Trade and investment policy in the context of global value chains

With the rising importance of global value chains international trade is increasingly characterised by comparative advantages in specific stages of the production process (“trade in tasks”). For many developing countries, this fragmentation of the production process has facilitated their integration into the international trading system. By providing better access to networks, capital, technology, knowledge, technology and markets, participation in global value chains has the potential to act as a catalyst for economic development.

But new opportunities also bring new challenges. Many developing countries access global value chains by first specialising in low value segments of the chain. Increasing domestic value capture in order to create jobs and growth remains a key challenge. Accordingly, it can prove useful to accompany integration into global value chains with strategic trade and investment policy.

When doing so, the effects of traditional policy instruments need to be thoroughly reassessed. In the context of global value chains, price-distorting barriers to trade such as import tariffs come with higher costs for intermediate inputs in downstream production stages. Hence, they can easily erode a country’s comparative advantage and jeopardise their participation in global value chains. Whether or not such policy measures should be applied therefore requires careful consideration.

Against this background, many countries opt to undertake extensive liberalisation processes – either unilaterally or via deep preferential trade agreements. On the one hand, these measures may reinforce a country’s comparative advantage and attractiveness for foreign investors. On the other hand, they can lead to a reduction of policy space which is needed to enact accompanying policies in line with national development strategies.

In the context of this project the following questions will be addressed: How do selected trade and investment policy instruments affect participation in global value chains? Are they successful in increasing the domestic share of value added in international trade? To what extent do liberalisation processes and development objectives stand in conflict?