A World Bank Group Flagship Report OVERVIEW A World Bank Group Flagship Report OVERVIEW This booklet contains the overview from World Development Report 2020: Trading for Development in the Age of Global Value Chains, doi: 10.1596/978-1-4648-1457-0. A PDF of the final book, once published, will be available at https://openknowledge.worldbank.org/ and http://documents. worldbank.org/, and print copies can be ordered at www.amazon.com. Please use the final version of the book for citation, reproduction, and adaptation purposes. © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Cover image: The cover image is a screen capture of an interactive visualization depicting the flow of international trade, with each dot representing US$1 billion in value. The interactive map was created by data visualization expert Max Galka, from his Metrocosm blog: http://metrocosm.com/map-international -trade/. Used with the permission of Max Galka; further permission required for reuse. Cover design: Kurt Niedermeier, Niedermeier Design, Seattle, Washington. Interior design: George Kokkinidis, Design Language, Brooklyn, New York, and Kurt Niedermeier, Niedermeier Design, Seattle, Washington. World Development Report 2020: Trading for Development in the Age of Global Value Chains What is a global value chain (GVC)? A global value chain breaks up the production process across countries. Firms specialize in a specific task and do not produce the whole product. Exports Exports Exports for consumption Raw materials Parts and components Border Border Border Finished goods Services inputs Semifinished goods How do GVCs work? Interactions between firms typically involve durable relationships. Economic fundamentals drive countries’ participation in GVCs. But policies matter—to enhance participation and broaden benefits. Drivers Outcomes p e ra t i o n Policies: Coo So ci • al ty vi an i ct d ne en d I ne E nd an hy q en ness • Con ow h v i ro p ra bs jo t ua w og m l it G ro en y Ge nmental p ts ecializ rsp at En pe i ct rt y Ins e n vi siz io v e nm ro tit Hy on ut e Po u t io Op rk en r ns d Ma t re ot e s: ct GVC ie i o n lic Po s Fir ip sh -t m o- n fir m relatio Overview GVCs can continue to boost growth, create better jobs, and reduce poverty— provided that developing countries undertake deeper reforms and industrial countries pursue open, predictable policies. I nternational trade expanded rapidly after 1990, 3D printing could draw production closer to the powered by the rise of global value chains (GVCs). consumer and reduce the demand for labor at home This expansion enabled an unprecedented con­ and abroad. Second, trade conflict among large coun- vergence: poor countries grew faster and began to tries could lead to a retrenchment or a segmentation catch up with richer countries. Poverty fell sharply. of GVCs. These gains were driven by the fragmentation What does all this mean for developing countries of production across countries and the growth of seeking to link to GVCs, acquire new technologies, connections between firms. Parts and components and grow? Is there still a path to development through began crisscrossing the globe as firms looked for effi­ GVCs? That is the central question explored in this ciencies wherever they could find them. Productivity Report. It examines the degree to which GVCs have and incomes rose in countries that became integral contributed to growth, jobs, and reduced poverty—but to GVCs—Bangladesh, China, and Vietnam, among also to inequality and environmental degradation. others. The steepest declines in poverty occurred in It spells out how national policies can revive trade precisely those countries. growth and ensure that GVCs are a force for develop- Today, however, it can no longer be taken for ment rather than divergence. Finally, it identifies inad- granted that trade will remain a force for prosperity. equacies in the international trade system that have Since the global financial crisis of 2008, the growth of fomented disagreements among nations and provides trade has been sluggish, and the expansion of GVCs a road map to resolving them through greater interna- has slowed. The last decade has seen nothing like the tional cooperation. transformative events of the 1990s—the integration This Report concludes that GVCs can continue to of China and Eastern Europe into the global economy boost growth, create better jobs, and reduce poverty, and major trade agreements such as the Uruguay provided that developing countries undertake deeper Round and the North American Free Trade Agreement reforms and industrial countries pursue open, pre- (NAFTA). dictable policies. Technological change is likely to be At the same time, two potentially serious threats more of a boon than a curse for trade and GVCs. The have emerged to the successful model of labor- benefits of GVC participation can be widely shared intensive, trade-led growth. First, the arrival of and sustained if all countries enhance social and labor-saving technologies such as automation and environmental protection. Overview | 1 Figure O.1 GVC trade grew rapidly in extend production processes beyond national borders the 1990s but stagnated after the 2008 (figure O.1). GVC growth was concentrated in machin- global financial crisis ery, electronics, and transportation, and in the regions specializing in those sectors: East Asia, North America, 55 and Western Europe. Most countries in these regions participate in complex GVCs, producing advanced GVC share of global trade (%) 50 manufactures and services, and engage in innovative activities (map O.1). By contrast, many countries in 45 Africa, Latin America, and Central Asia still produce commodities for further processing in other countries. 