Written by Santiago Fernandez de Cordoba and Rubiah Lambert, UNCTAD
Globalization has brought profound changes in international trade over the last 50 years. In this period, not only has the volume of trade nearly tripled, it has also changed in its form and complexity.
Today, global value chains (GVCs) are a pervasive feature of global trade, accounting for nearly 70% of the total share of global trade.
GVCs have become a link between trade expansion and development. International fragmentation has given rise to an intense involvement of emerging and developing economies participating in the GVCs.
UNCTAD estimated that value-added trade in developing countries contributed nearly 30% to countries’ GDP on average, as compared with 18% in developed countries.
However, participation in GVCs does not automatically result in overall economic upgrade, especially when considering the economic losses from environmental damages that may have been caused by GVCs.
Trade needs complementary tools, and Voluntary Sustainability Standards (VSS) is one of them. VSS can help to empower developing countries to effectively use GVCs to achieve the Sustainable Development Goals (SDGs).
Clearly, the significance of GVCs in the world economy, in combination with its paradoxical side effects of pre- and post-COVID-19, can be considered as one of the most cited reasons why Sustainable Value Chains (SVC) is needed.
While there are many instruments that works in favour of SVC, the United Nations Forum on Sustainability Standards (UNFSS) approach to pursue this objective lies with the complementary interplay between SVC and VSS.
Challenges of global value chains
The economic chaos worldwide due to the current pandemic may seem increasingly sensible for countries to adopt protectionist policies which may undermine any economic interests of participating in GVCs – putting developing countries’ economic growth at stake.
While the pandemic may compromise GVCs’ existence, there are however, nations which for lack of adequate resources cannot feed and clothe their population out of domestic resources.
Every nation has a material interest in the other nations’ economic well-being because maladministration of one country hurts all other nations too.
Essentially, firms in developing countries can significantly gain in productivity from GVC participation – a 1% increase in GVC participation is estimated to boost per capita income by more than 1%, or much more than 0.2% income gain from standard trade.
There is also the danger that some countries could remain stuck in performing lower value-add links of the chain, leading to unequal profit distribution.
As the standard models of international trade are based on comparative advantages, they mostly deal with final goods, global value chains’ fragmented international process has contributed to significant implications for the distributive effects of trade – economic actors at the downstream end of the value chain tend to benefit the most.
Furthermore, GVCs have also been cited to contribute to the harmful effects on the environment.
The main environmental costs of GVCs are associated with the growing, more distant trade in intermediate goods compared with trade only in final goods. This leads to higher carbon dioxide (CO2) emissions from transportation (relative to standard trade) and to excess waste from the packaging of goods.
While the world is taking all possible actions to suppress the health crisis, this will not change the fact that climate change will continue to accelerate, and that inequality and poverty will continue to exist.
Suppressing these issues altogether will contribute positively to the crisis as they are linked one way or another. Therefore, economic cooperation on these priority areas would go a long way in improving the lives of everyone across the world.
Turning to sustainable value chains
As regional value chain links are increasingly becoming more important than the global ones, especially in North America, Europe and South-east Asia, it is also a clear indication that international trade (more so regional trade) will continue to persist despite any tendencies of closing trade borders due to the pandemic.
GVCs have long been accounted for by policymakers in the design of trade policies, noting that free trade agreements (FTAs) have also evolved in terms of content.
Non-trade objectives such as sustainable development have increasingly been included to enhance the economic fundamentals with social and environmental protection provisions.
Environmental provisions in trade policies are increasingly linked through preferential trade agreements (PTAs)[1] and the number of FTAs that include labour provisions have been growing in the last two decades[2].
As the secretariat of the UNFSS, an initiative of five UN agencies – FAO, UNIDO, UNCTAD, ITC and UN Environment Programme, UNCTAD will continue to support developing countries to design policies to leverage on these non-trade objectives as an avenue to strive towards the implementation of VSS. These standards play a significant role in pursuing Sustainable Value Chains.
As a new regulatory form, VSS set social and environmental standards for transnational production, and they often operate certification programs to verify compliance in GVCs.
The extent to which GVCs can affect the SDGs can be defined by answering two questions: 1) Are the producers in developing countries included in the GVCs?, and 2) Do standards help build the capabilities in these economies which allow producers to achieve sustainable progress across one or more of the triple bottom line agendas – economy, environment and social?
To this end, the use of standards and often certification are meant to reduce the negative externalities of transnational production, while promoting sustainable development through fostering green growth and trade.
It is also increasingly popular as a tool for sustainable supply chain management, reputational risk mitigation, and the promotion of competitiveness. More and more lead firms in global value chains adopt VSS, making their buying decisions dependent on suppliers’ (across borders) compliance with voluntary standards.
In this time of crisis, the need for an international trading system that works for all is even more evident. There is a need for a system that does not perpetuate the inequalities and enables people, particularly the most vulnerable in the value chains to prosper.
If important stakeholders can influence and instrumentalize VSS to achieve SVC, they may well inspire others towards the trajectory of an inclusive and sustainable global economic system.
[2] International Labour Organization. 2015. Social dimensions of free trade agreements. Geneva: International Labour Organization; International Institute for Labour Studies.