Global supply chains (GVC)

• - businesses internationalized their operations across multiple locations

• Some Governments, but not all, recognize that participating in GVC will bring
value and opportunities to their workers and economies
For many economies
• Imports are increasingly a key complement of local production & exports
• For ex., in East Asia, intermediate goods have comprised over 50% of exports and
over 60% of imports since 2000.
• That’s why it is important to look at trade in value added terms.
• When we measure exports in terms of import content – we can understand
domestic value-added.
GVC are not new, but what has changed is:
• Speed
• Scale
• Depth
• Breadth of global interactions
Governments need to think on how to encourage a range of GVC in order to
improve growth and development
• New opportunities for some small, less developed countries to
participate in GVC – for that appropriate policies are needed.
• Governments need to create “hard” and “soft” infrastructure for GVC
Factors influencing the GVC:
• Revolution in ICT
• industrialization & rapid growth in developed economies;
• Widening the income divide between North and South
• Booming trade and migration & local production agglomeration
• Industrialization in the emerging economies
• Intensification of GVC – networked trade, investment, services and innovation.
 Role of services in GVC
• It was underestimated due to difficulties in identification
• Existence of market complementarities
• Modularized supply arrangements, and
• The growth of service-intensive networks involving different
technologies, entrepreneurship and producer-consumer relationships
that innovate and create value.
• Developing countries could use services as a means to upgrade their
involvement in supply chain production.
Statistics on trade in value added helps to improve understanding of what
underlies:
• Trade
• Growth & development
• To identify the true sources of value addition in production and trade.
Policy areas that can influence the operation of supply chains
• Infrastructure
• Transportation
• Administrative interventions affecting logistics
• Product standards
• Examples of areas that involve costly reforms: improving physical
infrastructure
• Ones that that imply less costs: customs reform, transport
deregulation, market access improvements in logistics, express
delivery, telecommunication etc.
• In reality, about 70% of international trade today involves global
value chains (GVCs), as services, raw materials, parts, and
components cross borders – often numerous times.
 For example, a smart phone assembled in China
• might include graphic design elements from the United States,
computer code from France, silicone chips from Singapore, and
precious metals from Bolivia. Throughout this process, all countries
involved retain some value and benefit from the export of the final
product. But much of this value added throughout the international
supply chain is invisible in traditional trade statistics, which attribute
the full value of a good or service to the last country in the chain that
finalised production.
Evolution of Foreign Value added
• While the globalisation of production increased unabated in many
OECD countries and emerging economies from the end of the 20th
century, there
are signs that this trend has slowed in recent years.
For example, since around 2011, the foreign value-added content of
exports (“backward linkages”) has gradually fallen for many major
economies.
• This decline has been most pronounced in China.
• Some OECD and G20 countries, notably Argentina, China, Indonesia
and Israel, experienced a significant fall in the foreign value-added
content of manufactured exports between 2005 and 2015.
• However, many others experienced an increase notably Greece,
Japan, the Netherlands and South Africa.
• Small open economies with significant tourism activities (e.g. Greece,
Iceland, Portugal and New Zealand) are among those with the highest
contributions of non-resident expenditures to exports.
• Australia, Spain, Turkey and the United States also have high
contributions of non-resident expenditures.
• Between 2005 and 2015 there was a significant increase in the nonresident
household expenditure share of exports in a number of Asian
(Indonesia, Japan, Korea) and northern European (Sweden, Poland,
Iceland, Latvia) economies.