40 In recent years, however, trade and GVC growth have slowed (figure O.1). One reason is the decline in 35 overall economic growth, and especially investment. Another reason is the slowing pace and even reversal 30 of trade reforms. Furthermore, the fragmentation of production in the most dynamic regions and sectors 70 75 80 85 90 95 00 05 10 15 has matured. China is producing more at home.1 In 19 19 19 19 19 19 20 20 20 20 Sources: WDR 2020 team, using data from Eora26 database (https://world the United States, a booming shale sector reduced mrio.com/) and Johnson and Noguera (2017). oil imports by one-fourth between 2010 and 2015 and Note: See figure 1.2 for details. slightly reduced the incentives to outsource manufac- turing production.2 The expansion of GVCs could Recent increases in protection could also affect stall unless policy predictability the evolution of GVCs. Protectionism could induce reshoring of existing GVCs or their shifts to new is restored locations. Unless policy predictability is restored, any GVCs have existed for centuries. But they grew swiftly expansion of GVCs is likely to remain on hold. When from 1990 to 2007 as technological advances—in future access to markets is uncertain, firms have an transportation, information, and communications— incentive to delay investment plans until uncertainty and lower trade barriers induced manufacturers to is resolved. Map O.1 All countries participate in GVCs—but not in the same way GVC linkages, 2015 Low participation Limited commodities High commodities Limited manufacturing Advanced manufacturing and services Innovative activities Data gaps IBRD 44640 | AUGUST 2019 Source: WDR 2020 team, based on the GVC taxonomy for 2015 (see box 1.3 in the main Report). Note: The type of a country’s GVC linkages is based on (1) the extent of its GVC participation, (2) the country’s sectoral specialization in trade, and (3) measures of innovation. Details are provided in figure 1.6 in the main Report. 2 | World Development Report 2020 GVCs boost incomes, create Figure O.2 GDP per capita grows most rapidly when better jobs, and reduce poverty countries break into limited manufacturing GVCs Hyperspecialization enhances efficiency, and durable 60 57 Cumulated change in GDP per capita (%) firm-to-firm relationships promote the diffusion of 50 48 technology and access to capital and inputs along chains. For example, in Ethiopia firms participat- 40 ing in GVCs are more than twice as productive as similar firms that participate in standard trade. 32 30 Firms in other developing countries also show significant gains in productivity from GVC partici- 20 pation. A 1 percent increase in GVC participation is estimated to boost per capita income by more than 10 1 percent, or much more than the 0.2 percent income gain from standard trade. The biggest growth spurt 0 typically comes when countries transition out of Event 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 year exporting commodities and into exporting basic Years after event manufactured products (for example, garments) using imported inputs (for example, textiles) (figure Limited manufacturing O.2), as has happened in Bangladesh, Cambodia, and Advanced manufacturing and services Vietnam. Innovative activities Eventually, however, these high growth rates Sources: WDR 2020 team, using data from Eora (https://worldmrio.com/) and World Bank’s WDI cannot be sustained without moving to progressively database (https://datacatalog.worldbank.org/dataset/world-development-indicators). more sophisticated forms of participation. But the Note: The event study quantifies the cumulated change in real GDP per capita in the 20 years following a switch from a lower to a higher stage of GVC engagement. See box 3.3 in the main Report for the transitions from limited manufacturing to more methodology. advanced manufacturing and services, and finally to innovative activities (the GVC taxonomy used in this Report is explained further in box 1.3 of the trade. In Mexico and Vietnam, for example, the main Report), become increasingly more demand- regions that saw more intensive GVC participation ing in terms of skills, connectivity, and regulatory also saw a greater reduction in poverty. institutions. GVCs also deliver better jobs, but the relationship The gains from GVCs are not with employment is complex. Firms in GVCs tend to be more productive and capital-intensive than other equally shared, and GVCs can (especially nontrading) firms, and so their production hurt the environment is less job-intensive. However, the enhanced produc- The gains from GVC participation are not distributed tivity leads to an expansion in firm output and thus to equally across and within countries. Large corpora- increases in firm employment.3 As a result, GVCs are tions that outsource parts and tasks to developing associated with structural transformation in develop- countries have seen rising markups and profits, sug- ing countries, drawing people out of less productive gesting that a growing share of cost reductions from activities and into more productive manufacturing GVC participation are not being passed on to consum- and services activities. Firms in GVCs are unusual in ers.6 At the same time, markups for the producers in another respect: across a wide range of countries, they developing countries are declining. Such a contrast is tend to employ more women than non-GVC firms.4 evident, for example, in the markups of garment firms They contribute therefore to the broader development in the United States and India, respectively. benefits of higher female employment. Within countries, exposure to trade with lower- Because they boost income and employment income countries and technological change contribute growth, participation in GVCs is associated with a to the reallocation of value added from labor to capital. reduction in poverty.5 Trade in general reduces pov- Inequality can also creep upward in the labor market, erty primarily through growth. Because gains in eco- with a growing premium for skilled work and stag- nomic growth from GVCs tend to be larger than from nant wages for unskilled work.7 Women also face chal- trade in final products, poverty reduction from GVCs lenges: GVCs may offer more women jobs, but they also turns out to be greater than that from standard seem to have even lower glass ceilings. Women are Overview | 3 generally found in the lower value-added segments; it Innovation is leading to the emergence of new is hard to find women owners and managers.8 traded goods and services, which contributes to faster GVCs can also have harmful effects on the envi- trade growth. In 2017, 65 percent of trade was in cate- ronment. The main environmental costs of GVCs are gories that did not exist in 1992. associated with the growing, more distant trade in Surprisingly, new production technologies are intermediate goods compared with standard trade. also likely to boost trade. Automation does encourage This leads to higher carbon dioxide (CO2) emissions countries to use less labor-intensive methods and from transportation (relative to standard trade) and reduces the demand for the labor-intensive products to excess waste (especially in electronics and plastics) of developing countries. However, the evidence on from the packaging of goods. The growth generated reshoring is limited,9 and the evidence on automa- by GVCs can also strain natural resources, especially tion10 and 3D printing11 suggests that these technol- if accompanied by production or energy subsidies, ogies have contributed to higher productivity and a which encourage excess production. On a more posi- larger scale of production. As such, they have increased tive note, the concern that firms may choose to locate the demand for imports of inputs from developing the most polluting stages of production in countries countries (figure O.3). where environmental norms are laxer is not borne Similarly, digital platform firms are reducing the out by the data. cost of trade and making it easier for small firms to break out of their local markets and sell both goods and services to the world. But there are signs that the New technologies on balance rising market power of platform firms is affecting the promote trade and GVCs distribution of the gains from trade.12 The emergence of new products, new technologies of production such as automation and 3D printing, National policies can boost GVC and new technologies of distribution such as digital platforms is creating both opportunities and risks. participation But the evidence so far suggests that on balance these In principle, breaking up complex products such as technologies are enhancing trade and GVCs. cars and computers allows countries to specialize in simpler parts and tasks, making it easier for those at an early stage of development to participate in trade. Figure O.3 Automation in industrial countries has But a country’s ability to participate in GVCs is by no boosted imports from developing countries means assured. 10 GVC participation is determined by factor endow- ments, geography, market size, and institutions. These % change in imports of parts from developing countries 8 fundamentals alone need not dictate destiny, however; policies also play an important role. Policies to attract 6 foreign direct investment (FDI) can remedy the scarcity of capital, technology, and management skills.13 Liber- 4 alizing trade at home while negotiating trade liberal- 2 ization abroad can overcome the constraints of a small domestic market, liberating firms and farms from the 0 limits of domestic demand and local inputs. Improving transportation and communications infrastructure str es ric on uc e M n g m pr s Fo fac ng he ts ac ls cs l to ics e ec ry g pr ing d eta d tile Ed ltur iv io in in M ica C duc El ine ni on iliti Ag ucti ti Au last ot at in ur od tur an M an in th an Tex tro u m and introducing competition in these services can m h t o ct U p u fa u an address the disadvantage of a remote location.14 And C m er O r, n pe bb er no participating in deep integration agreements can spur pa Ru er d, th institutional and policy reform, especially when com- oo O W plemented by technical and financial assistance.15 Industries in order of increasing automation Based on an analysis of the drivers of various Source: Artuc, Bastos, and Rijkers 2018. types of GVC participation, this Report identifies Note: The figure depicts the automation-induced increase in industrial countries’ imports of materials from developing countries by broad sector over 1995–2015. The change in imports of parts is measured the policies that promote integration into more in log points; a 0.10 increase in log points is roughly equivalent to a 10 percent increase in imports. advanced GVCs (figure O.4). Importantly, national 4 | World Development Report 2020 Figure O.4 Transitioning to more sophisticated participation in GVCs: Some examples of national