Global value chains: From fruitful discussions to meaningful actions

08/12/2021

Global Value Chains (GVCs) are critical topic of discussion these days. Discover some insights on how we can improve the GVC outlook in the coming months.

Global value chains (GVCs) have been at the center of attention in both business and policy spheres around the globe for the past two years. Disruptions created in GVCs as a result of operational inefficiencies were only magnified by the COVID-19 pandemic. The discussions happening worldwide on the relevance of GVCs have allowed us to see how closely the world is interconnected via GVCs and how quickly local events can become a global matter, resulting in thousands of SMEs getting pushed out of business.

Global value chains have a critical role in the world economy and in our daily lives, representing more than two-thirds of global trade, providing essential products and services, and supporting jobs across a diversity of economic sectors ranging from agricultural and natural resources to traditional and high-tech manufacturing and a vast and diverse list of services.

While the ongoing discussions on GVCs have produced worthwhile conversations by creating more awareness and a better understanding of their relevance, we cannot deny that these discussions are not enough to remedy future disruptions that might happen as a consequence of new contingencies. Nor can they support efforts to build more resilient value chains after COVID-19.

The ongoing discussions that have occurred over the last two years are promising, but tangible actions are missing. So, what can we do to guarantee the proper functioning of global value chains and to build the desired resilience? What should we do to avoid the shortage of essential products and services for the benefit of all? What has to be done to pave the way for SME success in GVCs? How can we make GVCs more inclusive to underrepresented groups such as businesses led by women, youth, and indigenous people? How do we support the shift that GVCs are experiencing from operating under traditional business models to innovative and digital ones? Even though there are no simple answers to these complex questions, there are a few actions that can bring us closer to the goal of achieving resilient and sustainable supply chains.

global value chain

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Below are three proposals that could push us from fruitful discussions on supply chains toward meaningful actions:

1) Private and public sectors should work together 

To minimize or avoid future disruptions, input and coordinated efforts from all the participants and stakeholders of GVCs are imperative. Two key players in this process are the members from private and public sectors who have been very active in GVC discussions since the pandemic arose. Both have shown a strong commitment and determination to support effective and efficient vaccine production and distribution worldwide and have guaranteed access to essentials for all—which are a precondition for inclusive and strong global supply chains.

The actions that could be implemented as a result of the synergies built between private and public sectors are certainly diverse, but one that could be particularly useful is working together to predict future shocks and prepare for them.

International organizations, such as the OECD, have suggested that governments and companies should apply stress tests at the GVC level for ensuring that essentials can be supplied when disruptive events happen.

Both companies and governments may be interested in these findings via the implementation of these stress tests, as they would highlight the blockages, gaps, and fragile links in the GVCs when facing crisis scenarios. Testing the systems would allow greater visibility of any concerns across the entire supply chain. 

In addition, trade experts, policymakers, scholars, business people, and leaders from private and public sectors need to work collectively to design formal mechanisms for sharing information among them. This will create and produce available dedicated platforms where participants and stakeholders can find relevant GVC data to revise statistics and define new metrics that respond better to GVC dynamics and the decision-making process.

Private and public sector members must move quickly and take the issues of GVCs seriously. They need to learn what has worked well and what can be improved while working collaboratively to avoid repeating the same mistakes. Research from the McKinsey Global Institute (MGI) found that disruptions are occurring more frequently than we think and that these have a costly price for companies. The MGI study also points out that manufacturing companies can expect to see their production disrupted for two weeks every two years on average and that, over the course of a decade, these companies can expect to lose nearly forty percent of their earnings in one year due to these interruptions.

The call for action for private and public sector members to collaborate is real and necessary. It will put all their expertise and knowledge on the ground, starting with the implementation of stress tests, followed by the use of the results to define risk management strategies and provide financial and technical assistance for GVCs participants. GVCs may continue being powerful engines for growth and development, but they require coordination and collective actions between the private and public sectors.

2) Promote free and open markets for GVC resilience

It was reasonable that national governments closed their borders during the first stage of the Covid-19 pandemic to protect their people. We were facing a health emergency that we did not know how to address and contain, and so, a logical solution was to restrict the movement of people and goods across borders. However, the closure of borders alongside government measures taken to tackle the COVID-19 pandemic have seriously affected GVC operations. Unsurprisingly, they’ve had an overall negative impact on trade and investments worldwide, with The Global Trade Alert Report finding that, from the policy interventions made, 170 countries experienced their merchandise exports facing their worst market-access scenario abroad in 2020, whereas only 26 economies actually saw improved market access. The same report added that policy measures implemented around the globe represented 17,252 negative spillover effects.

