by Santiago Fernandez de Cordoba: Senior Economist at UNCTAD and Coordinator of the United Nations Forum on Sustainability Standards (UNFSS) www.unfss.org

and Ruby Lambert: Sustainability Expert at the United Nations Conference on Trade and Development (UNCTAD) www.unctad.org

Did COVID-19 make trade and cooperation less attractive? Is it sensible for countries to adopt protectionist policies moving forward? Did the pandemic affect the sustainability agenda?

Globalization has brought profound changes to international trade over the last 50 years. Not only has volume , it has also changed in nature, as value chains spread around the globe and become more complex. Today, about  US $8 trillion worth of world trade goes through Global Value Chains (GVCs), accounting for nearly 70% of the total share of global trade.

GVCs have become a lever in the interconnectedness of open trade, making such activity a significant mechanism through which both trade and development can be fostered. As such, international production fragmentation has given rise to intense involvement of emerging and developing economies participating in the GVCs.

UNCTAD (United Nations Conference on Trade and Development) estimated that value-added trade in  developing countries contributed nearly 30%  to countries’ GDP on average, as compared with 18% in developed countries. There is a positive correlation between participation in GVCs and growth rates of GDP per capita. These gains were driven by the fragmentation of production across countries and the growth of connections between firms.

However, with the economic chaos worldwide caused by the current pandemic, it may seem increasingly sensible for countries to adopt protectionist policies. In other words, the likelihood of favoring self-sufficient economies by embracing policies seeking protectionism in the name of greater resilience may undermine any economic interest in participating in GVCs – putting developing countries’ economic growth at stake.

Complete autarky (or self-sufficiency) is unlikely to be possible as regional value chain links are increasingly becoming more important than global ones, especially in North America, Europe, and South-East Asia. This is a clear indication that international trade (more so than regional trade) will continue to persist despite any tendency to close trade borders.

The degree of trade openness is very much dependent on policy tools such as import and import quotas, tariffs, monetary or fiscal policy, exchange rate controls, and controls on capital, etc., these tools are, to a large extent, policies that spell protectionism.

Has the pandemic triggered a higher degree of protectionism, making trade and cooperation less attractive? While for some countries, that may be the case, however, there are countervailing trends in one of the paradoxes of participating in global value chains, that will increase incentives for more cooperation.

Although there were factors contributing to a slowdown in the expansion of GVCs pre-COVID19 including shifts in global demand, reshoring, overall decline in economic growth, especially investment, reversal trade reforms and recent increases in protectionism, regional integration seemed to   support the expectation that GVCs are unlikely to disappear automatically.

There are nations that lack adequate domestic resources, to feed and clothe their population. Every nation has a material interest in other nations’ economic well-being because mismanagement of one country’s resources hurts all other nations too. Essentially, firms in developing countries can significantly gain productivity through participation in GVCs – a  1% increase in GVC participation is estimated to boost per capita income by more than 1%, or much more than a 0.2% income gain from standard trade.

Paradoxes of Global Value Chains

 

“When all this is done  (the current crisis),  we will have a discussion on globalization. There are negative effects of globalization, but this also shows that we’re all in this together. The answer to the questions that are raised should not be a plea for less globalization. We have everything to lose if we roll back globalization.”   Alexander De Croo, Belgium’s deputy prime minister and finance minister, 25 March 2020

According to UNCTAD’s research, the majority of developing countries are increasingly participating in GVCs. The developing-country share in global value-added trade increased from 20% in 1990 to 30% in 2000 to over 40% today, even though many poorer developing countries are still struggling to gain access to GVCs beyond natural resource export.

There is also the danger that some countries could remain stuck in performing lower value-add links of the chain, leading to unequal profit distribution. As the standard models of international trade are based on comparative advantages, they mostly deal with final goods. Global value chains’ fragmented international process has significant implications for the distributive effects of trade: economic actors at the downstream end of the value chain tend to benefit the most.

Furthermore, GVCs have also been cited as contributing to harmful effects on the environment. The main environmental costs of GVCs are associated with the growing, more distant trade in intermediate goods compared with trade in final goods.  This leads to higher carbon dioxide (CO2) emissions from transportation (relative to standard trade) and excess waste from the packaging of goods.

While the world is taking all possible actions to address the health crisis, this will not change the fact that climate change will continue to accelerate, and that inequality and poverty will continue to exist. Failing to address these issues altogether will aggravate the crisis as they are linked one way or another. Therefore, economic cooperation in these priority areas would go a long way in improving the lives of everyone across the world.

“Any slowdown in manufacturing in one part of the world will have a ripple effect in economic activity across the globe because of regional and global value chains.”  UNCTAD Secretary-General Mukhisa Kituyi

Turning to Sustainable Value Chains

As regional value chain links are increasingly becoming more important than global ones, especially in North America, Europe, and South-East Asia, it is also clear that international trade (more so than regional trade) will continue to persist despite any tendency to close trade borders due to the pandemic.

GVCs have long been considered by policymakers in the design of trade policies, though Free Trade Agreements (FTAs) have also evolved in terms of content. Non-trade objectives such as sustainable development have increasingly been included to enhance economic fundamentals with social and environmental protection provisions. Environmental provisions in trade policies are increasingly linked through preferential trade agreements (PTAs), and the number of FTAs that include labor provisions has been growing in the last two decades.

The ability to restore nature’s resources to provide for humanity requires that the production and consumption system be more sustainable. To be sustainable, the production and consumption system must be circular and regenerative, which can only be achieved by collaborating with all economies participating in the value chain.

Although this may prove challenging at this current juncture, closing the economy completely will only lead to adverse impacts, more so for developing countries as they will have to restructure their revenue stream coming from GVCs which have been significantly contributing to their growth of average income and poverty alleviation.

To make the situation less severe than what has been speculated could happen with increasing deglobalization, Sustainable Value Chains (SVC) can complement labor market policies to help workers, and employers ensure that compliance with labor regulations, and environmental protection measures are met.

Sustainability standards play an important role in SVC. As a new regulatory form, Voluntary Sustainability Standards (VSS) set social and environmental standards for transnational production, and the system often operates certification programs to verify compliance in GVCs. The extent to which GVCs can affect Sustainable Development Goals (SDGs) can be defined by answering two questions:

  • 1) To what extent are the producers in developing countries included in the GVCs?, and
  • 2) Does the compliance of standards help build capacities in these economies that allow producers to achieve sustainable progress across one or more of the triple bottom line agendas – economy, environment and social?

To this end, the use of standards and often certification is meant to reduce the negative externalities of transnational production, while promoting sustainable development through fostering green growth and trade.

It is also increasingly popular as a tool for sustainable supply chain management, reputational risk mitigation, and the promotion of competitiveness. More and more leading firms in global value chains adopt VSS,  making their buying decisions dependent on suppliers’ (across borders) compliance with voluntary standards.

In this time of crisis, the need for an international trading system that works for all is even more evident. There is a need for a system that does not perpetuate the inequalities and enables people, particularly the most vulnerable in the value chains to prosper. If important stakeholders can influence and instrumentalize VSS to achieve SVC, they may well inspire others towards the trajectory of an inclusive and sustainable global economic system.

 

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