The global development landscape witnessed a significant shift in emphasis and commitment in 2015 with the adoption of the 2030 Agenda for Sustainable Development. This universal framework includes the 17 Sustainable Development Goals (SDGs), underpinned by the Addis Ababa Action Agenda on Financing for Development. Explicit recognition of the role that trade and investment policies can play in advancing sustainable development is included in the agenda.

The SDGs provide an opportunity to mainstream an inclusive and comprehensive approach to development in the national strategies of low income countries and least developed countries (LDCs). The goals are mutually reinforcing and will be strengthened by the application of well-articulated trade and investment policies. For example, efforts to design policies that consider the gender dimensions of trade in achieving SDG 5 (gender equality) will have ramifications not only for the goal in question and related targets, but also for competitiveness and growth (SDG 8), ending poverty (SDG 1), reducing inequality (SDG 10), and promoting peaceful and inclusive societies (SDG 16).

The emphasis on the need to enhance inclusive and sustainable growth in the current policy debate is particularly important in the context of global value chains (GVCs) driving the geographic dispersion of production across borders. From a policy perspective, the discussion around GVCs is increasingly concerned with how to spread the distribution of gains along the chain rather than concentrating the rents in the hands of lead firms governing the processes along the chain. This focus on inclusive growth and the distribution of gains naturally flows into a discussion on how the processes driving value chains on a global and regional level dovetail with the global aims for the SDGs.

The following papers were produced under ICTSD’s Programme on Development and Least Developed Countries as the inaugural component of a research and publication series on GVCs. The papers were conceived as framework documents to provide an analytic and policy agenda that scholars and policymakers can use when they undertake detailed and in-depth analysis of the impact of GVCs on sustainable development on a sectoral and geographic basis. The objective of the series is to provide input into the policy debate on how LDCs and low-income countries can utilise value chains to achieve sustainable and inclusive development.

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Inclusive and Sustainable Growth: The SDG Value Chains Nexus

Executive Summary

The Sustainable Development Goals (SDGs) have been established in an era of deepening globalisation. Although many economies, firms, farms, and individuals have benefited greatly from globalisation, these gains are not automatic – the challenge is not whether to participate in the global economy, but how to do so beneficially. This applies to growth as well as SDG targets of employment, equity, nutrition, and longevity. A key to a positive outcome is for producers to position themselves appropriately in the global value chains (GVCs), which now account for more than two-thirds of total global trade.

Market forces have an important role to play in achieving the SDGs – both positive and negative. On the positive side, economic growth allows the state to deliver developmental services to its population. It also provides employment and incomes, not just in the large-scale formal sector, but also in the small and micro enterprises that relate directly to the poor. On the negative side, growth as we have known it over the past few decades has tended to exclude much of the population from the fruits of economic expansion. Thus, the challenge is to fashion growth into a more inclusive path, which includes the SDGs. This is as true for low per capita income southern economies as it is for the middle and higher income northern economies.

One important contributor to growth is outward-oriented production through the framework of GVCs. We know from experience that GVCs are not undifferentiated – some enhanced, and others undermined achieving the Millennium Development Goals (MDGs). These two different faces of GVC-led growth did not happen by accident or the simple extension of market-led expansion. They resulted from the concerted action of five key sets of stakeholders: international agencies, national governments, lead firms, civil society organisations, and public-private partnerships. Sometimes these lead actors acted in isolation; in other cases, they worked together to achieve MDG-friendly outcomes.

The SDG task is to learn from the GVC-MDG experience to ensure that GVC-led growth does not result in excluding patterns of growth. A clear lesson from the past two decades is that for developmental goals to be achieved, policy interventions by each of the five major sets of GVC stakeholders must be evidence-based. If policies are not built on real dynamics, their unintended consequences may be adverse. It may not just be that alternative policies may have delivered better results, but in the worst cases, they may work against promoting sustainable development.

This paper provides the framework to generate policy-relevant data to reinforce the maximum achievement of SDGs in GVC-led economic growth. In the same way that growth in itself is highly unlikely to achieve the SDGs, routinely collecting data in market-led growth will not provide evidence that the key stakeholders require to achieve SDG-friendly developmental outcomes.

Introduction

The global community has set itself an ambitious programme of Sustainable Development Goals (SDGs) to be achieved by 2030. The SDGs build on many of the Millennium Development Goal (MDG) targets set in 2000 to be achieved by 2015. But the SDGs go beyond the MDG targets in broadening the objectives to include a wider set of equity goals and a more decisive targeting of environmental objectives.

Since the MDG targets were defined in the last decade of the twentieth century, global economic integration has increased. The major driver of this deepening integration has been the ever-widening spread of Global Value Chains (GVCs), which currently account for two-thirds of total global trade. The pressing policy challenge which now has to be faced by the development community is how these two sets of developments – a commitment to new and wider SDGs in a context in which deepening global economic integration is driven by the extension of GVCs – can be brought into alignment.

