Strengthening the multilateral trading system
Global Value Chains: Development Challenges and Policy Options Sherry Stephenson
Draft Policy Options for the E15 Expert Group on Global Value Chains
Draft version, not for citation
DRAFT POLICY OPTIONS E15 Expert Group on Global Value Chains 6 June 2013
The E15 Expert Group on Global Value Chains has considered the numerous ways in which GVCs have changed the international trading system as well as the role and incentives of actors within it. Discussion in the Group has revolved around several aspects of GVCs, including the drivers of GVCs, the regional nature of GVCs and the way that rules of origin in preferential trading agreements have influenced the pattern of trade through GVCs, the importance of logistics costs and trade facilitation in the operation of GVCs, the role of services in GVCs, deriving benefits from GVCs, spillovers from GVCs, the appropriateness of industrial policy with regard to GVCs and the evolution of the WTO in the context of GVCs (see summary report of the group in date of March 2013). The group has reflected on these many aspects and has been tasked in particular to examine the relevance of the WTO in the advent of GVCs. It has considered how both existing trade rules, as well as the possible development of a new, broader framework for WTO action could be important for adapting and maintaining relevance in a world of GVCs. A summary of the reflections of the Expert Group on three key issues related to the WTO and GVCs is followed by a set of proposed Policy Options. With regard to the WTO, three key issues framed the discussion, namely: How can the WTO be relevant in a new trading world of Global Value Chains? What can the WTO do, if anything, to make GVC operations truly global and to help all its Members to benefit? What is the role for multilateral trade negotiations, in any, under the WTO in light of GVCs? Issue 1: How can the WTO be relevant in a new trading world of Global Value Chains? Viewpoint 1: The WTO is basically not very relevant in a world of GVCs. o o o
Most of the GVC agenda is a domestic, not a multilateral one The WTO relies on a normative framework (with disciplines in silos) and on an incentive structure that are incompatible with the way GVCs operate The WTO is at present only an inter-governmental mechanism, whereas GVCs involve many other key players, particularly the private sector; to make the WTO more relevant in the current context, private sector involvement would be necessary There are existing structures/organizations available already to deal with GVCs
Viewpoint 2: WTO and trade policy are relevant and can do some useful things; but existing WTO structures/rules could and should be used better. Trade instruments do not need to be radically changed but new approaches are required. 1
Regional agreements have on the whole not done better than the WTO in dealing with GVCs; they have demonstrated the same lackings Changes to WTO architecture take forever to occur, so it is useful to start from the existing architecture and examine what role current WTO rules can play and the implications of GVCs for each of the WTO’s main areas; WTO has roles in tariff reduction, non-tariff measures, and services liberalization that could be better targeted to help the smooth functioning of GVCs The WTO and other international institutions should be called upon and used according to their comparative advantage
Viewpoint 3: The WTO is somewhat relevant in a world of GVCs, but its scope needs expanding. o o
o o o
The “bundling” approach is useful; many of the issues need to be examined together in a holistic manner that facilitate the operations of firms within GVCs Some areas are very important for GVCs that are currently not covered by WTO e.g. investment & competition policy; these could be the focus of plurilateral agreements which would complement the current core disciplines Improving existing WTO structures and adopting a “bundling” approach are not necessarily alternatives or mutually exclusive; they can be used simultaneously WTO can be used to promote better understanding of GVC operation and related issues WTO research could identify distributional effects of GVCs: do large firms derive most of the benefits? (evidence suggests that all countries benefit from GVCs; this would be a strong message to get across)
Note: Other institutions can also be brought into this agenda, according to their relevance; the issues in question must be identified, the nature of the problem determined, and then the decision made as to which institution is best placed to address it; rules may only be a small part of the picture. This argues for an interinstitutional Task Force on GVCs involving not only the WTO but also the international financial institutions, multilateral development institutions, as well as the World Customs Organization, among others.
Issue 2: What can the WTO do, if anything, to make GVC operations truly global and to help all its Members to benefit? Viewpoint 1: WTO does not have much of a role in helping the gains from GVCs to be distributed more equitably. o
Some countries will always have more problems than others because of their geography and distance from major centers of demand and because of scale problems (although with services, scale issues are less important) Domestic factors are those that determine countries’ ability to participate in GVCs 2
Role of WTO is to provide a framework for good and fair governance in trading system
Viewpoint 2: Aid for Trade, with WTO involvement, can make a difference in helping countries to participate in GVCs and thus to distribute the gains more equitably. o
Aid for Trade discussions are shining a spotlight on the needs for directing trade assistance to needed areas; several things could be done in this regard to improve participation of small holders and SMEs in operation of GVCs WTO involvement is essential for identifying the trade components of GVCs that could be improved with proper targeted assistance
Viewpoint 3: WTO research and advocacy could shed useful transparency on GVC issues o o
WTO architecture & influence could be brought to play to encourage participation from private sector and civil society in discussion of GVCs. This does not have to be under hard laws; instead, a form of committee or advisory council can be useful to facilitate cooperation (e.g. APEC Business Advisory Council (ABAC) or the Transatlantic Business Dialogue between EU and US) WTO could also develop and/or improve useful measurement tools to analyze and compare non-tariff measures and trade barriers between countries that affect the operation of GVCs WTO could research the distributional impact of GVC, so that participants in GVC can be aware of their potential benefits
Issue 3: What is the role for multilateral trade negotiations, in any, under the WTO in light of Global Value Chains? o o
WTOâ€™s emphasis on rules and hard laws make it an unwieldy institution for the discussion of many aspects of GVCs; not everything can be negotiated For the completion of the Doha Round or for the next round of multilateral trade negotiations, a â€œvalue chainâ€? approach should be adopted. For example, take one sector such as agribusiness and follow it through from start to finish in terms of the value chain. In each case, tariffs, services and trade facilitation should all be negotiated together. The convergence of these areas would provide cross-cutting advantages. In any future multilateral trade negotiation, there should be a mechanism whereby the private sector can participate and interact with trade negotiators.