policy Commodities to limited Limited manufacturing to advanced Advanced manufacturing and manufacturing manufacturing and services services to innovative activities Fundamentals Policy priorities Foreign direct investment: adopt supportive investment policy and improve the business climate Endowments Finance: improve access to banks Finance: improve access to equity finance Labor costs: avoid rigid regulation and Technical and managerial skills: Advanced skills: educate for exchange rate misalignment educate, train, and open to foreign skills innovation and open to foreign talent Access to inputs: reduce tariffs and NTMs; Standardization: harmonize or mutually accept standards reform services Market size Market access: pursue trade agreements Market access: deepen trade agreements to cover investment and services Trade infrastructure: reform customs; liberalize transport services; invest in Advanced logistics services: invest in multimodal transport infrastructure ports and roads Geography Basic ICT connectivity: liberalize ICT services; invest in ICT infrastructure Advanced ICT services: expand high-speed broadband Governance: promote political stability Governance: improve policy predictability; pursue deep trade agreements Institutions Standards certification: establish Contracts: enhance enforcement Intellectual property rights: conformity assessment regime ensure protection Source: WDR 2020 team. Note: ICT = information and communication technology; NTMs = nontariff measures. policies can and should be tailored to the specific Overvalued exchange rates and restrictive labor circumstances of countries and to specific forms of regulations raise the cost of labor, preventing labor- participation in GVCs. abundant countries from taking advantage of their Attracting FDI is important at all stages of par- endowments. For example, manufacturing labor ticipation. It requires openness, investor protection, costs in Bangladesh are in line with its per capita stability, a favorable business climate, and, in some income, but in many African countries, labor costs cases, investment promotion. Some countries, such are more than twice as high. as those in Southeast Asia that have benefited from Connecting to markets through trade liberalization foreign investment in goods, still restrict foreign helps countries expand their market size and gain investment in services. Others try to draw in invest- access to the inputs needed for production. For example, ment through tax exemptions and subsidies, but large unilateral tariff cuts by Peru in the 2000s are asso- they risk antagonizing their trading partners, and ciated with faster productivity growth and expansion the net benefits may not be positive. Nevertheless, and diversification of GVC exports.16 Trade agreements countries such as Costa Rica, Malaysia, and Morocco expand market access, and they have been a critical cat- have attracted transformative GVC investments by alyst for GVC entry in a wide range of countries, includ- large multinational corporations through the use ing Bangladesh, the Dominican Republic, Honduras, of successful investment promotion strategies. Lesotho, Madagascar, and Mauritius. Because goods Overview | 5 and services economies are increasingly linked, reform- 70 percent of the earnings of the poor. Ensuring that ing services policies—in telecommunications, finance, smallholders benefit requires additional support, transport, and a range of business services—should be such as through agricultural extension services, part of any strategy for promoting GVC activity. access to risk management instruments (such For many goods traded in GVCs, a day’s delay as insurance), and coordination to exploit scale is equal to imposing a tariff in excess of 1 percent. through producer organizations. Improving customs and border procedures, promoting competition in transport and logistics services, and Improving the business and investment climate enhancing port structure and governance can reduce for GVCs on a national scale can be costly and take trade costs related to time and uncertainty, mitigating time, spurring many countries to set up special eco- the disadvantages associated with a remote location. nomic zones (SEZs) to create islands of excellence. Because GVCs thrive on the flexible formation of But the results so far suggest that relatively few SEZs networks of firms, attention should also be paid to are successful, and only when they address specific contract enforcement to ensure that legal arrange- market and policy failures. Getting the conditions ments within the network are stable and predictable. right, even in a restricted geographical area, requires Protecting intellectual property rights is especially careful planning and implementation to ensure that important for the more innovative and complex value the resources needed—such as labor, land, water, chains. Strengthening national certification and test- electricity, and telecommunications—are readily avail- ing capacity to ensure compliance with international able, that regulatory barriers are minimized, and that standards can also facilitate GVC participation. connectivity is seamless. The few successful zone pro- Many of the traditional approaches to industrial grams in countries such as China, Panama, the United policy, including tax incentives, subsidies, and local Arab Emirates, and now in Ethiopia—as well as the content requirements, are likely to distort production numerous examples of SEZs that have failed to attract patterns in today’s GVC context. Other