MADE IN THE WORLD
Value added trade, global value chains, and trade policy: renewed push for trade liberalization.
By Yildirim Aydin, Researcher, University of Antwerp (Centre for Institutions and Multilevel Politics), Belgium
The emergence of global value chains fueled by the ever-increasing nature of fragmentation of production in world trade led to a complex set of causes and consequences. Indeed, the intricacies of long supply chains and their impact on economic, political, and social world have been garnering academic attention for a long while. However, with the additional data we have today — thanks to initiatives such as the OECD and WTO partnered World Trade Tables as well as World Input Output Database — fascinating results have been realized. The current trends in political economic research have been able identify the impact of GVCs and the importance of intermediate consumption on trade policy preferences of nations. This background paper is aimed at outlining these findings with the hopes of disseminating our yet-to-be-exhausted knowledge on the implications of growing value added trade and the expansion of GVCs. Overall, we can see that the overwhelming increase of integration to GVCs contribute positively to trade liberalization in a several interlinked ways.
So what are the consequences of global value chains in trade policy terms and how do they increase trade liberalization? The importance of this strand of research highlights the core political values of World Trade Organization. Little would argue against that the WTO, and its crown jewel Dispute Settlement Mechanism (DSM) both operate with an underlying political foundation — in addition to economic and legal ones1. Political preferences of member states shape the outcome of the treaties, and their preferences also affect the outcome of dispute settlement negotiations and compliance. From this perspective, the academic enterprise has been focusing on explaining resistance to trade liberalization and resistance to compliance with DSM rulings2.
At the core of this research in understanding trade policy and trade liberalization, we find the impact of GVCs in two interrelated ways. Firstly, integration to GVCs increases the demand for trade liberalization of firms and industries while lowering demand for trade protection. Firm engagement in vertical integration or arm’s length trade leads to a higher dependence on intermediate products. Whether firms are export-oriented or import-competing, fragmentation of production creates a direct dependency to imports and exports of intermediate products. Therefore, demands for traditional measures of trade protection decreases. This potential relationship has recently been substantiated as firms with high integration to GVCs have been found to use relatively less anti-dumping petitions. Amongst the most productive US firms, the ones that use more intermediate products and the ones that are more integrated to GVCs have been filing anti-dumping applications less than their counterparts3. This corroborates the point that trade protectionism is no longer a viable option as firms integrate to global supply chains.
Secondly, the impact of integration to GVCs is also apparent at the dispute settlement mechanism of the WTO. As the complainants and defendants proceed through a trial, it is no secret their preferences are shaped by the domestic interests that brought the cases into the attention of the delegates in the first place4. Firms and industries are heavily involved in disputes both during preparation, consultations, and during the panel proceedings. Besides the economic or legal merits of a dispute, political preferences of member states do impact the outcome of disputes5. At this stage, we see the importance of GVCs as they shape the interests of firms (and industries). Since member states during disputes “listen” to their constituencies, the dispute that involve industries or firms that are highly integrated to GVCs tend to result in more timely and full compliance without problems6. In other words, GVC integration has a potential to shape industrial preferences towards compliance which removes trade barriers and benefit the firms that use high amounts of intermediate products. Conclusively, high integration GVCs seems to have the capacity to reignite firms’ preferences towards less trade protection, which is apparent during dispute settlement cases where firms integrated to GVCs are less likely to voice resistance to compliance.
In trade policy terms, states follow economic actors (firms and industries) and their collective demands7. For instance, in the EU or the US, the interest groups representing various industries make their preferences to the Commission or the USTR, which follow various constituencies’ demands in either pushing for more trade liberalization or using trade defense instruments. With the increase in global value chains, the expansion of fragmentation of production is leading all the industries towards less protection and more liberalization. This demand is subsequently translates into policies that favor liberalization rather than protection.
We have been witnessing the incredible advancement of global supply chains, and with the newly-established databases that provide additional information, we can see that the impact of the increasing reliance on intermediate products lead firms and industries to favor trade liberalization. The academic enterprise dealing with political economy can observe that the firms highly integrated to GVCs resort to less trade protection measures and the disputes that deal with highly integrated industries favor more timely and full compliance. The studies on the impact of these networks are preliminary and growing day by day. Therefore, although we still know little about the implications of GVCs, with our foot in the door, the future studies will be able to understand better how GVCs shape international trade dynamics. It is clear that the impact of value added trade is not simply on the distributional dimension of economic resources, but also on the larger reality of trade policy, which leads to a whole new set of possible avenues of research in understanding our globalized world.
1.Hudec, R. (2000) 'Broadening the Scope of Remedies in WTO Dispute Settlement' in: Improving WTO Dispute Settlement Procedures Issues and Lessons from the Practice of Other International Courts and Tribunals, ed. by Friedl Weiss, London: Cameron May.Back to text
2. Zangl, B. (2008) 'Judicialization Matters! A Comparison of Dispute Settlement Under GATT and the WTO', International Studies Quarterly, 52(4): 825-854. See also, Spilker, G. (2012) 'Compliance with WTO Dispute Rulings', Swiss National Centre of Competence in Research Working Paper, http://www.nccr-trade.org/publication/compliance-with-wto-dispute-rulings/ Back to text
3. Jensen, B., Quinn, D., and Weymouth, S. (2013) “Global Supply Chains, Currency Undervaluation, and Firm Protectionist Demands”. National Bureau of Economic Research, http://www.nber.org/papers/w19239. See also, Baccini, Pinto, and Weymouth. (2014) “International Economic Agreements and the Activities of Heterogenous Multinational Firms” Paper presented at the ECPR General Conference, Glasgow, UK.Back to text
4. Poletti, A. and De Bièvre, D. (2014) 'Political mobilization, veto players, and WTO litigation: explaining European Union responses in trade disputes', Journal of European Public Policy, (June), pp.1–18 Back to text
5. Sattler, T., Bernauer, T. (2011) 'Gravitation or Discrimination? Determinants of litigation at the World Trade Organization', European Journal of Political Research, 50 (2), 143-167.Back to text
6. Yildirim, A. (2014) ‘Determinants of Compliance at the WTO: The case of the EU”. Paper presented at the ECPR General Conference, Glasgow, UK. Back to text
7. Ludema, R. D., Mayda, A. M., and Mishra, P. (2010) “Protection for Free?: The Political Economy of US Tariff Suspensions”. Centre for Economic Policy Research. Back to text