manufacture, sell and service their products. Thirty years ago, the bulk of trade occurred under a “build it here, sell it there” model. Things have changed, and nowadays industry is focusing on an “in the world, for the world” model of production. Driven by a commercial imperative to be closer to their customers, many companies are looking at every country as a potential place to innovate, manufacture and service goods – and to do so in a globally integrated manner.

This revolutionary change in GVCs is having an equally profound impact on trade policy. Attention formerly focused on traditional trade rules – tariffs, quotas and the like – has now turned to rules governing foreign investment and “behind-the-border” regulations.

Left to market forces alone, four factors should shape investment decisions: size of market; quality of the enabling physical infrastructure; quality of the human infrastructure; and the regulatory and legal environment. These factors should drive governments seeking foreign investment to pursue sound fiscal and monetary policies, invest in their people and infrastructure, and build durable and transparent political, legal and judicial institutions.

Unfortunately, since the financial crisis, we are seeing an increasing number of policies that seek to distort investment decisions, and skew international trade.

Many of these investment-distorting rules fall into one of the following categories:

• FDI restrictions in certain sectors
• constraints on flows of capital, technology, people or other resources
• forced technology transfer
• local content requirements
• limits on availability of raw materials
• subsidies to incentivize investment

Adopted for the seemingly benign purpose of supporting jobs and economic development, these policies are ultimately economically unsound, and are harming consumers, businesses and countries.

Governments have sought to address the challenge of investment-distorting rules through bilateral negotiations, WTO litigation and regional trade negotiations. One encouraging channel for addressing this trend is the pending Trans-Pacific Partnership (TPP) trade negotiations, encompassing 11 countries including a number in East Asia.

I am very hopeful that the agreement will offer companies an improved operating environment by:

• strengthening disciplines around government procurement, including addressing disqualifying local content requirements;
• ensuring a level playing field with State-owned enterprises;
• promoting enhanced transparency;
• promoting easier and faster clearance of goods and movement of people;
• eliminating tariffs on manufactured goods (and environmental goods in particular);
• addressing non-tariff barriers; and
• fostering trans-Pacific innovation through cross-border data flows and 21st century intellectual property disciplines.

Above all, though, I support TPP because I believe that the processes of economic reform and openness that it will drive will support broader and more inclusive economic growth and technological progress. And – simply stated – where economies are healthier, more transparent and freer, companies, employees and customers do better.

Author: Karan Bhatia is Vice-President and Senior Counsel, Global Government Affairs and Policy at General Electric and is a member of the World Economic Forum’s Global Agenda Council on Trade and FDI.

Image: A general view of a steel mill in China REUTERS/Jason Lee