proactive investors or grow—offer important lessons on how to policies are more promising—especially when they use SEZs for development. address market failures: •  To strengthen domestic capacity to support upgrad- Other policies can help ensure ing in value chains, countries should invest in GVC benefits are shared and human capital.17 The Penang Skills Development sustainable Centre in Malaysia is an example of an industry-led training center that has played an important role in Beyond policies to facilitate participation in GVCs, supporting Malaysia’s upgrading to electronics and complementary policies are needed to share their engineering GVCs. benefits and attenuate any costs. These include labor •  Targeted policies to unblock constraints to GVC market policies to help workers who may be hurt by trade can be effective. For example, in Bangladesh the structural change; mechanisms to ensure compliance introduction of bonded warehouses, combined with with labor regulations; and environmental protection the “back-to-back” letters of credit (ensuring access measures. to working capital), is acknowledged as a catalyst for As GVCs expand, some workers will gain, but the country’s integration into the apparel GVC. others could lose in some locations, sectors, and occu- •  Countries can connect domestic small and medium pations. Adjustment assistance, which is especially enterprises (SMEs) with lead firms in GVCs—by important in middle- and high-income countries, supporting training and capacity building while pro- will help workers adapt to the changing patterns of viding information to lead firms about supply oppor- production and distribution that GVCs bring about. tunities. Examples of successful supplier linkage Adjustment policies can include facilitating labor programs include Chile and Guinea in mining, Kenya mobility and equipping workers to find new jobs.18 and Mozambique in agriculture, and the Czech Because unemployment resulting from structural Republic in the electronics and automotive sectors. change tends to be persistent, wage insurance can •  For countries participating in agriculture value help keep workers employed in lower-paying jobs chains, policies to help integrate smallholders are without experiencing income loss, leading to bet- particularly important. In Africa, 55 percent of jobs ter long-term outcomes. For example, Denmark’s are in agriculture, which is the source of more than successful “flexicurity” model gives employers the 6 | World Development Report 2020 freedom to hire and fire workers with few restric- reform, market access around the globe, and recourse tions, but it supports workers with generous unem- in case of disputes—even against the trade heavy- ployment benefits and active labor market programs. weights. Today, however, the international trade sys- Labor regulations, when well designed and tem is under tremendous pressure. Three decades of enforced, can help ensure the safety and health of trade-led catchup growth in developing countries has workers. Private firms can contribute, especially contributed to shifts in economic power across coun- when their consumers are sensitive to labor condi- tries and increased income inequality within coun- tions in the firm’s global operations. There is also tries. The growing symmetry in the economic size an important role for national policy supported by of countries is placing in sharp relief the persistent international cooperation in establishing and mon- asymmetry in their levels of protection. Meanwhile, itoring appropriate labor standards. In Vietnam, the trade system, which adapted to changes in the past, working conditions improved when firms partic- has faltered in recent years, most notably with the fail- ipated in the International Labour Organization- ure of the Doha negotiations. Regional initiatives such International Finance Corporation (ILO-IFC) Better as the European Union and NAFTA have also been hurt Work Programme, along­side complementary govern- by disagreements among member countries. ment action to publicly disclose the names of firms The trade conflict between the United States and that fail to meet key labor standards.19 China is leading to protection and policy uncertainty, Pricing environmental degradation can prevent and it is beginning to disrupt GVCs. If the trade con- GVCs from magnifying misallocations of resources.20 flict worsens and causes a slump in investor confi- Prices of goods should reflect both their economic dence, the effects on global growth and poverty could and socioenvironmental costs. Appropriate pricing be significant—more than 30 million people could of e­nvironmental damage would also encourage be pushed into poverty (measured as income levels innovation in environmentally friendly goods and below $5.50 a day), and global income could fall by as production processes. Reducing distortions, such as much as $1.4 trillion. That said, even in the status quo, those created by energy and production subsidies, adverse effects are likely to have resulted from the and shifting toward taxing carbon would improve trade practices that provoked the conflict. resource allocation and reduce CO2 emissions.21 In To sustain beneficial trade openness, it is essential addition, environmental regulations, especially for to “walk on two legs.” The first priority is to deepen specific industries and pollutants, could curb the dam- traditional trade cooperation to address remaining age caused by GVC-related production and transport. barriers to trade in goods and services, as