Unit 2, Lecture 3 - The Evolution of Global Trade Rules
Older trade rules protected latecomers of industrialization against the 1st movers … allowed a nation to catch up behind protective walls. Of course the 1st movers who are more competitive want those tariffs down. The developing country used to be able to stipulate certain conditions … US and other rich nations and corporation were able to lower the tariffs while increasing protection for themselves.
How to protect 1st movers? IPRs, lowering of tariffs, special export zones, etc.
Non-tariff barriers? Technical standards but also public service (funded by the state, by tax payers). Difficult for corporations to compete with the public service. New int’l trade agreements are ever more limiting the scope of nations to have a public sector
Many times GSCs are presented as “only choice” to diversify economies … increase manufacturing capability. Possible to get stuck at a low end of a GSC … doesn’t get any of the linkage benefit or knowledge for further industrialization.
Many trade agreements actually work against their ability to raise their value added and do an effective diversification
4 ways they do this:
- increase competition in the production phase. All production economies are in competition. competition is encouraged by forcing the reduction of costs in their own economies
- monopoly power – concentrate the pre-production and post production phases in the Global North (marketing / branding retained in the North) gain more monopoly power b/c of intellectual property rights … further reinforced by regional agreements
- Protection to investors: tie the hands of government to regulate investment…increasing bargaining power of investors via the state and workers
- No protection of workers in outsourced activities … MNCs effectively have no responsibility over workers in their supply chains
Competition, investment and intellectual property right are not sufficiently addressed at the multilateral level from a global value chains perspective … lack of institutions, regulations and mechanisms to deal with such “behind-the-border” issues.
Preferential trade agreements (PTA) include commitments that go further than trade rules set by the WTO. Address the consequent need for reforming behind-the-border regulations. Address the following: labor standards, environmental protection, etc.
PTAs eliminate trade barriers and also associated with increased FDI and trading activity but also regarded as restricting policy-makers in their choice of support policies for development. PTAs encourage further integration by eliminating tariffs and non-tariff barriers to trade and investment.
Fragmentation of production processes along the value chain or ‘vertical specialization’ has led to trade in final goods being increasingly substituted by ‘trade in tasks’. Countries no longer need to be competitive in the production of final goods but rather in certain tasks involved in the production process.
What matters is not only participation in GVCs but the extent of the value created in the export-related economy that effectively contributes to domestic job creation and growth.
Productivity growth -- > narrows technology gap between host and source country and domestic wages increase eroding the country’s comparative advantage. Developing countries risk being caught in a “middle-income trap” or “imitation trap”.
A country that wants to participate in GVCs and improve its position in them will have to look beyond traditional trade policy. It must also address “behind-the-border” issues that affect its attractiveness as part of these chains.
“the missing piece in the GVC debate” – tradeoffs between deep integration and developmental space in relation to PTAs (link between GVCs and PTAs)
The growth in global value chain trade and the proliferation of deep preferential trade agreements are highly interconnected.
The design of deep PTAs is likely to improve participation in GVCs and increase trade flows for the singing parties by eliminating tariffs and non-tariff barriers to trade. In particular, developing countries with a weaker domestic regulatory environment can benefit from deep provisions in PTAs bolstering insufficient domestic regulations.
Participating in GVCs - Mere participation in GVCs does not imply a positive aspect for a country’s economic development prospects. GVC participation alone could lock developing countries in low valued-added segments, i.e. induce ‘thin’ industrialization
Capturing value in GVCs – domestic economic policies largely determine which position countries occupy in GVCs and thus what value they are able to create and capture
Retaining autonomy over domestic policy decisions – PTAs intensify the developmental trade-off between market access and policy space. PTA is likely to reduce the range of policy instruments available to developing countries for supporting their development strategies. Signing a PTA to promote participation in GVCs may come at the cost of domestic policy autonomy.
PTA Chapters – Effects on Developing Economies :
Elimination of tariffs – the concept behind this is that to get access to developed countries markets, developing countries also have to reduce their tariffs. 2 major potential negative effects: developing country will no longer have the opportunity to keep tariffs high in order to protect infant industries until they become competitive enough for the world market. Also elimination of tariffs = lost of tariff revenue. Lost $ to use to promote economic development i.e. public investments.
Services trade – services constitute a large share of valued added in the final product. being competitive in GVCs implies that all inputs must be sourced at the lowest price
Investment and trade-related investment measures – contribute to GVC participation by attracting foreign investors, helps countries with weak domestic regulatory environments that scare potential investors. Negative effect: foreign firms can sue the state before int’l arbitration tribunal if it feels provisions have been violated. Risk that developing countries refrain from making policies that increase social, health or environmental standards in order to avoid being sued (i.e. ‘regulatory chill’)
Standards – PTAs facilitate common standards upfront, which can reduce coordination costs and grant the signing partners a competitive advantage
Public procurement – commonly targets industrial development i.e. the promotion of small and medium enterprises as well as state-owned enterprises. Signing PTAs with restrictions on public procurement deprives developing countries the opportunity to use this means of support industrial development and attempting to increase domestic value capture
Competition – could restrict their choices of domestic policy instruments (i.e. limiting competition in order to strengthen domestic firms and protect infant industries)
Intellectual Property Rights (IPRs) – strong IPRs restrict developing countries in copying and adapting technology-intensive products … hinders domestic firms’ ability to produce at a higher valued-added segment of the value chain