GLOBAL ECONOMIC LANDSCAPE IN THE LIGHT OF

COVID-19 PANDEMIC
• THE GLOBAL ECONOMIC LANDSCAPE WAS CHARACTERIZED BY MAJOR FRACTURES, WITH THE
WORLD ECONOMY MARKED BY INEQUALITY AND MIRED IN TRADE AND GROWTH SLOWDOWNS
• THE PANDEMIC BARED TO THE FULL THE WEAKNESSES THAT SUCH FRACTURES ENTAIL.
• WE NEED TO FIND SOLUTIONS TO THE COVID-19 CRISIS THAT ALSO HELP TO REDRESS THE
FRACTURES THAT HAVE EMERGED FROM GLOBALIZATION, CREATING UNFAIR OUTCOMES AND
CONTRIBUTING TO INEQUALITY AND VULNERABILITIES.
• GLOBALIZATION IS A POLICY-DRIVEN PROCESS AND THAT MULTILATERALISM PRESENTS THE
MOST EFFECTIVE APPROACH TO MANAGING POLICIES AND THEIR IMPACTS, IN A MUTUALLY
GAINFUL WAY, ACROSS NATIONAL BORDERS.
UNFULFILLED TRADE AND DEVELOPMENT PROMISES PRIOR TO THE PANDEMIC
• EVER INCREASING GLOBALIZATION AND EVER DEEPER ECONOMIC INTEGRATION HAS
DELIVERED THE EXPECTED BENEFITS ONLY TO A FEW DEVELOPING COUNTRIES, WHICH
ARGUABLY MAY NOT EVEN HAVE FOLLOWED THE POLICY SCRIPT, AND TO A LIMITED NUMBER OF
PEOPLE THAT HAD THE RIGHT SKILLS AND INITIAL CONDITIONS THAT ALLOWED THEM TO SEIZE
THE OPPORTUNITIES THAT GLOBALIZATION HAS OFFERED.
• ECONOMIC CATCH-UP THAT MANY OTHER DEVELOPING COUNTRIES RECORDED OVER SHORTER
PERIODS COULD NOT BE SUSTAINED, PARTLY BECAUSE THEIR INTEGRATION PROCESSES HAVE
PROVEN TO BE CRISIS-PRONE, DEFLATIONARY AND TO EXACERBATE VULNERABILITIES OF THE
MOST DISADVANTAGED.
• AS SUCH, THE DOMINANT POLICY PARADIGMS OF THE PAST 40 YEARS HAVE UNLEASHED A DUAL
PROCESS OF INTEGRATION AND EXCLUSION, AS REFLECTED BY WIDENING FRACTURES BETWEEN
AND WITHIN NATIONS.

AN UNBALANCED GLOBAL ECONOMY AND DETERIORATING GLOBAL ECONOMIC CONDITIONS

• AS A RESULT OF THESE UNEVEN GLOBALIZATION PROCESSES, THE MULTIPLE SHOCKS OF
THE COVID-19 CRISIS HIT A GLOBAL ECONOMY CHARACTERIZED BY SLOW GROWTH,
SLUGGISH TRADE AND INVESTMENT, HISTORICALLY HIGH LEVELS OF DEBT, INCREASED
INEQUALITY AND RAMPANT ENVIRONMENTAL DEGRADATION.
• IN 2019, THE GLOBAL ECONOMY REGISTERED ITS SLOWEST GROWTH IN A DECADE, WITH
THE DOWNTURN IN ECONOMIC ACTIVITY HIGHLY SYNCHRONIZED ACROSS REGIONS.
• THE SLUGGISHNESS OF THE RECOVERY FROM THE GLOBAL ECONOMIC AND FINANCIAL
CRISIS MAY BE ATTRIBUTED TO LOW INVESTMENT IN THE REAL ECONOMY, WHICH ALSO
PROLONGED THE DECADE-LONG DECLINE IN GLOBAL PRODUCTIVITY GROWTH.
DEVELOPING COUNTRIES
• GROWTH PERFORMANCE IN THE DEVELOPING WORLD HAD TOO OFTEN BECOME CLOSELY
RELATED TO VOLATILE INTERNATIONAL CAPITAL FLOWS, AND MANY DEVELOPING
COUNTRIES WERE NO LONGER NARROWING THE GAP IN LIVING STANDARDS BUT INSTEAD
FALLING BEHIND.
• THE DANGEROUS ECONOMIC VULNERABILITY OF MOST DEVELOPING COUNTRIES WAS
COMPOUNDED BY DISRUPTIONS FROM THE RAPID SPREAD OF DIGITAL TECHNOLOGIES
AND MOUNTING VULNERABILITIES TO CLIMATE CHANGE.
• SLOW RECOVERY FROM THE GLOBAL ECONOMIC AND FINANCIAL CRISIS AND POLICY CHOICES,
COMBINED WITH FORCES FROM GLOBALIZATION AND TECHNOLOGICAL CHANGE, HAVE BEEN
ACCOMPANIED ALMOST EVERYWHERE BY A DETERIORATION IN THE DISTRIBUTION OF INCOME
AND WEALTH, MAKING INEQUALITY ONE OF THE BURNING ECONOMIC, SOCIAL AND POLICY
ISSUES OF OUR TIME.
• INEQUALITY HAS CREATED SOCIAL AND POLITICAL TENSIONS ACROSS DEVELOPED COUNTRIES,
WHERE INCOME AND WEALTH INEQUALITY HAS RISEN STRONGLY SINCE THE 1980S AND LED TO A
POLARIZATION BETWEEN PROSPEROUS, EDUCATED CITY DWELLERS AND THE REST OF THE
POPULATION.
• INEQUALITY HAS ALSO RISEN IN MANY DEVELOPING COUNTRIES, ESPECIALLY THOSE THAT HAVE
ENJOYED HIGH GROWTH PERFORMANCE. INEQUALITY REMAINS STUBBORNLY HIGH EVEN IN
THOSE CASES WHERE POLICIES HAVE HELPED REDUCE INEQUALITIES IN DEVELOPING COUNTRIES
OVER THIS TIME PERIOD, SUCH AS IN LATIN AMERICA.