well as other measures that distort trade, such as subsidies and the activities of state-owned enterprises. In par- International cooperation allel, cooperation should be widened beyond trade supports beneficial GVC policy to include taxes, regulation, and infrastructure. participation The international trade system is especially valuable Deepen traditional cooperation in a GVC world. GVCs span boundaries, and policy Looking ahead, the first priority should be to deepen action or inaction in one country can affect produc- traditional trade rules and commitments. International ers and consumers in other countries. International cooperation has so far delivered uneven openness in cooperation can help address the spillover effects goods and services. Trade liberalization is overdue in of national policies and achieve better development agriculture and services, and some industrial goods outcomes. Because the costs of protection are magni- remain restricted in certain markets and by nontariff fied when goods and services cross borders multiple measures. Trade preferences have reduced certain times, the gains from coordinated reduction of barri- tariffs faced predominantly by the poorest countries— ers to trade are even larger for GVCs than for standard but not the tariffs these countries impose on their trade. In view of the inextricable link between foreign imports. Special and differential treatment for devel- investment and GVCs, creating an open and secure oping countries has in some cases accommodated climate for investment is vital for GVC participation, sluggish reform, ultimately inhibiting GVC participa- especially by capital-scarce countries. tion and integration into the global economy. Developing countries have benefited enormously In addition, the escalation of tariffs in some of from the rules-based trade system, particularly its the world’s largest markets—which serve to pro- guarantees against trade discrimination, incentives to tect higher value-added production—is inhibiting Overview | 7 processing activities in agroindustry and other labor- importing countries, as is the case in some recent intensive areas such as apparel and leather goods agreements on data flows. in developing countries. Restrictive rules of origin But developing countries must not be left out of in preferential agreements are curtailing sourcing such arrangements because that would undermine options. Subsidies and state-owned firms are dis- their productive engagement in GVCs. International torting competition, and the existing rules do not support can help them to both make regulatory com- guarantee competitive neutrality. For services, inter- mitments in areas of export interest (such as in data- national negotiations have delivered little liberaliza- based services) and extract commitments from their tion beyond that undertaken unilaterally. Important trading partners when they open their markets (such GVC-relevant services, such as air and maritime as for the enforcement of competition policy). transportation (which most need coordinated lib- Finally, coordination failures in infrastructure eralization), have been excluded from negotiations investment affect GVC investment, expansion, and because of the power of vested interests. upgrading, especially in the poorest countries. From Traditional trade negotiations may deliver more a global perspective, countries underinvest in trade- meaningful outcomes if the major developing coun- related infrastructure because they do not take into try traders engage as equal partners and even leaders account the additional benefits to their trade part- instead of seeking special and differential treatment; ners. Countries that share a border can obtain larger if the large industrial countries continue to place their gains when they act simultaneously to expedite trade. faith in rules-based negotiations instead of resorting Guatemala and Honduras, for example, reduced bor- to unilateral protection; and if all countries work der delays from 10 hours to 15 minutes when they together to define a negotiating agenda that reflects joined a customs union and agreed to accept the both development and business priorities. same electronic documentation. The World Trade Organization’s Trade Facilitation Agreement encour- Widen cooperation on taxes, competition, ages countries to coordinate improvements in trade and data flows facilitation, and provides low-income countries with Taxing capital is increasingly difficult in an era of financial assistance for the necessary investments. A global firms, fragmented production, and growth in similar approach may help exploit synergies for other intangible assets such as intellectual property. Coop- investments in transport, energy, and communica- eration should ensure fair access to tax revenues— tions infrastructure. which rich countries need to help displaced industrial workers and poor countries need to build infrastruc- Notes ture. Ultimately, a joint approach to greater use of 1. Constantinescu, Mattoo, and Ruta (2018). destination-based taxation could eliminate firms’ 2. Constantinescu, Mattoo, and Ruta (2018). incentives to shift profits and countries’ incentives to 3. In Vietnam, firms that both import and export employ compete over taxes, but the consequences for tax rev- more workers than firms that export only and firms enue in small developing countries would have to be that do not trade, controlling for sector and province considered. Meanwhile, other measures to combat tax fixed effects as well as state and foreign