Effectively governing global value chains

Although estimates vary, it is generally acknowledged that since the latest phase of globalization which began in the 1980s, the proportion of trade that takes place on an intra- rather than inter-firm basis has been increasing. This means that increas-ingly trade takes place within the firm (typically a multinational or transnational corporation) as opposed to between firms. Because of these developments focus has shifted towards the organization of firms, their boundaries, and how this relates to contracts. Other pertinent questions are being raised regarding capital mobility and the role of multinationals. This is because of the combined effects of the erosion of

12 Dani Rodrik, ‘The Inescapable Trilemma of the World Economy’, a blog post of 27 June 2017, available at <http://rodrik.typepad.com/dani_rodriks_weblog/2007/06/the-inescapable.html> (visited 14 August 2018).

13 Easterly ‘The Trouble with’, supra note 7, at 323.

14 See <http://www.wto.org>.

15 This is indicated in the report by the WTO (‘WTO Trade Report 2017: Trade, Technology and Jobs’

(2017), available at <https://www.wto.org/english/res_e/booksp_e/world_trade_report17_e.pdf> (visit-ed 24 August 2018).

19 Jodie Keane public policy frameworks under neoliberalism coupled with reduced tax liabilities for firms positioning themselves and their operations strategically, whilst operating within and spanning multiple jurisdictions.

Global trade increasingly involves spreading the production process across firms lo-cated in separate countries with each one undertaking what is better described as ‘a task’ in the overall process, rather than the production of a discrete good.¹⁶ These changes have occurred as capital has become increasingly mobile under the accel-erated pace of financial globalization and resulted from the internationalization of global production and its fragmentation across countries. The GVC literature which emerged in the 1990s was motivated by the need to better understand how produc-ers engage with the process of globalization and the implications for the develop-ment of productive capacity and capabilities.¹⁷

The GVC approach considers trade to be embedded in, but also to a considerable extent determined by, specific (but changing) institutional structures and organi-zational aspects of international trade.¹⁸ However, external GVC governance struc-tures usually remain outside of the modelling sphere of ‘which GVC takes what shape and why.’ For example, the conventional value chain governance structures widely referred to in the literature¹⁹ do not include reference to external structures, including the institutional framework negotiated by governments for private actors, but rather focus on the internal structures between firms and private actors.

This is an important omission. It is therefore recognized that domestic regulation and public sector support needs to be incorporated in a comprehensive framework linking GVC governance, institutional frameworks, and upgrading.²⁰ In addition, so far, GVC analysis has focused mainly on governance mechanisms internal to the value chain, treating the institutional framework (including state regulation) as

‘background’.²¹ Research questions remain, including how overall GVC governance is shaped by broader institutional, regulatory and societal processes.

This includes how the collective action and shared responsibilities between the pub-lic and private sectors in order to implement the SDGs will influence the upgrading

16 WTO and Institute of Developing Economies (IDE)-JETRO, ‘Trade Patterns and Global Value Chains in East Asia: From trade in goods to trade in tasks’ (2011), available at <https://www.wto.org/english/

res_e/booksp_e/stat_tradepat_globvalchains_e.pdf> (visited 24 August 2018).

17 Kahlid Nadvi and John Thoburn, ‘Vietnam in the Global Garment and Textile Value Chain: Impacts on Firms and Workers’, 16(1) Journal of International Development (2004) 111-124 at 111-113.

18 Phillip Raikes, Michael Friis Jense and Stefano Ponte, ‘Global Commodity Chain Analysis and the French Filiere Approach: Comparison and Critique’, 38(3) Economy and Society (2000) 390-417 at

397-19 402.Gary Gereffi, John Humphrey and Timothy Sturgeon ‘The Governance of Global Value Chains’, 12 Review of International Political Economy (2005) 78-104 at 80-88.

20 Stefano Ponte and Timothy Sturgeon, ‘Explaining Governance in Global Value Chains: A Modular The-ory-Building Effort’, 21(1) Review of International Political Economy (2014) 195-223 at 195-200.