CHANGING GLOBAL PRODUCTION STRUCTURES AMIDST SLOWING TRADE AND FOREIGN DIRECT
INVESTMENT FLOWS
• THE PRE-PANDEMIC TRADE SLOWDOWN MAY WELL HAVE BEEN A STRUCTURAL PHENOMENON
OF A LONGER-TERM DIMENSION THAT OPERATED IN ADDITION TO THE CYCLICAL DRIVERS OF
SLOWING GLOBAL INCOME GROWTH AND CURRENT TRADE TENSIONS.
• LOOKED AT FROM A HISTORIC PERSPECTIVE, THE RATIO BETWEEN TRADE AND OUTPUT VARIES
OVER TIME, AND THE PERIOD BETWEEN THE EARLY-1990S AND 2008 WAS A MAJOR OUTLIER ON
THE UPSIDE, DRIVEN BY THE REINTEGRATION OF CENTRAL AND EASTERN EUROPE AND CHINA
INTO THE GLOBAL ECONOMY, THE CREATION OF THE NORTH AMERICAN FREE TRADE AREA AND
THE EXPANSION OF GLOBAL VALUE CHAINS AS THE DOMINANT MODE OF ORGANIZING
PRODUCTION PROCESSES AT A GLOBAL SCALE.
• GLOBAL VALUE CHAINS PROMISE BENEFICIAL TRADE AND DEVELOPMENT EFFECTS IN THAT
THEY ALLOW MORE COUNTRIES, FIRMS AND WORKERS TO PARTICIPATE IN TRADE AS
THEY ORGANIZE GLOBAL PRODUCTION AROUND NARROW SLIVERS OF COMPARATIVE
ADVANTAGE.
• BUT THE INTEGRATION OF DEVELOPING COUNTRIES INTO GLOBAL VALUE CHAINS ALSO
POSES CHALLENGES. DEVELOPING COUNTRIES FACE THE RISK OF REMAINING LOCKED
INTO ACTIVITIES WITH RELATIVELY LITTLE DOMESTIC VALUE ADDED, FOR EXAMPLE, BY
PROVIDING LOW-COST LABOUR WHILE PROPRIETARY TECHNOLOGY REMAINS IN
DEVELOPED COUNTRIES. THIS HAS LEFT ONLY FEW CHANNELS OF TRANSMISSION OF
TECHNOLOGY BETWEEN FOREIGN AND INDIGENOUS FIRMS AND HAMPERED THE
POTENTIAL TO MOVE UP THE VALUE CHAIN AND EXPLOIT NEW ECONOMIC
OPPORTUNITIES, BEYOND EXISTING COMPARATIVE ADVANTAGE, BY LEVERAGING
TECHNOLOGY AND FOREIGN DIRECT INVESTMENT (FDI) TO BUILD TRANSFORMATIVE
PRODUCTIVE CAPACITIES.

