Global Value Chains and EU trade policy

Phoebe Weller // 15 May 2017

Earlier this year, the EU’s Trade Commissioner Cecilia Malmström spoke in Brussels about the various challenges facing EU trade policy in 2017. Talking Trump, Brexit, and development, Malmström’s speech was underpinned by a stirring defence of globalisation, and a commitment to maintaining the EU’s role in promoting ‘fair’ and ‘transparent’ trade in line with its core values, both at home and abroad.

 

In recent years, a ‘retreat’ from globalisation has raised concerns for the EU and its free trade agenda. A recent index produced by EPICENTER partner organisation, Istituto Bruno Leoni, has charted this withdrawal, and indicated some of its consequences for the internationalisation of global trade. Following Donald Trump’s decision to pull out of TPP (and probably TTIP, too), it would seem as though this trend towards ‘de-globalisation’ and re-nationalisation is set to continue. All of this, however, raises problems for the EU as the largest player on the global trading scene, and the international champion of free-trade.

 

Since the turn of the century, global trade has undergone dramatic change, expanding to include new economies and an ever-widening range of transactions and processes. Increasingly, international trade is fragmented along Global Value Chains (GVCs) – where services, materials, components and skills are exchanged across national borders before being incorporated into final products (OECD, 2015). With ever-more linkages, producers in GVCs purchase input, before ‘adding value’ to goods or services, which are then passed on to the next stage of production. These complex chains have grown to include a wide range of ‘upstream’ and ‘downstream’ actors, and are now largely dominated by the actions and decisions of multinational corporations and global firms. Countries that predominantly produce raw materials, such as Australia and Brazil, are further ‘upstream’; whereas those that focus on constructing and processing products, including South Korea and numerous Central and Eastern European countries, are further ‘downstream’ (ECB 2013). Unsurprisingly, the countries and firms engaged in the various stages of GVCs perform different value-adding processes, each of which raise diverse and complex challenges.

 

GVCs play a central role in cross-border trade, as 50% of trade in goods now takes place in intermediaries, that is, countries or firms involved in the trade processes preceding the export of final products. According to the OECD, three quarters of global trade is now fuelled by firms buying inputs and investment goods and services that contribute in some way to the production process (OECD 2015). This international fragmentation is re-shaping the world economy, changing the nature of free-trade and providing new prospects for growth, development and jobs.

 

Driven by multinational corporations, these chains of ‘value-adding’ processes provide opportunities for developing countries to enter into a global economy. Value-added trade contributes about 30% to the GDP of developing countries – significantly more than in developed countries (18%). Furthermore, the level of participation in GVCs is associated with stronger levels of GDP per capita growth – indicating the role of value-chains in enhancing productive capacity and opportunities for development (UNCTAD 2013). At the same time, however, the impact of GVCs has been marred by concerns over their lack of transparency, and the risks they present for human rights violations and disregard for social, fiscal and environmental regulations (EU 2017).

 

Within this transformed trade environment, the EU Parliament is currently considering new recommendations relating to their role in managing GVCs. Last month, a report by S&D MEP Maria Arena detailed a number of suggestions of ways that the EU could address the challenges posed by GVCs, and lead the way in shaping the debate over international trade. In particular, this report called for the inclusion of ‘binding and enforceable’ sustainable development chapters in all trade agreements, building on international agreements and standards for environmental, labour and social regulations. Alongside the introduction of independent monitoring bodies, the recommendations suggested that more prominence be given to promoting corporate social responsibility, with cooperation mechanisms in place to combat illicit financial flows and tax evasion by multinational firms (EU 2017).

 

These standards and regulations are indisputably important – in an environment of increasingly complex trading relationships, and as the world’s leading trade-bloc, the EU should continue to use its global influence in reducing the scope for exploitation, and labour, social or environmental corruption as a result of trade. This is not to say that corporations must move out of developing countries – in many cases, these firms provide people with safe and stable jobs, and can act as a safety-net against more dangerous occupations. Rather, as Malmström highlighted in her speech, it is to say that a commitment to free-trade need not always mean the toleration of unfair practices. Trade and development can be mutually sustainable; and the EU has also a responsibility to promote high standards of protection in areas of consumer safety, health and climate change.

 

At the same time, the implementation of these recommendations may also present the EU with a number of possible complications for the conclusion of future free-trade agreements. The complexity and heterogeneity of quality standards has proven to be one of the main barriers to their introduction into GVCs, particularly for small and medium-sized firms who struggle to make the necessary changes (OECD 2015). For example, in agro-food GVCs, the need to meet private and international standards has been identified as one of the main obstacles to firms participating in GVCs. As a 2015 report by the OECD emphasises, the EU would do well to focus on enhancing regulatory cooperation, including certification requirements and mutual recognition agreements, to ‘alleviate the burden of compliance’, and allow small-scale enterprises to compete within GVCs.

 

This is not to say that the EU should remove its sustainable development chapters, or lessen its commitment to the promotion of corporate social responsibility – rather, that a higher degree of differentiation between trading partners would allow the EU to pursue customised agreements less-likely to run into hurdles and delays. For example, the inclusion of binding environmental or human-rights regulation in trade agreements is likely to frustrate some of the EU’s more developed trading partners, including Australia, New Zealand and the United States – each of which have possible FTAs with the EU in the pipeline. Ms Arena’s report to the European Parliament fails to properly account for this, suggesting a blanket introduction of new regulations and standards.

 

Looking forward, it will be difficult for the EU to account for all of its trading partnerships within the same regulatory framework. Given the deepening complexity of GVCs, and the ever-increasing number of actors, processes and exchanges involved in trading relationships, a ‘catch-all’ approach may prove ineffective. The inclusion of environmental standards in trade agreements are increasingly important in promoting sustainable accountability, particularly for multinational corporations and firms. The same standards, however, may prove a sticking-point in negotiations with some of the EU’s largest trading partner-countries. In addressing the challenges of GVCs and the internationalisation of trade, a more nuanced approach that accounts for the differences between ‘upstream’ and ‘downstream’ actors would allow the EU to maintain its leading role in promoting transparent and fair trade, while retaining a firm commitment to advancing global free-trade.

 

 

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