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Inclusive GVCs for Resilient Global Trade and Investment

28 Mar 2023

Global Value Chains (GVCs) have played a crucial role in securing the development of the world economy since intermediate commodities, services and capital goods account for more than 70% of international trade. As a result, GVCs have given nations a way to industrialize at a much earlier stage of development as producing enterprises opt to outsource portions of the production value chain to nations with lower labor cost or where other locational benefits provide the entire GVC a competitive cost advantage. 

Rapid economic expansion, generally accompanied by increased trade, has reduced income disparities and levels of inter-country inequality. The Sustainable Development Goals (SDGs) and the 2030 UN Agenda for Sustainable Development both specifically mention the role trade plays. However, the impact of trade on inequality may not be consistent. National and multinational policy also play a major role in the differences in outcomes. For instance, the regulations controlling market access and entry conditions and the uneven distribution of earnings across value chains in a trade scenario may benefit certain countries while harming others. 

Therefore, a new approach to trade policy should be considered in the context of growing inequality and advancement towards the SDGs. Such disparities have been made worse by the COVID-19 pandemic and trade disruption, which has had a significant negative impact on MSMEs. Hence, the post-pandemic trade policy should promote MSMEs’ integration into the global market, allowing them to compete more effectively on a global scale. 

International Trade 

The years preceding the pandemic saw a drop in international trade growth. From 1990 to 2010, the contribution of trade to the global GDP grew at a 2% but shrank by around 0.9% between 2010 and 2020. That trend was somewhat accelerated by the pandemic. Notably, 2020 saw the largest trade and output volume declines since World War 2. In the first half of 2020, both global industrial production and goods commerce decreased. 

Despite tensions and policy uncertainty, the global trade is expected to grow by 2 to 4% in 2022, closely tracking the expansion of the global economy. However, a convergence of continued supply chain issues like aggressive monetary policy, reduced demand for consumer durables and elevated freight costs would cause a substantial downturn starting in 2021. 

Although the global economy was on the road to recovery after the pandemic, most of the G20 countries are forecasting a considerable output gap for 2023 compared to the pre-COVID trend.

Chances of an early or short-term reversal of the current trend have been severely hampered by recent geopolitical uncertainty. These uncertainties intensified the rising price pressures on the historically high prices of the several commodities in the global market. Fuel prices spiked around 80% between March 2021 and the first half of 2022. The prices for other commodity groupings also rose positively YoY for the majority of the same period. As a result, the UNCTAD Commodity Price Index (UCPI) reached all-time high levels in August 2022.

The falling GVC participation and the subsequent GVC contribution to the global GDP led to the recent decline in global trade. The years 2018 – 2020 indicated significant concerns that can put the regular operation of GVCs and commerce in danger. There were significant commercial uncertainties during this time due to trade restrictions, sanctions, and natural disasters in key GVC cities.

Although overall trade has increased recently, significant variations exist among products, industries, and trading relationships. Supply chains have come under pressure as a result of the different impacts across goods, services, and trading partners. 

Opportunities and Imperatives 

In 2020, services trade decreased more than that of products since travel, hospitality, etc. were scarce and witnessed a slower rate of recovery. Thankfully, trade in online services soared.

Telecommunications, computer, and information services kept growing on the back of increased demand during the pandemic. Globally, they grew by 19% in 2021, more than doubling their growth from the year before. In-house collaboration, B2B and B2C networking, and digital trade are frequently supported by these services. 

These recent developments in ICT growth and digital service delivery offer a rare chance to advance Trade 4.0 based on the rise of digital infrastructure in developing economies. These services could provide an alternative to the existing GVC participation’s significant reliance on natural resources, particularly in developing economies. 

Challenges 

In a time of varied geopolitical situations and disruptions in supply chains owing to the pandemic, climate related disasters, and weaponization of trade, there is need for nations as well as businesses to shift their models of external engagement. Trade that is fostered through dependable, stable and flexible supply chains with minimal risks has the potential to support the growth of all countries and the world at large, thereby addressing the recalcitrant issue of poverty alleviation and generating resources for climate action.

 International trade must address the following key challenges: 

Building resilient and sustainable GVCs: Value chain disruptions have expanded along with the size and complexity of the GVCs. To avoid such interruptions, better supply chain management, enhanced trade facilitation, and supply chain diversification are required. Techniques to reduce disturbances and react quickly to them should also be promoted. 
Trade facilitation and connectivity: With the increased use of digital technologies, it is important that trade across borders becomes easier, more transparent and less costly. This can be carried out through enhanced use of new technologies, including Industry 4.0 technologies of artificial intelligence, big data, cloud, and others, in the systems and processes for trade. An ecosystem for digitalization at the borders that is integrated across the world is the need of the hour. These adjustments would create new opportunities, such as stronger MSMEs integration in trade.
Promoting services trade: With most economies now being dependent more on the services sectors for their growth rather than the agriculture or manufacturing sectors, services trade becomes central to economic growth. Trade in services has increased more rapidly than that in products since 2011; however, the flow of services across borders in the different modes of delivery remains a challenge due to different definitions, regulations, and policies. 
Enhancing MSME participation: In most countries, micro, small and medium enterprises make up the bulk of the enterprise sector and contribute significantly to jobs and exports. However, they are often unable to understand international trade or participate effectively in global value chains due to various gaps in information, finance, competitiveness, and so on. Global organizations must endeavor to make global trade more welcoming to MSMEs, particularly those led by women and youth to generate opportunities for growth that can boost the participation of underrepresented sections of society on the international arena.

To know more download the publication on Partnership Summit: Collaborative Frameworks.

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