HONG KONG, CHINA – Asian economies—having reaped substantial gains from global value chains (GVCs) in the past 25 years—can extend these gains if governments and business work together to reduce tariffs and non-tariff trade barriers, and improve logistics and transport infrastructure, says a new Asian Development Bank (ADB) report.
GVCs play an increasingly important role in international trade. One study of 59 economies found almost half of all manufacturing exports were linked to GVCs, up from about one-third in the mid-1990s. The share of Asia’s GVC trade in worldwide manufacturing exports reached 16.2% in 2008, before the 2009 global trade slump, almost doubling from 8.6% in 1995, notes the theme chapter, “Asia in Global Value Chains,” in the Asian Development Outlook 2014 Update.
“Looking at cross-border movements of goods from a value-added perspective radically redefines the way we view bilateral relations and a country’s comparative advantage within the global trade map,” said ADB Chief Economist Shang-Jin Wei. “By thinking in terms of competitiveness in specific stages of production rather than over the entire production process, countries can boost their income growth and employment by linking to dynamic GVCs.”
While being part of a GVC exposes an economy to shocks that hit others in the chain, the benefits seem to outweigh the costs. Industries in which GVC trade doubled during 1995–2008 saw output grow 19% faster than other industries and employment rise by 10%. Economies in which GVC trade doubled in the same period enjoyed a 12% increase in real per capita income.
So far the economies of East and Southeast Asia, including Japan and the People’s Republic of China, generate the bulk of the region’s GVC trade. Few countries in Central Asia, South Asia, or the Pacific have found their GVC niche. These economies face multiple challenges to linking with GVCs including remote location, high trade barriers, underdeveloped transport infrastructure, and regulatory hurdles and policy deficiencies that make them less attractive for GVC investment.
The report finds that falling tariff, logistics, and transport costs have nurtured cross-border production, but more can be done. Simulations of simple two-stage chains in Southeast Asia show that GVCs magnify trade costs by as much as 80%, due to a compounding of costs such as tariffs on goods traded across borders. Savings from small reductions in costs are similarly amplified and offer outsized benefits for production network growth.
The report identifies three areas for policy action that could help countries establish or strengthen ties to GVCs and reap the related benefits:
- GVCs thrive only where tariffs are low and predictable. Authorities can make tariffs more predictable by normalizing trade relations with partners, lowering bound tariffs under the World Trade Organization (WTO), and avoiding temporary trade measures. Low and predictable rates for other taxes, including value-added taxes collected at the border, also benefit GVCs.
- Better logistics and transport infrastructure may cut trade costs even more than tariff reduction. Delays in moving goods from inland factories to the coast, through customs facilities, or through ports themselves add to shipping costs. Infrastructure investment can ease port congestion and speed inland transport. Streamlining customs procedures to eliminate paperwork further trims shipping times. International cooperation—such as investment in regional transport corridors or WTO trade facilitation—can complement national efforts.
- Process and product standards are necessary for GVC operations and to safeguard public health, social well-being and the environment, but they must not be hijacked as barriers to trade. As with tariffs, GVCs magnify costs from nontariff measures such as product standards. As production lines span more jurisdictions, harmonized standards gain importance. Regulations and conformity assessments should not discriminate or unduly add costs, but ensuring compliance does require investment in laboratories and other facilities for calibration, accreditation, certification, and conformity assessment.