NEVERTHELESS, THE EXPANSION OF GLOBAL VALUE

CHAINS WAS A GAME CHANGER FOR TRADE POLICY
• FIRMS CAN ASSEMBLE INTERMEDIATE INPUTS FROM VARIOUS DESTINATIONS AND FIRMS THAT
RESPECT THE SAME STANDARDS. AS A RESULT, TRADE POLICY BECAME INCREASINGLY
CONCERNED ABOUT NON-TARIFF MEASURES AND ENGAGED IN BEHIND-THE-BORDER
LIBERALIZATION AND THE HARMONIZATION OF REGULATIONS AND STANDARDS, OFTEN
CODIFIED IN BILATERAL OR REGIONAL TRADE AGREEMENTS.
• BUSINESS DECISIONS TO SHORTEN AND REGIONALIZE SUPPLY CHAINS OR TO ”RESHORE”
PRODUCTION SUGGEST AN APPARENT DE-GLOBALIZATION OF TRADE. NOTABLY, THERE HAS BEEN
A MOVE AWAY FROM HIGHLY FRAGMENTED, GLOBE-SPANNING SUPPLY CHAINS TOWARDS A
GREATER RELIANCE ON REGIONAL AND LOCAL PRODUCTION NETWORKS.
• MUCH OF WHAT APPEARS TO BE A DE-GLOBALIZATION OF TRADE MAY WELL SIMPLY REFLECT A
RECONFIGURATION OF SUPPLY CHAINS.
RISING FINANCIAL VULNERABILITIES: VOLATILE CAPITAL FLOWS,
RISING INDEBTEDNESS AND ILLICIT FINANCIAL FLOWS
• NET CAPITAL FLOWS TO DEVELOPING COUNTRIES CONTINUED TO BE HIGH. HOWEVER,
ESPECIALLY IN ECONOMIES WITH MORE OPEN CAPITAL MARKETS, THEIR EXTENT WAS HIGHLY
VOLATILE AND LARGELY DETERMINED BY AN ABUNDANCE OF GLOBAL LIQUIDITY AND THE
APPETITE FOR RISK OF GLOBAL FINANCIAL INVESTORS.
• PEAKS IN 2010 AND 2013 WERE FOLLOWED BY THE SUDDEN CAPITAL WITHDRAWAL
FOLLOWING THE ANNOUNCEMENT IN MAY 2013 BY THE FEDERAL RESERVE OF THE UNITED
STATES OF AMERICA THAT IT WOULD EVENTUALLY TAPER OFF ITS EXPANSIONARY MONETARY
POLICY), A REBOUND IN 2017 AND 2018 AND BROAD STABILITY IN 2019.
THE VOLATILITY AND PROCYCLICAL NATURE OF THE NET CAPITAL FLOWS,
HOWEVER, COMPLICATES MACROECONOMIC MANAGEMENT AND
INCREASES FINANCIAL VULNERABILITIES AND INDEBTEDNESS
• THESE RISKS ARE PARTICULARLY LARGE IN DEVELOPING COUNTRIES.
• A GLOBAL FINANCIAL CYCLE IMPLIES THAT CAPITAL FLOWS TO DEVELOPING COUNTRIES ARE
GENERALLY DRIVEN MORE BY FACTORS EXTERNAL TO THE RECEIVING COUNTRY – SUCH AS LOW
INTEREST RATES AND MONETARY EXPANSION IN DEVELOPED ECONOMIES, COMBINED WITH LOW
GLOBAL RISK AVERSION – RATHER THAN BY LOCAL FACTORS – SUCH AS CAPITAL-ACCOUNT
OPENNESS AND STRONG ECONOMIC GROWTH – THAT MAY PULL INTERNATIONAL CAPITAL FLOWS
TOWARDS THEIR ECONOMIES.
• MOST DEVELOPING COUNTRIES DO NOT HAVE THE MULTIPLE POLICY INSTRUMENTS, THAT
WOULD BE REQUIRED TO STEM THESE PRESSURES.
HIGH INDEBTEDNESS HAS BECOME A KEY FEATURE OF THE GLOBAL ECONOMY
• THE GLOBAL DEBT TO-OUTPUT RATIO HIT WHAT WAS OVER 322 PER CENT IN THE THIRD
QUARTER OF 2019, WITH TOTAL DEBT REACHING CLOSE TO $253 TRILLION.
• DEBT EXPANSION HAS BEEN MOST PRONOUNCED IN THE NON-FINANCIAL CORPORATE SECTORS
AND TO A LESSER EXTENT IN GOVERNMENT SECTORS.
• FOR DEVELOPING COUNTRIES, THE PRE-PANDEMIC LEVEL OF TOTAL DEBT WAS ABOUT
DOUBLE THEIR COMBINED GROSS DOMESTIC PRODUCT (GDP) – THE HIGHEST LEVEL ON
RECORD.
• THE INDEBTEDNESS OF HIGHER- AND MIDDLE-INCOME DEVELOPING COUNTRIES IS AT
UNPRECEDENTED LEVELS AND DOMINATED BY PRIVATE SECTOR DEBT.
PUBLIC DEBT HAS OFTEN INCREASED BECAUSE OF INSUFFICIENT FISCAL REVENUES
• THE DROP IN FISCAL REVENUES IS IN PART THE RESULT OF CONSCIOUS CHOICES, AS
POLICYMAKERS EMBRACED A NOTION ACCORDING TO WHICH SHOULD BE REDUCED AS MUCH
AS POSSIBLE.
• MEANWHILE, TAX EVASION BY HIGH-WEALTH INDIVIDUALS AND AN INCREASE IN
TAXMOTIVATED ILLICIT FINANCIAL FLOWS (IFFS) BY MULTINATIONAL ENTERPRISES HAVE ADDED
FURTHER DOWNWARD PRESSURE.
• RECENT ESTIMATES ON REVENUE LOSSES CAUSED BY TAX-MOTIVATED IFFS FROM DEVELOPING
COUNTRIES AS A GROUP POINT TO A RANGE OF $49–$193 BILLION, WITH ESTIMATES OF THE
PROCEEDS FROM TRADE UNDERINVOICING AND OTHER IFFS POINTING TO AN AVERAGE OF $88.6
BILLION PER YEAR FOR AFRICA ALONE.
TRADE-RELATED IFFS
• TRADE-RELATED IFFS CONCERN ILLEGAL WILDLIFE TRADE, LOGGING AND FISHING, BUT ABOVE
ALL UNDERINVOICING OF COMMODITY EXPORTS, ESPECIALLY FROM THE EXTRACTIVE SECTOR. IT
HAS BEEN ESTIMATED, FOR EXAMPLE, THAT ABOUT HALF OF ILLICIT FINANCIAL OUTFLOWS FROM
AFRICA ARE GENERATED VIA TRADE MISPRICING AND MORE THAN HALF OF TRADE-RELATED IFFS
STEM FROM THE EXTRACTIVE SECTOR.
• THE LACK OF DATA MAKES COMPARISONS OVER TIME DIFFICULT. BUT COUNTRY-SPECIFIC
EVIDENCE BASED ON THE PARTNER-COUNTRY TRADE GAP METHOD SUGGESTS THAT THE
REVENUES LOST FROM TRADE MISPRICING HAVE BEEN MUCH LARGER OVER THE PAST 15 YEARS
THAN DURING THE PERIOD 1990–2005.
TRADE POLICY RESPONSES TO THE COVID-19 PANDEMIC
ONE OF THE INSTRUMENTS MANY GOVERNMENTS RESORTED TO IN RESPONDING TO THE COVID-
19 PANDEMIC WAS TRADE POLICY
• BARRIERS TO THE IMPORTATION OF MEDICAL PRODUCTS AND SUPPLIES AND
AGRICULTURAL AND FOOD PRODUCTS WERE LOWERED, AND RESTRICTIONS IMPOSED ON
EXPORTS OF SUCH GOODS.

