GVCs: Improving trade and industrial policy design and coordination

The Covid-19 pandemic and the war in Ukraine have reignited the debate on efficiency versus resilience in international trade and global value chains (GVCs). This policy brief (i) explains the contrasting perspectives of the private sector (primarily seeking efficiency) and the public sector (aiming for resilience); (ii) demonstrates that GVCs are still flourishing, despite some mounting signals of a geo-fragmentation leading to greater reallocation of the GVCs; and (iii) provides recommendations to help the G20 navigate the balancing act between efficiency and resilience considerations. Domestic policy design in the G20 countries and international coordination among these countries is essential.

The reliance on input producers across different geographical locations can lead to production disruptions when countries along the global value chain (GVC) experience negative shocks such as pandemics, conflicts resulting in economic sanctions, or natural disasters. Recent events such as the Covid-19 pandemic and the war in Ukraine have underscored the risks associated with trade integration and the use of GVCs. Consequently, many countries engaged in implementing nationalist industrial policies aimed at reducing their exposure to global hazards by encouraging companies to relocate their businesses back to their home countries.

For instance, the newly proposed Net-Zero Industry Act Commission intends to scale up the strategic autonomy of the European Union (EU) in clean energy manufacturing. The anchor for this strategy is to produce 40 percent of the EU’s deployment needs by 2030. The strategy comes as the EU’s response to the US’s Inflation Reduction Act (IRA) launched in 2022, which aims to position the country as a pioneer in the green economy. The scope of these policies goes beyond the energy dimension. The European Commission has announced its goal to increase the EU’s market share of semiconductor production to 20 percent of global output by the end of the decade. The American Chips Act is another example of this trend, emphasising security, resilience, and robustness over efficiency in the organisation of GVCs.

One should not overlook the contrasting perspectives between the private and public sectors regarding the trade-off between efficiency and resilience. In broad terms, from the private sector perspective, which represents GVC owners and managers, reallocating activities closer to home may lead to losses in efficiency and profitability. In parallel, governments, from the perspective of industrial policymakers, prioritise and seek domestic resilience to shield their economies from global disruptions and, more recently, geopolitical and security threats. To entice the private sector, some governments resort to implementing—and bearing the fiscal cost of—necessary subsidies.

The juxtaposition between the viewpoints of the private sector and the concerns of policymakers appears clear on the ground. This, amid an evolving context of still-dominant globalisation forces and growing protectionist measures, has produced a monumental policy challenge to balance wide-ranging economic, geopolitical, and other considerations. The following paragraphs clarify, and in some cases reframe, this challenge by adding more nuances that help reconcile seemingly conflictive policy priorities on resilience versus efficiency. In particular, it provides evidence in two areas: (i) the status quo of GVC relocation, and (ii) recent public sector actions on trade and GVCs as well as private sector perceptions and response.

The paper can be accessed by clicking here.

This article is authored by Otaviano Canuto and others from ORF.