Global Income Could Fall $1.4 trillion Due to Trade Disruptions
Global income could fall by as much as $1.4 trillion if current disruptions in trade and global value chains (GVCs) continue. According to the World Bank, in a worst-case scenario, these disruptions could push more than 30 million people into poverty. Today, almost 50% of global trade involves GVCs, which have helped poor countries grow faster and lifted many out of poverty over the past 30 years.
GVC is the series of stages in the production of a product or service for sale to consumers. Each stage adds value, and at least two stages are in different countries. For example, a bike assembled in Finland with parts from Italy, Japan, and Malaysia and exported to the Arab Republic of Egypt is a GVC. By this definition, a country, sector, or firm participates in a GVC if it engages in (at least) one stage in the chain.
The growth of international trade and the expansion of GVCs have had remarkable effects on development. Incomes have risen, productivity has gone up—particularly in developing countries—and poverty has fallen. The World Bank states that there has been marked progress in reducing poverty over the past decades. According to the most recent estimates, in 2015, 10% of the world’s population lived at or below $1.90 a day, down from 16% in 2010 and 36% in 1990. The fragmentation of production and knowledge transfer inherent in GVCs are in no small part responsible for these advances.
The recent disruption in the supply chains of few essential goods and shortages of key medical products during the Covid-19 outbreak highlighted the interconnection between countries through GVCs and the risks and instability associated with the international fragmentation of production. This, however, does not diminish the impact of GVCs in generating significant economic gains to both participating firms and countries that host GVC activities.
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Trade conflict and the lack of major reforms may inhibit GVCs from remaining a force for prosperity. And GVCs can only further boost inclusive and sustainable growth, create better jobs and reduce poverty if developing countries implement deeper reforms and industrial countries pursue open, predictable policies. A 1% increase in GVC participation is estimated to boost per capita income levels by more than 1% – about twice as much as conventional trade.
The report is worried that the expansion of GVCs has been on the dip since 2008 due to a decline in overall economic growth and the slowing pace of reforms. The absence of major trade initiatives and growing trade conflict could make it more difficult for developing countries to benefit from GVCs.
Institutions such as the World Trade Organisation (WTO) have been hard beat to forge a common agenda for member countries towards improving global trade. The former director-general of the WTO stepped down one year before the expiration of his tenure due to frustration on the inability of the over 150 member countries to reach an agreement. Since the General Agreement on Tariffs and Trade (GATT), signed in 1947 was replaced by the WTO in 1995, there has been no formal agreement among countries. The Doha Round of talks which was supposed to conclude on new negotiations in 2005 collapsed in 2015 after developed economies like the United States and the European Union on one hand, and developing countries like China and India on the other were unwilling to make fundamental concessions.
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The World Bank believes that GVCs can continue to be a force for sustainable and inclusive development if developing countries speed up trade and investment reforms, and improve connectivity, while advanced economies pursue open, predictable policies. It is important for all countries to strengthen social and environmental protection, to ensure the benefits of GVC participation are shared and sustained.
The World Bank envisages that new technologies, such as automation and 3D printing, are a frequent cause for concern but is optimistic that they are more likely to boost GVCs as trade and communication costs come down, new products are developed, and productivity increases.
In the age of GVCs, the need for greater international cooperation is particularly urgent. According to the report, public policies and economic conditions in one country strongly affect trade partners through production linkages, hence the benefits of coordinated policy action are even larger with GVCs than conventional trade, as goods and services cross borders multiple times.
All countries need to work together to forge a common front to eliminate policies that distort trade and to keep markets open.