TRADE POLICY CHANGES OVER THE FIRST NINE MONTHS OF THE COVID-19 PANDEMIC:
• THERE WAS A BIG JUMP IN TRADE POLICY ACTIVISM STARTING IN FEBRUARY 2020. THIS
ACCELERATED IN MARCH, WITH THE INITIAL INCREASE OCCURRING IN TANDEM WITH THE RISE IN
THE NUMBER OF COVID-19 CASES. AT THE GLOBAL LEVEL, THERE IS AN APPROXIMATE BALANCE
BETWEEN TEMPORARY AND OPEN-ENDED MEASURES, BUT THERE IS SIGNIFICANT
HETEROGENEITY AT THE REGIONAL/COUNTRY LEVEL.
• MEASURES TARGETING MEDICAL PRODUCTS AND PPE DOMINATE, ACCOUNTING FOR TWO-
THIRDS OF ALL TRADE MEASURES TAKEN. FOOD IS LESS IN FOCUS.
• EXPORT CURBS IN MEDICAL GOODS COVERED INTERNATIONAL TRADE WORTH $135 BILLION (OF
2019 TRADE), WHEREAS IMPORT REFORMS IN THE SAME SECTOR COVERED $165 BILLION. IN THE
CASE OF FOOD AND AGRI-FOOD PRODUCTS, THE COMPARABLE TOTALS ARE $39 BILLION AND
$42 BILLION, RESPECTIVELY.
• COUNTRIES RESPONDED TO THE COVID-19 PANDEMIC WITH DIFFERENT COMBINATIONS
OF EXPORT CONTROLS AND IMPORT LIBERALISATION MEASURES. SOME COUNTRIES
ACTED BOTH ON THE RESTRICTIVE AND LIBERALISING SIDE, CREATING LONG-TERM
CHANGES IN THEIR PRE-COVID TRADE POLICY STRUCTURES FOR THE FOOD AND MEDICAL
SECTORS; OTHER COUNTRIES ACTED ONLY ON ONE SIDE, EITHER RESTRICTING TRADE OR
LIBERALISING IT.
• ALTHOUGH MANY COUNTRIES RESORTED TO TRADE POLICY INSTRUMENTS, IT IS
NOTEWORTHY THAT MANY DID NOT RESORT TO TRADE POLICY TOOLS AT ALL.
• THERE IS ALSO SUBSTANTIAL HETEROGENEITY ACROSS COUNTRIES IN THE TYPES OF TRADE
INSTRUMENTS USED AND THE EXTENT AND SPEED WITH WHICH CRISIS-MOTIVATED TRADE
MEASURES WERE REMOVED.
COVID-19 PANDEMIC MEANT GOVERNMENTS FACED THEIR
SECOND SYSTEMIC ECONOMIC CRISIS IN UNDER 15 YEARS
• OVER 2,000 POLICY INTERVENTIONS WERE TAKEN DURING THE FIRST TEN MONTHS OF 2020.
• STATES MADE DISSIMILAR CHOICES, WITH DIFFERENT REPERCUSSIONS FOR THEIR TRADING
PARTNERS. COLLATERAL DAMAGE WAS NOT INEVITABLE. THE FALLOUT ACROSS NATIONS IN 2020
WAS VERY UNEVEN.

