Trading Value-Added : Global Value Chains and International Trade Hubert Escaith, 21 March 2012

1. Trading Value-Added:Global Value Chainsand International TradeHubert Escaith, 21 March 2012

2. Overview • A typology of supply chains • Factors shaping and changing supply chains • The policy interface

3. A Typology of Supply Chains • Cost minimization: buyer-driven, high volume of consumer goods/commodities, low technology, low margins, cost/price competition and speed oriented, many firms, SME involvement • Mass Customization: buyer-driven, high volume but higher margins, cost/price competition but elements of market segmentation (branding, trademarks) higher technology, speed oriented, multi-firm but some market dominance, SME involvement • Product differentiation: producer-driven, lower volume, higher margins, speed less important, technology and proprietary knowledge matters and is key to market segmentation, fewer firms, perhaps only one

4. Geographical Setting Domestic International Upstream generally driven by resource factors (natural resources, labour, technologies) Upstream Manufacturing Downstream generally driven by market factors (USA, EU. Increasingly Emerging markets) Downstream Domestic International Domestic and international (undifferentiated product)

5. Smiley Face(Source:Adapted from Stan Shih, Business Week International online, 16/5/2005) Value Added Added Value Supply chain <-> Demand chain Customer services Standardization Innovation Brand R&D Marketing Design Logistics Manufacture Assembly Services Goods andservices Services Production & distribution processes Brand R&D Design Customer services Logistics Assembly Marketing Innovation Manufacture Standardization

6. Role of Services • Pure services supply chains • Services entering goods chains • Directly in the manufacturing process • Priced as part of the pre- or post-manufacturing stage • Post-retail services • Key role of services in upgrading along supply chains

7. As trade is changing, trade statistics should adapt • Trade statistics still follow 19th century concepts. • The full value of the traded goods are assigned to the last step in the supply chain, often low value-added country of assembly or consignment • Wrong numbers can lead to wrong perception [e.g., Bilateral (im)balances are overstated] • Wrong numbers lead to wrong decisions • Trade statistics must also adapt: • Product differentiation and firm heterogeneity: “Who trades what” is more important now than only “what is traded” • Global value chains: appropriate data to (i) track the flows of intermediate goods and services, and (ii) allocate value-added where it accrues

8. Policy implications Trade Facilitation: Time is money (especially in just-in-time arrangements) • Some keys to efficiency along supply chains: • Customs/port clearance times and efficiency • Standards and regulations (complexity) • Overly restrictive and costly trade regulations • Documentation (burdensome) • Procedural opacity (cost-augmenting) • Variability in time taken by administrative procedures (uncertainty) • Rules of origin (time and money) • Multi-agency interventions (transactions costs) • These effects fall harder on SMEs and developing countries

9. Some (very tentative) questions for the Multilateral Trade System (and Preferential Trade Agreements…) • Trade relationships along Global Value Chains are embedded into longer-term industrial, business and investment approaches • From “arm’s length trade” transactions, towards a “investment+trade in goods&services+supporting services” nexus • Is our frame of thinking about trade policy still adequate in the contemporary global economy? • Design of regimes for goods and services: is MFN still relevant? (yes) • Design of rules of origin (value added, thresholds) • Treatment of Non Tariff Measures (norms and standards) • Harmonization versus mutual recognition (Multilateral vs bilateral) • Trade and investment: Competition policy (OECD) vs Trade policy (WTO) • Contingency trade policy (who “captures” the value added?) • Institutionalized mechanisms for managing uncertainty/unpredictability in trade policy (RTAs as a potential source of regulatory spaghetti bowl)

10. Significant Research Questions for industrialized countries (and others) • Decomposing and understanding the source of value-added along supply chains (including services and invisible assets) – moving up the value chain, preserving core-business, modularized versus integral production, tradeables versus non-tradeables • Assessing and managing risk (strategic/operational, political, natural disasters, government policy) – risk pooling, alignment, flexibility and slack in the chain • Understanding the role of SMEs in multi-firm supply chain operations – a key source of job creation • Identifying practices and policies aimed at sustainability, broadly defined (environmental, labour, social) – constrained optimization • Capturing the role of policy

11. Some Policy Considerations • The “multiplier” effect of interventions and inefficiencies along a supply chain • Minimize policy interventions or their costs • Minimize trade costs • Maximize logistics efficiency (“hard” and “soft” technologies) • The relative importance of trade facilitation in a world of vertical integration: a comparative advantage for industrialized countries • Emerging challenges: • Industry initiatives (private standards and codes of conduct, bottom-up norms: sustainability, carbon footprints, organic products) • Technological advances increasing uncertainty (GMOs, ICT) • NGO initiatives (fair labour standards, fair trade)