In seeking to address this policy challenge, we begin (in Section 2) by reviewing the nature and significance of GVCs in the extension of global integration. It is clear from this that although there are many gains to be realised from a deepening presence in the global economy, the issue is not whether an economy should pursue this outward growth trajectory, but how it does so. Incorrect positioning in the global economy, particularly by low-income countries, can lead to the undermining of SDGs, or a less than optimal rate of progress. This being the case, the question then is what steps need to be taken to ensure favourable outcomes, and how might progress on these fronts be measured. This is the subject matter of Section 3. But not all SDGs are centrally relevant in GVCs. Hence, Section 4 of this framework paper focuses on those SDGs which are most likely to be affected by the character of involvement in GVCs. In each case we seek to identify the nature of the SDG-GVC nexus, the data required to assess this interaction, and the problems which might emerge in data collection. The ultimate goal is to assist in the evidence informed rollout of policies designed to further progress with respect to the SDGs, particularly (but not exclusively) in the least developed economies.

It is important to pay close attention while reading Section 4 of this framework paper which sets out an ambitious programme for a holistic analysis of the impact of GVCs on all of the SDGs. It is very unlikely that any one project will seek to undertake such comprehensive enquiry. Moreover, context differs between different types of GVCs and different types of economies. For example, the challenges faced by least developed economies with very large informal sectors and high levels of absolute poverty are different from those faced by middle and upper middle income economies. Similarly, the challenges faced and opportunities opened in sectors involving labour-intensive assembly are qualitatively different from those involved in the service sector and in high-tech industries. In addition, the resources available for the investigation and analysis of GVCs may be constrained in terms of both time and human effort.

Thus, analysis of specific GVCs and specific SDGs will necessarily selectively draw on this methodological toolkit. Therefore, the first step required in drawing on this toolkit is a strategic judgment which begins with a reasoned assessment of the particular context, the objectives of the data-gathering exercise, and the constraints imposed by time and investigative resources. Without this fit-for-purpose lens to the analysis of GVCs and the SDGs, there is a danger that the search for appropriate and effective policy will be drowned, rather than facilitated, by the investigative process.

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Trade Policies and Sustainable Development in the Context of Global Value Chains

Executive summary

Global value chains (GVCs) have become a major feature of the 21st century economy as a result of sharply reduced costs of transportation and communication, coupled with decades of trade liberalisation. The expansion and increased sophistication of GVCs has created a new “trade-investment-services-technology nexus.” This nexus involves not just the movement of final goods but also that of intermediates, capital, ideas, and data flows, as well as increasing demand for services to coordinate these dispersed production and distribution networks. As a result, GVCs have brought to the fore issues that were not as important in a world of trade in final goods and more discrete markets.

This paper explores the types of trade and trade-related policies that are the most relevant to support the development of country participation and upgrading in GVCs; it also explores the implications these policies may have for GVCs to contribute to sustainable development. It stresses the fact that appropriate policies, while crucial, are by themselves insufficient to achieve participation in GVCs and must necessarily be supplemented by a number of supportive and mutually reinforcing domestic policies.

Enabling policies dealing with trade, investment, and the distribution of gains must be set in the context of the new GVC trading framework. Today’s exports and imports are inextricably entwined in the globalisation of production. Open and predictable trade and investment regimes, accompanied by efficient logistics and supportive domestic policies, are all necessary to achieve sustainable development outcomes.

The present paper emphasises the following main findings with regard to GVCs, trade policy, and sustainable development:

• Foreign direct investment (FDI) is the driving force behind GVCs;

• There are many factors that determine competitiveness for participation in GVCs, of which trade policy is only one;

• Efficient services are critical components of GVC participation as they are the glue that links the supply chains together in fragmented production networks;

• Participation in regional trade agreements may help to shape GVC operations, as these agreements (and their rules of origin) provide a normative framework of rules within which firms can operate in a larger economic space;

• Openness is important as interventionist trade policies can affect the competitiveness of both goods and services, and divide markets;

• This applies equally to both tariffs and non-tariff measures such as subsidies and local content requirements; however, governments may choose to have recourse to these interventionist policies if they are pursuing goals other than economic efficiency (such as encouraging technology transfer, pursuing environmental clean energy objectives, creating employment, or promoting the economic development of particular sectors) and consider that these policies would be the best way to achieve such outcomes;

• There are many sustainable development considerations surrounding participation in GVCs, particularly for developing countries;

• These include questions over who captures value in supply chains; whether and under what conditions it is possible to upgrade and avoid being caught in low value tasks; the type of employment and social gains that GVCs may generate and whether they foster greater gender equality in the work place; and, lastly, whether GVCs increase the vulnerability and exposure of a country to footloose investors and external shocks.