GLOBAL POLICY DYNAMICS AFFECTING CROSS-BORDER COMMERCE

• TRADE DISTORTIONS IMPLEMENTED IN 2020 COVER 13.6% OF WORLD GOODS TRADE. BY
CONTRAST, TRADE REFORMS COVER 8.2%.
• BY 31 OCTOBER 2020, A TOTAL OF 2,031 POLICY INTERVENTIONS AFFECTING INTERNATIONAL
COMMERCE WERE IMPOSED BY GOVERNMENTS AROUND THE WORLD. THAT TOTAL IS UP 74%
OVER THE SAME PERIOD IN 2019 AND 147% HIGHER THAN THE AVERAGE FOR 2015-2017, THE
YEARS BEFORE THE US–CHINA TRADE WAR REALLY KICKED IN.
• ONLY 27% (OR 554) OF THOSE 2,031 POLICY INTERVENTIONS BENEFITED TRADING PARTNERS.
• THIRTY-SEVEN NATIONS SAW THEIR COMMERCIAL INTERESTS BENEFIT FROM 100 OR MORE
REFORMS IN TRADING PARTNERS, WHEREAS 58 NATIONS SAW THEIR INTERESTS HARMED 100
TIMES OR MORE SO FAR THIS YEAR.
• IN 2020, 43 NATIONS SAW 10% OR MORE OF THEIR GOODS EXPORTS FACE WORSE MARKET
ACCESS CONDITIONS. ONLY SEVEN NATIONS SAW 10% OR MORE OF THEIR GOODS EXPORTS
ENJOY BETTER MARKET ACCESS.
• DURING THE FIRST TEN MONTHS OF 2020, 26 NATIONS SAW MORE OF THEIR GOODS EXPORTS
EXPOSED TO BETTER MARKET ACCESS ABROAD THAN WORSE CONDITIONS. FOR THE REST –
OVER 170 ECONOMIES – MORE OF THEIR GOODS EXPORTS FACED IMPAIRED ACCESS TO
FOREIGN MARKETS THAN IMPROVEMENTS.
• OVERALL, POLICY INTERVENTION DURING THE FIRST TEN MONTHS OF THIS YEAR GENERATED A
TOTAL OF 10,546 POSITIVE CROSS-BORDER EFFECTS FOR TRADING PARTNERS. MEANWHILE,
POLICY INDUCED 17,252 NEGATIVE SPILLOVERS.
• A TOTAL OF 110 EXPORT CURBS ON MEDICAL GOODS AND MEDICINES REMAIN IN FORCE; 68
SUCH CURBS HAVE NO PHASE-OUT DATE RAISING THE PROSPECT OF LONG-TERM SCARRING.
• THIS YEAR, 106 NATIONS IMPLEMENTED A TOTAL OF 240 REFORMS TO EASE THE
IMPORTATION OF MEDICAL GOODS AND MEDICINES.

GLOBAL ECONOMIC INEQUALITY (2)