ownership. In Mexico, firms that have relationships with buyers, as base erosion and income shifting could alleviate asso- well as firms that export and import, also see higher ciated challenges for domestic resource mobilization. employment than firms that only import or only export. Among consumers, concern is growing about data This finding holds even when considering the regional, flows and the international expansion of digital firms, sector, and foreign ownership characteristics of firms. both of which play an important role in GVCs. The Across a country, then, firms that both import and risks range from privacy abuses in data-based services export employ more workers than one-way traders or nontraders. to anticompetitive practices in platform-based ser- 4. Rocha and Winkler (2019). vices. Governments are resorting to data localization 5. The poverty elasticity of growth depends on various fac- laws to limit the cross-border mobility of data and tors, including its incidence (changes in inequality), the to strict rules on the handling of data domestically. initial distribution of land, wealth and income, education Competition laws, too, remain explicitly nationalist in levels among the poor, other forms of past public invest- focus, and cooperation in bilateral or regional trading ment, as well as local institutions, including unions (Ferreira, Leite, and Ravallion 2010; Ravallion and Datt agreements has been limited. The solution may be 2002). Also see Dollar and Kraay (2002) and Ferreira and a new type of bargain: regulatory commitments by Ravallion (2008). exporting firms to protect the interests of consumers 6. Markups can increase because prices are higher, or abroad in return for market access commitments by because costs are lower, or a combination of both when 8 | World Development Report 2020 markets are not perfectly competitive, meaning that Chen, Maggie Xiaoyang, and Min Wu. 2018. “The Value of firms can affect prices. The effect on firms’ markups Reputation in Trade: Evidence from Alibaba.” Paper pre- depends on whether the reduction in costs, or the gains sented at Workshop on Trade and the Chinese Economy, from GVC participation, are passed fully on to the con- King Center on Global Development, Stanford University, sumer through lower prices. Stanford, CA, April 12–13. 7. Feenstra and Hanson (1996, 1997); Verhoogen (2008). Constantinescu, Ileana Cristina Neagu, Aaditya Mattoo, 8. Rocha and Winkler (2019). and Michele Ruta. 2018. “The Global Trade Slowdown: 9. Oldenski (2015) provides evidence that reshoring is not Cyclical or Structural?” World Bank Economic Review. widespread in the United States. Published electronically May 23. https://doi.org/10.1093 10. Artuc, Bastos, and Rijkers (2018). /wber/lhx027. 11. Freund, Mulabdic, and Ruta (2018). Cramton, Peter, David J. MacKay, Axel Ockenfels, and Steven 12. See Chen and Wu (2018); Garicano and Kaplan (2001); Stoft, eds. 2017. Global Carbon Pricing: The Path to Climate Höppner and Westerhoff (2018). Cooperation. Cambridge, MA: MIT Press. 13. The positive association between FDI and capital, Dollar, David, and Aart Kraay. 2002. “Growth Is Good for the technology, and management skills is driven by GVC Poor.” Journal of Economic Growth 7 (3): 195–225. participation in the manufacturing sector only. There is Farid, Mai, Michael Keen, Michael G. Papaioannou, Ian W. H. no association between FDI inflows and countries’ GVC Parry, Catherine A. Pattillo, and Anna Ter-Martirosyan. integration of their agriculture, commodities, or services 2016. “After Paris: Fiscal, Macroeconomic, and Finan- sectors. This finding could point to a more favorable cial Implications of Global Climate Change.” IMF Staff role for efficiency-seeking or market-seeking FDI that Discussion Note 16/01 (January), International Monetary looks for internationally cost-competitive destinations Fund, Washington, DC. and potential export platforms. See Buelens and Tirpák (2017) for further evidence that bilateral FDI stocks are Feenstra, Robert C., and Gordon H. Hanson. 1996. “Foreign positively associated with the bilateral backward GVC Investment, Outsourcing, and Relative Wages.” In The participation as well as with bilateral gross trade. Political Economy of Trade Policy: Papers in Honor of Jagdish 14. APEC and World Bank (2018). Bhagwati, edited by Robert C. Feenstra, Gene M. Gross- 15. According to Johnson and Noguera (2017), the European man, and Douglas A. Irwin, 89–128. Cambridge, MA: Union and other preferential trade agreements, espe- MIT Press. cially deep ones, play an important role in decreasing the — —— —. 1997. “Foreign Direct Investment and Relative Wages: ratio of bilateral value added to gross exports, a sign of Evidence from Mexico’s Maquiladoras.” Journal of Interna- growth in global production fragmentation. tional Economics 42 (3–4): 371–93. 16. Pierola, Fernandes, and Farole (2018). Ferreira, Francisco H. G., Phillippe George Leite, and Martin 17. Evidence from the Eora database (https://worldmrio Ravallion. 2010. “Poverty Reduction without Economic .com/) shows a U-shaped relationship between GDP per Growth? Explaining Brazil’s Poverty Dynamics, 1985– capita and forward GVC integration across countries. 2004.” Journal of Development Economics 93 (1): 20–36. 18. Bown and Freund (2019). Ferreira, Francisco H. G., and Martin Ravallion. 