As discussed in the paper, many of these questions are only now being explored in the literature. In a world of GVCs, trade policy needs to be understood in a different way. This begins with the recognition that exports are only a small part of the development equation. The existence of large and growing trade in intermediates and services inputs, associated with FDI and the globalisation of production, greatly raises the stakes for developing countries to have open and predictable trade and investment regimes, supported by efficient domestic services and logistics.

The paper underlines that while participation in GVCs can generate economic benefits, it does not automatically bring all of the desired developmental impacts such as the creation of more employment and better-paid jobs, the increased participation of women in the labour force, and a transfer of skills and technology. It may also increase the vulnerability of GVC participants to external shocks and a downturn in business cycles through greater dependence on production and demand links with third markets. Participation in GVCs is also not guaranteed to lead to an upgrading trajectory along the value chain.

All of these outcomes will be a function of a number of factors, some of which may lie outside the ability of a country to influence, such as geographical location, the sector in which the GVC operates, and the origin and characteristics of the lead firm and investor, among others. Nonetheless, many of these outcomes can be influenced by appropriate and proactive government policies, including policies of a horizontal nature, which have economy-wide effects.

The paper concludes that GVCs can be an important avenue for developing countries to build productive capacity, increase their participation in world markets, and help to create opportunities for manufacturing and services upgrading in their economies. However, such potential benefits from GVCs are not automatic. Policies matter and must include a set of coherent and mutually reinforcing trade, investment, and domestic enabling policies that will help generate sustainable development outcomes.

Introduction

Global value chains (GVCs) have become a major feature of the 21st century economy. Costs of transportation and communication have been sharply reduced. Decades of trade liberalisation through multilateral, regional, and unilateral efforts, combined with the transformative power of information technology (IT), have allowed firms to split up their production and source intermediate inputs and services throughout the global market in a seamless fashion to deliver final products. A GVC usually involves a collection of firms located in different countries that jointly form a production line. Depending on the location of a firm, participation may either involve forward linkages – where a firm produces an output that is used in production for export in another nation – or backward linkages where a firm uses imported parts or components used as input into production that is exported. While GVCs permit enterprises in different locations to concentrate on specific tasks, they also increase interdependence. Each link in the chain relies on upstream producers delivering their output on time and meeting the required quality and safety standards.

The origin of GVCs has been explained by Richard Baldwin (2006) as a process of “unbundling” or a transformation of the various constraints around the way in which goods are produced. While the “first unbundling” was caused by a rapid decline in transportation costs that removed the need for goods to be produced close to the point of their consumption, the “second unbundling” was caused by rapidly falling communication and coordination costs that have allowed producers to separate components of their production in various locations, not only within one country but also around the world. As Baldwin emphasised, the second unbundling opened up firms to global competition on a task-by-task basis, rather than on a firm-by-firm or sector-by-sector basis.

The application of low-cost information communication technology has thus transformed trade to the extent the flow of goods, services, people, investment, technology, and data now takes place across borders rather than just within borders. This new, fragmented production structure and the resulting GVCs have created a new “trade-investment-services-technology nexus” or an intertwining of trade in intermediates, of the movement of capital, of ideas and data flows, together with a demand for services to coordinate these dispersed production and distribution networks.1 As a result of such a nexus, GVCs have brought to the forefront issues that were not as important under the “first unbundling” where the only separation, according to Baldwin (2006), was between markets and consumers.

The most critical among these issues is foreign direct investment (FDI), not least because GVCs remain largely driven by investment decisions of multinational corporations (MNCs), through their outsourcing and offshoring activities. Secondly, services play a key role in the operation of international production networks, especially transport, communications, and other business services. Services act as the “glue” that binds together the geographically dispersed production stages involved in GVC networks. They are both embodied and embedded activities across the whole value chain for manufactured, agricultural, and natural resource products. Thirdly, as firms unbundle their production processes, logistics costs and efficient border operations become crucial. This includes all aspects of clearance procedures, port operations, cargo handlers, storage facilities, as well as transport and trade-related infrastructure. Finally, another element often included in this new paradigm is information technology (IT), which allows the supporting data flows to be moved around the world at almost zero cost.

This Issue Paper explores the types of trade and trade-related policies that are the most relevant to support the participation of developing countries and their upgrading in global value chains, as well as the implications of these policies for the sustainable development potential of GVCs. It stresses the fact that appropriate trade and trade-related policies, while crucial, are by themselves insufficient for achieving participation in GVCs. It underlines the numerous supportive and mutually reinforcing domestic policies that must also be brought into play in order for GVCs to lead to sustainable development outcomes.