Asian economies can improve their competitiveness and stimulate income and employment growth by removing the obstacles to joining global value chains, as GVCs continue to play an increasingly important role in international trade, says a new Asian Development Bank (ADB) report.
The chapter “Asia in Global Value Chains” in the Asian Development Outlook 2014 Update says many countries in Asia stand to reap substantial gains from GVCs if governments and business work together to overcome trade obstacles such as high tariffs and nontariff trade barriers, and poor logistics and transport infrastructure.
“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.”
The report highlights one study of 59 economies that found that 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 percent in 2008, before the 2009 global trade slump, almost doubling from 8.6 percent in 1995, further notes the theme chapter.
While being part of a GVC exposes an economy to shocks that hit others in the chain, the benefits seem to outweigh the costs, it states. “Industries in which GVC trade doubled during 1995-2008 saw output grow 19 percent faster than other industries and employment rise by 10 percent. Economies in which GVC trade doubled in the same period enjoyed a 12 percent increase in real per capita income.”
So far the economies of East and Southeast Asia, including Japan and China, generate the bulk of the region’s GVC trade, says the report, noting that 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,” it says.
The report finds that while falling tariff, logistics, and transport costs have nurtured cross-border production, more can be done.
“Simulations of simple two-stage chains in Southeast Asia show that GVCs magnify trade costs by as much as 80 percent, 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,” it says.
Countries can look at three areas for policy action to help them establish or strengthen ties to GVCs and reap the related benefits.
For one, authorities can make tariffs more predictable by normalizing trade relations with partners, lowering bound tariffs, and avoiding temporary trade measures. Low and predictable rates for other taxes, including value-added taxes collected at the border, also benefit GVCs.
They can also work on improving logistics and transport infrastructure to help cut trade costs. “Delays in moving goods from inland factories to the coast, through customs facilities, or through ports themselves add to shipping costs,” says the chapter. “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.”
Finally, countries have to uphold necessary process and product standards for GVC operations, but these standards “must not be hijacked as barriers to trade,” it says. 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.
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