It must be highlighted that global trade was not the cause of the COVID-19 pandemic, but the interconnected commercial networks among nations meant that policy responses of one government had mostly adverse effects on their trading partners. Every nation has the right to design its own trade policy according to its own economic reality, but closing borders and isolation are not the solutions.

Public policies that aim to unwind trade integration and re-shore production are harmful strategies that will have a negative impact on domestic companies. They increase fragility to local disruptions with no option to implement diversification strategies through international markets.

GVC resilience should not be seen as simply a domestic matter, but as regional and international matters that need to be addressed in collaboration with like-minded countries.

Thus, it is indispensable to promote free, open, and inclusive markets as a basic element to create resilience and sustainability in supply chains. Lowering and eliminating barriers to trade can help companies diversify markets by maximizing sourcing opportunities, easing access to new markets, and reducing risk exposure. Likewise, revising rules on Foreign Direct Investment (FDI) should be considered as a fundamental element for strengthening GVC performance.

A particular consideration that governments must assess is the strategic role that multinational enterprises (MNEs) play in global supply chains. MNEs are key drivers in GVCs, investing in trading inputs and outputs, investing in productive assets wherever needed, and integrating and working with SMEs across supply chains. The actions to open markets are diverse, from standardizing and digitizing customs processes, reducing the cost of cross-border trade, and working on the permanent removal of import tariffs and export restrictions on essential products and services to the establishment of predictable rules on investments and the elimination of barriers to the movement of businesspeople and essential workers.

3) Boost cooperation at the regional and multilateral level

As countries continue to navigate paths towards recovering from the effects of the global pandemic, it must be recognized that cooperation among governments and companies is instrumental in improving resilience to shocks in supply chains for three main reasons:

First, it can support diversification efforts by articulating regulations across different nations that mean access to new markets, which, otherwise, local companies would not have access to.

Second, collaboration among nations can help in anticipating and managing risks in a better way by sharing business intelligence data, research, and analyses on potential shocks of critical inputs and other elements that could disrupt supply chains—namely weather, transportation, logistics, ports, airports, telecommunications, labour market changes, and industry trends.

Third, cooperation can help share real-time data in global supply chains so governments and companies can react and make adjustments if needed, identifying bottlenecks, gaps, and potential threats and opportunities further down GVCs.

Resilience building will give better results if actions are implemented and harmonized across countries. Governments need to utilize collective forums to turn ideas into concrete policies, rules, and/or programs. They also need to take advantage of their participation and memberships in regional and multilateral organizations and in trade agreements. Cooperation must be promoted on an ongoing basis under fundamental principles such as prosperity for all, non-discrimination, inclusiveness, transparency, equity, predictability, and sustainability.

A particular action that nations may want to consider is reviewing and updating the provisions of their trade agreements, ensuring these are not running behind business challenges and can respond to the new realities that GVCs face. They must also be tailored to confront crises. To carry out this process, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which has brought together eleven Asia-Pacific economies, could be used as a benchmark.

Moreover, an important action that should be prioritized at the multilateral level is concluding at least one of the ongoing SME, e-commerce, services, investment, or agriculture negotiations that are currently happening in the WTO. Reaching an agreement in any of these negotiations will contribute to GVC resilience.

For all the above reasons, the invitation to translate fruitful discussions into tangible actions at the local, regional and multilateral levels will guarantee that key products and services can move freely around the world. It will also ensure that global value chains operate resiliently during periods of crisis and will continue to positively drive the global economy for the benefit of all.

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Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Author: Juan Navarro, CITP|FIBP

Juan Navarro is an Associate Faculty at Royal Roads University, the Director and Principal Researcher at CMX Partnerships and a former economist of the Mexican Central Bank. He is an active member of the Vancouver Island Economic Alliance, the Canadian International Council and the Forum for International Trade Training. He is the founding president of the Society of Mexican Talent in British Columbia and a recognized Business mentor at Futurpreneur Canada. He has collaborated with international organizations such as the World Bank Group, the Asia-Pacific Economic Cooperation (APEC) and the APEC Business Advisory Council. Juan can be reached at juan.navarro@cmxpartnerships.com.

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