• in 2009 the poorest economies, accounting for 80 per cent of the world’s
population, contributed 24.6 per cent to world GDP.
• By 2019, their share in GDP rose to 33.9 per cent.
• The highest GDP per capita, in nominal terms, was recorded for Luxembourg
(US$113 642), Bermuda (US$104 951), Macao SAR (US$89 284), the Cayman
Islands (US$89 245), and the economy of Switzerland and Liechtenstein
(US$82 243).
• The richest economies, accounting for 66% of the world GDP in 2019, had
only 20% of the world’s population
WHY THERE IS HUGE DIFFERENCE BETWEEN COUNTRIES?
• For about 30 years after World War II trade policies in many developing
countries were strongly influenced by the belief that the key to
economic development was creation of a strong manufacturing sector.
• – The best way to create a strong manufacturing sector was by
protecting domestic manufacturers from international competition.
IMPORT-SUBSTITUTING INDUSTRIALIZATION
• Until the 1970s many developing countries attempted to accelerate their
development by limiting imports of manufactured goods to foster a manufacturing
sector serving the domestic market.
• The most important economic argument for protecting manufacturing industries is
the infant industry argument.
• It states that developing countries have a potential comparative advantage in
manufacturing and they can realize that potential through an initial period of
protection.
• • It implies that it is a good idea to use tariffs or import quotas as temporary
measures to get industrialization started.
• – Example: The U.S. and Germany had high tariff rates on manufacturing in the
19th century, while Japan had extensive import controls until the 1970s
PROBLEMS WITH THE INFANT INDUSTRY ARGUMENT
• It is not always good to try to move today into the industries that will have a
comparative advantage in the future.
• – Example: In the 1980s South Korea became an exporter of automobiles,
whereas in the 1960s its capital and skilled labor were still very scarce.
• Protecting manufacturing does no good unless the protection itself helps
make industry competitive.
• – Example: Pakistan and India have protected their heavy manufacturing
sectors for decades and have recently begun to develop significant exports of
light manufactures like textiles.
MARKET FAILURE JUSTIFICATIONS FOR INFANT INDUSTRY PROTECTION
• • Two market failures are identified as reasons why infant industry protection
may be a good idea:
• – Imperfect capital markets justification
If a developing country does not have a set of financial institutions that would
allow savings from traditional sectors (such as agriculture) to be used to finance
investment in new sectors (such as manufacturing), then growth of new industries
will be restricted.
• – Appropriability argument
Firms in a new industry generate social benefits for which they are not
compensated (e.g. start-up costs of adapting technology).
PROMOTING MANUFACTURING THROUGH PROTECTION
• Import-substituting industrialization
– The strategy of encouraging domestic industry by limiting imports of
manufactured goods
– Many less-developed countries have pursued this strategy.
• Has import-substituting industrialization promoted economic
development?
– Many economists are now harshly critical of the results of import
substitution, arguing that it has fostered highcost, inefficient production.
WHY NOT ENCOURAGE BOTH IMPORT SUBSTITUTION AND
EXPORTS?
– A tariff that reduces imports also necessarily reduces exports.
– Until the 1970s many developing countries were skeptical about the
possibility of exporting manufactured goods.
– In many cases, import-substituting industrialization policies combined
naturally with existing political biases.

RESULTS OF FAVORING MANUFACTURING: PROBLEMS OF

IMPORT-SUBSTITUTING INDUSTRIALIZATION
• Many countries that have pursued import substitution have not shown any signs of
catching up with the advanced countries.
– Example: In India, after 20 years of economic plans between the early 1950s and
the early 1970s, its per capita income was only a few percent higher than before.
Why didn’t import-substituting industrialization work the way it was supposed to?
– The infant industry argument was not as universally valid as many people assumed.
• Import-substituting industrialization generated:
– High rates of effective protection
– Inefficient scale of production
– Higher income inequality and unemployment
DUAL ECONOMY PROBLEMS
• Most developing countries are characterized by economic dualism.
• A high-wage, capital-intensive industrial sector coexists with a lowwage traditional sector.
• Dualism is associated with trade policy for two reasons:
• Dualism is probably a sign of markets working poorly (market failure
case for deviating from free trade).
• The creation of the dual economy (an economy that is characterized
by economic dualism) has been helped by import-substitution policies.
THE SYMPTOMS OF DUALISM
• Development often proceeds unevenly and results in a dual economy
consisting of a modern sector and a traditional sector.
– The modern sector typically differs from the traditional sector in that it has:
– Higher value of output per worker
– Higher wages
– Lower returns to capital
– Higher capital intensity
– Persistent unemployment (especially in urban areas)

