In today’s global economy, goods and services often represent only one link in a larger chain — factors of production in a worldwide process of creating final goods. This “global value chain” (GVC) requires a new perspective in analyzing the costs and benefits of trade policy.
A new study from the European Centre for International Political Economy (ECIPE), an Atlas Network partner in Brussels, Belgium, measures how countries place on the GVC. Written by Erik van de Marel, a senior economist with ECIPE, the study uses two categories to evaluate each nation’s placement. The first, “participation,” indicates how a country contributes to the GVC based on backward and forward linkages. The second, “distance from final demand,” indicates how far a country’s production lies from the end of the production chain. Van de Marel finds a positive correlation between the two categories.
The study finds that the factors influencing how countries participatate in the GVC are domestic market size, factor endowments such as human capital rates and Internet penetration, strength of institutions and rule of law, and trade and regulatory barriers. These barriers, alongside market inefficiencies, have the largest effect on countries’ distances from final demand. The study explores how the size of different economies can affect both domestic and foreign value-added production to the GVC, as well as how it can affect the participation of the country in the GVC.
Using a chart to plot where nations fall on the GVC map, the study outlines policy prescriptions for how to increase global positioning. Countries with only a moderate amount of participation should look to participate more in the GVC, van de Marel concludes, while countries neither near nor far from demand should look to either shift their specialization industries either further away or closer to final demand.
“Uncovering a country’s location in the GVC map is important as it can provide important policy guidance, especially within the EU where members are creating a common internal market and converging policies that are relevant to this new reality of trade,” van de Marel notes in the study’s introduction. “With the rise of GVCs in recent years, various so-called ‘new’ policy measures, going beyond traditional trade policy, have become important factors of trade. Examples include investment barriers, labour market inefficiencies, or obstacles to innovation.”
Read the full ECIPE study, “Positioning on the Global Value Chain Map: Where do You Want to Be?”