Who Governs Global Value Chains? Today we live in a networked - PDF document

Presentation for the International Trade Committee European Parliament Hearing on “ EU Trade Policies and the Sustainability of Global Value Chains ” 15 June 2016 SHERRY STEPHENSON, Senior Fellow, ICTSD Who Governs Global Value Chains? Today we live in a networked economy led by investment flows where business-to-business intermediate trade accounts for over two-thirds of the goods and nearly three-quarters of the services traded worldwide. GVCs have become fundamental to world trade and have defined how companies are doing business and how trade flows are structured. Most governments are keen for their companies integrate into GVC structures so that they can be a part of what is perceived as the dynamic growth channels of the world economy. In fact, research by the UNCTAD has shown that developing countries participating more intensively in GVCs have demonstrated around 2% faster economic growth over the past decade than those developing countries that did not. What is challenging about the area of GVCs is what a broad array of factors this phenomenon encompasses, including the nexus of trade, services, investment, skills, technology and data flows that envelope GVC operations. And everything that determines how these interact. Also complicating the phenomenon of GVCs is that they can mean very different things to different actors. To firms, GVCs are ways of

organizing production as efficiently as possible, without regard to national borders. To governments, GVCs are a channel through which to integrate their countries into the world economy and to move up the technology and skills ladder. To trade policy officials and international and regional organizations, GVCs are a new manifestation of the way in which international trade is carried out, and require new thinking about rules and normative frameworks. See the typology of GVC governance in the chart in Figure 1. This also means that the governance of GVCs means different things depending upon what perspective one takes on the question. If you were to ask me “Who Governs Global Value Chains?” I would say – “That depends upon who is answering this question”. Because governance of supply chains can be viewed from at least three perspectives: that of firms; that of individual countries; and that of the international trading system. Let’s examine each one.  The Firm Level At the firm level, governance of a supply chain is clear. It refers to how the activities in a production network are organized among the participating firms. Usually the lead firm sets and enforces the parameters under which other firms in the network operate. In today’s globalized world, MNCs drive most variants of firm governance in GVCs through their investment, outsourcing and off- shoring activities. 2

For firms, the primary motivations are those of market power and profit maximization in a globalized world. How they position themselves in a given value chain and what type of governance structure they adopt will depend partly on the type of production activity in which they are involved: strategic asset seeking; market seeking; efficiency seeking; or natural resource seeking output – and what type of decision-making power they have in the network. The business environment and ability to enforce contracts in various countries will also influence the lead firm’s choices about the scope for control in each of the segments of the chain and the potential trade-off of decision-making power with local firms. The objective of a firm in organizing the governance of supply chains is to create the most efficient production operation possible. A key question in this governance context is how the benefits are divided between lead firms (usually MNCs) and their small and medium-sized partners in different locations.  The Nation State Level At the nation state level, each sovereign government looks at the governance of global value chains as the challenge of creating the most conducive and enabling set of policies possible for firms to engage in GVCs operations. Nation-state governance is motivated by the desire of national officials to position their countries favorably in the 3

international market to attract investment and GVC activities in order to enhance economic growth and employment, stimulate the transfer of technology and skills and promote sustainable development. Many analysts have suggested that the GVC policy agenda is primarily a national or domestic one and that the determinants for successful participation of a country in GVCs are largely home-grown. Relevant policies in this regard are numerous and touch on many areas. A liberalizing trade policy is viewed as a necessary but far from sufficient component of national GVC governance. Open markets will not be effective without the human capital base necessary to provide the quality inputs into supply chains. Many other policies form part of this package of ‘enabling factors’. Key among these are : i) policies to foster a competitive services industry ii) investment-friendly policies iii) strong government institutions with minimum corruption and mechanisms for legal recourse in the case of disputes iv) enabling digital infrastructure and port and transport infrastructure v) efficient customs and border management that allow for logistics to operate efficiently vi) predictable and non-discriminatory domestic regulation 4

 The International Trading System Level At the level of the international trading system, the governance of GVCs has been little explored. Not focused on a single actor (firm or nation state), this broader level addresses decisions that affect trade and investment flows between several trading partners or the trading system as a whole . Some have argued that there is a ‘supply chain governance gap’ at this level that has been left by the WTO with its pre-occupation on the Doha Round agenda of 20 th century trade issues, and which is being filled by uncoordinated developments in deep regional trade agreements and single economic markets such as the EU that discipline behind-the-border regulatory issues as well as investment. New mega-regional negotiating initiatives such as the recently-concluded TPP and the ongoing TTIP and RCEP will also affect the governance of GVCs at the systemic level. The governance gap for GVCs at the multilateral level came about because the WTO system is characterized by: i) outdated trading rules – the WTO came into force in 1995 when the Internet was considered an “emerging technology” and the W orld Wide Web has just appeared ii) lack of coverage of key issues and disciplines that are vital to GVC operations including rules on investment, competition policy and e-commerce/digital trade. iii) no cross-cutting forum that allows WTO Members to discuss how issues and policies interact to affect the ability 5

of firms to engage in supply chain activities due to the st ructure of WTO rules in “silos”. A group of experts drawn together under the E15 Initiative co- sponsored by the ICTSD and the World Economic Forum looked at the challenges of GVC governance at the level of the international trading system during 2012-2015 and came up with a series of policy options and recommendations for enhanced trade governance relevant to GVCs that can be accessed in the final report on “Trade Governance Frameworks in a World of Gl obal Value Chains” (available http://www3.weforum.org/docs/E15/WEF_Global_Value_Chainrepor t_2015_1401.pdf. These options include the following: i) Develop and refine knowledge tools to promote a more empirical and sophisticated understanding of GVC operations in international trade ii) Establish an independent GVC Development Platform iii) Establish sector-specific supply chain councils, as challenges to GVC operations are specific to product areas iv) Convene a supply chain summit i) Explore the need for new international frameworks for key policy areas that impact GVC functioning including investment, competition policy, digital trade and data transfers 6

ii) Adopt a supply chain informed approach to trade negotiations Given that the notions of governance of value chains can be so different depending upon the context, all three perspectives must be understood when discussing this question. The motivations of private sector actors and even those of the nation state in their governance functions may conflict with the objectives of trade officials to design open, transparent and rules-based systems for trade. In the absence of WTO action to take on board new issues of 21st century relevance to GVCs, preferential, plurilateral and mega- regional trade agreements will continue to step into the governance void at the global level as testing grounds for new and relevant disciplines. 7