2008. “Global 19. Hollweg (2019). Poverty and Inequality: A Review of the Evidence.” Policy 20. Gollier and Tirole (2015); Nordhaus (2015). Research Working Paper 4623, World Bank, Washington, 21. Cramton et al. (2017); Farid et al. (2016); Weitzman DC. (2017). Freund, Caroline L., Alen Mulabdic, and Michele Ruta. 2018. “Is 3D Printing a Threat to Global Trade? The Trade Effects You Didn’t Hear About.” Unpublished working References paper, World Bank, Washington, DC. APEC (Asia–Pacific Economic Cooperation) and World Bank. Garicano, Luis, and Steven N. Kaplan. 2001. “The Effects of 2018. “Promoting Open and Competitive Markets in Road Business-to-Business E-Commerce on Transaction Costs.” Freight and Logistics Services: The World Bank Group’s Journal of Industrial Economics 49 (4): 463–85. Markets and Competition Policy Assessment Tool Gollier, Christian, and Jean Tirole. 2015. “Negotiating Effec- Applied in Peru, the Philippines, and Vietnam.” Unpub- tive Institutions against Climate Change.” Economics of lished report, World Bank, Washington, DC. Energy and Environmental Policy 4 (2): 5–27. Artuc, Erhan, Paulo S. R. Bastos, and Bob Rijkers. 2018. Hollweg, Claire H. 2019. “Firm Compliance and Public Dis­ “Robots, Tasks, and Trade.” Policy Research Working closure in Vietnam.” Policy Research Working Paper, Paper 8674, World Bank, Washington, DC. World Bank, Washington, DC. Bown, Chad P., and Caroline L. Freund. 2019. “Active Labor Höppner, Thomas, and Phillipp Westerhoff. 2018. “The EU’s Market Policies: Lessons from Other Countries for the Competition Investigation into Amazon Marketplace.” United States.” PIIE Working Paper 19–2 (January), Peter- Kluwer Competition Law Blog, November 30, Wolters son Institute for International Economics, Washington, Kluwer, Alphen aan den Rijn, The Netherlands. http:// DC. competitionlawblog.kluwercompetitionlaw.com/2018/11 Buelens, Christian, and Marcel Tirpák. 2017. “Reading the /30/the-eus-competition-investigation-into-amazon Footprints: How Foreign Investors Shape Countries’ Par- -marketplace/. ticipation in Global Value Chains.” Comparative Economic ILO (International Labour Organization) and IFC (Inter- Studies 59 (4): 561–84. national Finance Corporation). 2016. “Progress and Overview | 9 Potential: How Better Work Is Improving Garment Ravallion, Martin, and Guarav Datt. 2002. “Why Has Eco- Workers’ Lives and Boosting Factory Competitiveness.” nomic Growth Been More Pro-Poor in Some States of Inter­ national Labour Office, Geneva. https://betterwork India than Others?” Journal of Development Economics .org/dev/wp-content/uploads/2016/09/BW-Progress-and 68 (2): 381–400. -Potential_Web-final.pdf. Rocha, Nadia, and Deborah Winkler. 2019. “Trade and Female Johnson, Robert Christopher, and Guillermo Noguera. 2012. Labor Participation: Stylized Facts Using a Global Data- “Accounting for Intermediates: Production Sharing and set.” Background paper, World Bank-World Trade Organi- Trade in Value Added.” Journal of International Economics zation Trade and Gender Report, World Bank, Washington, 86 (2): 224–36. DC. ————. 2017. “A Portrait of Trade in Value-Added over Verhoogen, Eric A. 2008. “Trade, Quality Upgrading, and Four Decades.” Review of Economics and Statistics 99 (5): Wage Inequality in the Mexican Manufacturing Sector.” 896–911. Quarterly Journal of Economics 123 (2): 489–530. Nordhaus, William. 2015. “Climate Clubs: Overcoming Weitzman, Martin L. 2017. “How a Minimum Carbon-Price Free-Riding in International Climate Policy.” American Commitment Might Help to Internalize the Global Economic Review 105 (4): 1339–70. Warming Externality.” In Global Carbon Pricing: The Path Oldenski, Lindsay. 2015. “Reshoring by U.S. Firms: What Do to Climate Collaboration, edited by Peter Cramton, David the Data Say?” PIIE Policy Brief 15–14 (September), Peter- J. C. MacKay, Axel Ockenfels, and Steven Stoft, 125–48. son Institute for International Economics, Washington, Cambridge, MA: MIT Press. DC. Pierola, Martha Denisse, Ana Margarida Fernandes, and Thomas Farole. 2018. “The Role of Imports for Exporter Performance in Peru.” World Economy 41 (2): 550–72. 10 | World Development Report 2020 ECO-AUDIT Environmental Benefits Statement The World Bank Group is committed to reducing its environmental foot- print. In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)–certified paper, with nearly all containing 50–100 percent recycled content. The recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine–free (PCF), or enhanced elemental ­ c hlorine–free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. Global value chains (GVCs) powered the surge of international trade after 1990 and now account for almost half of all trade. This shift enabled an unprecedented economic convergence: poor countries grew rapidly and began to catch up with richer countries. Since the 2008 global financial crisis, however, the growth of trade has been sluggish and the expansion of GVCs has stalled. Meanwhile, serious threats have emerged to the model of trade-led growth. New technologies could draw production closer to the consumer and reduce the demand for labor. And trade conflicts among large countries could lead to a retrenchment or a segmentation of GVCs. World Development Report 2020: Trading for Development in the Age of Global Value Chains examines whether there is still a path to development through GVCs and trade. It concludes that technological change is, at this stage, more a boon than a curse. GVCs can continue to boost growth, create better jobs, and reduce poverty provided that developing countries implement deeper reforms to promote GVC participation; industrial countries pursue open, predictable policies; and all countries revive multilateral cooperation. SKU 33357