Suggested Policy Options for the WTO in light of GVCs In light of the above considerations, the following policy options are considered to be pertinent by the members of the E15 Expert Group so as to enhance the role of the WTO, as well as to facilitate the operation of Global Value Chains in the 21st century international trading system.
1. Actions the WTO could take under its current framework and set of rules in the short to medium-term 3
Conclude an ambitious Trade Facilitation Agreement, to be endorsed by Trade Ministers at the Bali MC9, to raise the efficiency of border crossings. Streamlining administrative procedures at the border can help WTO Members and firms, including especially SMEs, reap the full benefits of GVCs and better insert themselves more meaningfully in them. A Trade Facilitation Agreement could reduce trade costs by an estimated 10% in OECD countries and significantly more in developing countries. Reach a GVC-inspired tariff cutting deal under NAMA, with zero tariffs and open market access for intermediate goods imports. It is critical to avoid the magnification of the costs of tariff protection as goods cross the border several times during GVC operations, thus magnifying the punitive effect of tariffs. Reach agreement on ‘de minimus’ of $1,000 for all WTO Member with regard to the imposition of customs duties. Raising the amount of ‘de minimus’ would serve to lower the administrative costs of inspecting and processing customs shipments and would favor the participation of SMEs in GVCs.
Promote the liberalization of a GVC-related services cluster in the context of the negotiation of the agreement on trade in services. Numerous service activities are required to move goods and coordinate production along the value chain and GVCs cannot operate without well-functioning transport (all modes), logistics, finance, communication, distribution and other business and professional services. Liberalization of service inputs are also critical to better overall allocative efficiency, whether in extractive industries, agriculture, fisheries, manufacturing or other services. Advocate for a change of focus in the way that trade is understood. The WTO can play a bigger advocacy role in helping trade officials and the general public to understand better the functioning of GVCs through more publications, inclusion of new concepts in international trade in training programs, and the expansion and improvement of the useful new value-added data base on trade in services.
Make GVC-related trade capacity building a permanent central component of Aid for Trade. The Aid-For-Trade agenda should be refocused, so as to prioritize discussions of needed assistance in terms of the functioning of GVCs and how best to provide support to countries to better participate in these processes, such as assistance with establishing single windows, reducing compliance costs, etc.
2. Actions the WTO could take that would involve changing or expanding its mandate in the medium to longer term Incorporate some elements of “soft law” into WTO work relevant to GVCs through the development of new or improvement of comparative indicators on NTBs and trade facilitation that are useful in a world of GVCs. Such indicators could show how countries are doing on a comparative basis and foster a discussion of relevant policies on a regular basis. Incorporate these indicators into annual WTO publications and place item on the agenda of the General Council. Frame the discussion in terms of “best practices”. Establish a working group on investment to explore a possible multilateral agreement on investment in order to foster participation in and operation of GVCs. A Working Group on Investment would be a useful vehicle to discuss new approaches and possible rules required in the area of investment which is the key driver of GVCs and currently lack a common multilateral framework of rules. Establish a working group to examine how to incorporate more contract law into the WTO context in a trade-facilitating way for business. Explore ways for the WTO or/ Mandate the WTO Director General / to collaborate with the World Bank and other international finance and development institutions in order to support Members’ in their needs for greater participation in GVCs. This would involve the joint consideration of trade and development needs in the GVC context in the design of Aid-for-Trade assistance programs, with respective institutions providing support in their areas of expertise. Create a Business Advisory Council for the WTO and institutionalize dialogue with, and involvement of, the private sector in the WTO. Dialogue with the private sector should take place within the WTO purview; this process should be institutionalized so that a critical business voice can be incorporated into the GVC discussion in the WTO. Such private sector involvement must be both substantive and technical. Examples of institutionalized participation of the private sector in other organizations include the APEC Business Advisory Council, the ___ at the OECD, and the Transatlantic Business Dialogue in support of EU-US government discussions on trade. Host a "Supply Chain Summit". Such a Summit, organized by the WTO, would bring together all stakeholders to agree on the components of trade policy that would be relevant for facilitating the operation of GVCs. New negotiations would then be launched on the "whole of the supply" chain that would incorporate GVC-relevant issues of trade facilitation, tariffs, investment, services, etc. –