21 Ibid.

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Effectively Governing Trade within Global Value Chains as a Tool to Achieve Sustainable Development

trajectories in GVCs in the future. Table 1 provides an overview of how value chain governance is situated within a framework defined for firms by governments. This institutional context includes the management of trade and the macroeconomic context, finance and investment policy, human resources and labour market policy, as well as environmental policy.

External: Defined for firms Internal:

between firms

Combined Effects

Institutional Context Market GVCs meet Innovation Systems: upgrading processes stimulated.

Management of trade & macroeconomic context;

Finance & investment policy;

Human resources and labour market policy;

Environmental policy. Hierarchy

Table 1: Effective value chain governance and public policy frameworks.²²

Whilst the share of intra-firm trade has risen dramatically in recent years, and of course, large multinational firms have their own standards and systems of govern-ance, they operate within the framework of rules agreed by governments in view of public policy objectives. This includes trade policy frameworks established between governments, not only specifying tariffs and duties applicable, but also conformity and the mutual recognition of standards, certification and regulatory frameworks.

Even if not explicitly recognized, the combined effects of these public and private interactions result, in turn. in a type of innovation system. This can be challenging for policy-makers to grasp and, as a result, means that important opportunities to leverage knowledge and best practices are lost.

Trade statistics alone contain very partial information about the location of the value added, and no information about ownership of productive assets. Whilst the WTO, the governing body for global trade, has tried to redress this situation through the creation of trade in value added statistics – as a proxy for GVC participation – de-rived from input:output tables, the current situation is one in which there are lots of new data sets but very little information on the lead firms driving these trends, which can only be known through more qualitative analysis.

Given these unknowns, there is a recognition of fundamental asymmetry at play in view of ‘head quarter’ (HQ) economies compared to ‘factory economies’ and how

22 Source: the author.

21 Jodie Keane this affects trade policy formulation.²³ The analogy of the prisoners’ dilemma is used.

Whereas in the past the political economy of the General Agreement on Trade and Tariffs (GATT)²⁴ centred around a prisoners’ dilemma tariff setting game: in order to shift from high tariffs towards low tariffs, all parties had to act in concert and be punished for non-compliance. Nowadays, so long as lead firm’s investments are protected through strict regulation to secure profit maximization, then supply-chain led industrialization may take place within host countries.²⁵ This means that the incentives for governments to act in concert are reduced.

This is because unless lead firms find the regulatory environment favourable to their objectives, for example, in relation to levels of taxation or environmental standards and procedures (which may be related to MEAs), they can simply shift production to another more profitable location. This can create a race to the bottom be it in relation to lowest tax returns, labour laws, or environmental restrictions. It is this process which epitomizes the less palatable face of globalization, which since recent financial crises has experienced a severe backlash in the developed world. Whilst the SDGs seek to provide a universal framework for sustainable development, their high-level nature in view of the diverse (and in cases, divergent) interests of all UN members, means that responsibility for their implementation is not always covered in detail. This is because the framework, agreed by Heads of States, provides the mandate for different international agencies to address specific issues.

For example, in relation to issues related to taxation, the OECD has been grappling for a number of years with the specific issues relating to the location of multinational HQs for taxation purposes. In relation to climate change, the apex decision-making body for the international community is the United Nations Framework Conven-tion on Climate Change. Multilateral trade issues remain the purview of the WTO, although the rise of regional trade agreements is an unmistakable feature of the 21st century global trading system. The challenge which confronts policy-makers in relation to effectively governing GVCs within this context is that whilst new policy frameworks are being posited to maximize the gains from integration and ‘whole of supply chain’ approaches, a fragmented international policy landscape can compli-cate such efforts.

23 Richard Baldwin, ‘WTO 2.0: Global governance of supply-chain trade’, Centre for Economic Policy Re-search Policy Insight No. 64 (2012), available at <http://www.cepr.org/sites/default/files/policy_insights/

PolicyInsight64.pdf> (visited 14 June 2014).

24 The General Agreement on Tariffs and Trade, Marrakech, 15 April 1994, available at <http://www.wto.

org>.

25 Ibid.

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Effectively Governing Trade within Global Value Chains as a Tool to Achieve Sustainable Development