DUAL LABOR MARKETS AND TRADE POLICY

• The symptoms of dualism are clear signs of an economy that is not working
well, especially in its labor markets.
• Wage differentials argument
– The wage differences between manufacturing and agriculture is a
justification for encouraging manufacturing at agriculture’s expense.
– When there is a wage differential, the manufactures wage (Wm) must be
higher than the food wage (Wf)
THE HARRIS-TODARO MODEL
• It links rural-urban migration and unemployment that undermines the
case for favoring manufacturing
employment, even though manufacturing does offer higher wages.
– Countries with highly dualistic economies also seem to have a great deal of
urban unemployment.
– An increase in the number of manufacturing jobs will lead to a ruralurban migration so large that
urban unemployment actually rises.
• It helps the wage differentials argument to be in disfavor with economists.
TRADE POLICY AS A CAUSE OF ECONOMIC DUALISM
• Trade policy has been accused both of:
– Widening the wage differential between manufacturing and agriculture
– Fostering excessive capital intensity
• Wage differentials are viewed as:
– A natural market response
– The monopoly power of unions whose industries are sheltered by import
quotas from foreign competition
EXPORT-ORIENTED INDUSTRIALIZATION:
THE EAST ASIAN MIRACLE
• From the mid-1960s onward, exports of manufactured goods, primarily to
advanced nations, was another possible path to industrialization for the
developing countries.
• High performance Asian economies (HPAEs)
• A group of countries that achieved spectacular economic growth.
– In some cases, they achieved economic growth of more than 10% per year.
THE FACTS OF ASIAN GROWTH
• The World Bank’s definition of HPAEs contains three groups of
countries, whose “miracle” began at different times :
– Japan (after World War II)
– The four “tigers”: Hong Kong, Taiwan, South Korea, and Singapore
(in the 1960s)
– Malaysia, Thailand, Indonesia, and China (in the late 1970s and the
1980s)
• The HPAEs are very open to international trade
– Example: In 1999, exports as a share of gross domestic product in
the case of both Hong Kong and Singapore exceeded 100% of GDP (132
and 202 respectively)
TRADE POLICY IN THE HPAES
• Some economists argue that the “East Asian miracle” is the payoff to
the relatively open trade regime.
• – The HPAEs have been less protectionist (24%) than other, less
developing countries, but they have by no means followed a policy of
complete free trade.
• – Low rates of protection in the HPAEs helped them to grow, but they
are only a partial explanation of the “miracle.”
INDUSTRIAL POLICY IN THE HPAES
• Several of the highly successful economies have pursued industrial policies
(from tariffs to government support for research and development) that favor
particular industries over others.
• Most economists have been skeptical about the importance of such policies
because:
– HPAEs have followed a wide variety of policies, but achieved similarly high
growth rates.
– The actual impact on industrial structure may not have been large.
– There have been some notable failures of industrial policy.
OTHER FACTORS IN GROWTH
• Two factors can explain the rapid growth in East Asia:
– High saving rates
– Rapid improvement in public education
• The East Asian experience rejects that:
– Industrialization and development must be based on an inwardlooking strategy of import
substitution.
– The world market is rigged against new entrants, preventing poor
countries from becoming rich.
SUMMARY
• Trade policy in less-developed countries is concerned with two objectives: promoting
industrialization and coping with the uneven development of the domestic economy.
• Government policy to promote industrialization has often been justified by the infant
industry argument.
• Many less-developed countries have pursued policies of import-substituting
industrialization.
• These policies have fostered high-cost, inefficient production.
Most developing countries are characterized by economic dualism.
• Dual economies have a serious problem of urban unemployment.
The difference in wages between the modern and traditional sectors have sometimes been
used as a case for tariff protection of the industrial sector.
The HPAEs have industrialized not via import substitution but via exports of manufactured
goods.

General overview
• the increase in bilateral tariffs between the United States and China;
• Generally tariffs have remained substantially stable during the last few
years with tariff protection remaining a critical factor only in certain sectors
in a limited number of markets.
• the use of regulatory measures and other non-tariff measures remains
widespread.
ARIFFS
• Tariffs have remained essentially stable between 2010 and 2019.
• The notable exception is the rise in tariffs for 2019 mostly due to the
retaliatory tariffs between the United States and China.
• More broadly, import restrictiveness remains relatively higher in developing
countries, especially in South Asia and sub-Saharan Africa. Tariffs have been
increasing for the region comprising West Asia and North Africa.
• Exporters in East and South Asia face the highest tariffs. The 2019 increase
in tariffs faced by East Asian exports is largely due to the United States
tariffs on China.
Tariffs evolution by categories
• Since 2010, tariffs have somewhat declined, but mostly on a preferential basis.
• The tariffs imposed on agricultural products remain higher without significant
changes in MFN rates, but have declined by about 2 points under preferential trade
agreements.
• Similarly, preferential tariffs on manufacturing have declines at a faster pace than
MFN tariff.
• Still, weighted averages tariffs have in some instances increased indicating an
increase in tariffs between major trading nations.
• Overall tariff escalation is more pervasive in manufacturing products than
in agriculture.
• The tariff structure of countries in East Asia, West Asia and North Africa is
not escalating in the agricultural sector.
• Tariff escalation is prevalent in most sectors, including those of importance
to developing countries: apparel, animal products, tanning and many
light manufacturing sectors.
• Some notable exceptions are motor vehicles and office machineries
where intermediate inputs face a higher tariff relative to finished products.
Role of Trade Agreements in IT
• The international trading system is regulated by an increasing number of preferential
trade agreements (PTAs).
• Most of the recent trade agreements address not only goods but also services, and deal
with rules beyond reciprocal tariff concessions.
• The percentage of trade within PTAs has continued to increase. Although last few years
saw only marginal increases.
• In 2019, more than 50 per cent of world trade was taking place between countries that
had signed a PTA, and one third was regulated by deep trade agreements.