Global value chains

Global value chains

Global value chains

Driven by multinationals in the pursuit of increased efficiency, international production is increasingly organised within global value chains (GVCs) in which the production process spans several countries. The emergence of GVCs has challenged the traditional view of world trade and has required the European Union to adapt its trade and development policies, to ensure that they effectively address all of the interplaying issues in a world economy in which production has become increasingly fragmented internationally, while at the same time being tightly linked in global value chains.

So, what does this mean for development cooperation?

The contribution of GCVs to a country's economic development can potentially be very significant. The link between economic growth and poverty reduction is partly determined by Competitiveness, and integration into GVCs is an increasingly important factor when evaluating the competitiveness of a country's economy. What’s more, there is a positive correlation between participation in GVCs and per capita GDP growth rates. GVCs have a direct economic impact on jobs and income, and can be an important way for developing countries to build productive capacity, including as a result of technology dissemination and skill building.

GVCs can provide developing countries with an opportunity to integrate more easily into the global economy and, at later stages of development, upgrading to higher value-added tasks in GVCs can help to drive the development process. However, it can be a huge challenge for firms in developing countries to upgrade in GVCs, as more advanced economies try to retain higher-value segments of production. Consequently, this area is a focus for support such as, for example, investment in knowledge-based capital in developing countries.

There are a number of factors that determine an economy's participation in GVCs:

  • a favourable business environment and low tariffs;
  • openness to foreign direct investment (FDI);
  • quality of infrastructure and institutions;
  • market size;
  • level of development;
  • level of protection of Intellectual Property Rights;
  • the Technical Standards in place;
  • industrial structure;
  • geographical location.

EU support in the areas of Trade Facilitation and Aid for Trade in general address some of these issues and can help overcome obstacles to GVC integration. Inclusion in Regional Trade Agreements can also facilitate developing countries’ engagement in GVCs.

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The development of sustainable and responsible GVCs is a cornerstone of the EU’s internal and external policies, the objective of which is to create the framework conditions that allow countries to integrate into, and move up, regional and global value chains in accordance with international standards and guidelines in the areas of human rights, labour, environment and anti-corruption.

The vertically-fragmented nature of GVCs means that the EC needs to adopt both sector-specific and horizontal, cross-cutting approaches to policy formulation when addressing these issues. The unequal distribution of value along GVCs is also something that needs to be addressed.

There is also scope for Private Sector Engagement in this process, as companies stand to benefit from the triple advantage of increased revenue, reduced supply chain costs and benefits to their brand from their participation in responsible chains.

DG DEVCO works closely with DG TRADE and other EC services to ensure coherence of policy and to guarantee that the interests of developing countries are protected in international trade arrangements. The overarching aim here is to promote inclusive growth, one feature of which is the ability of developing countries to participate in, and benefit from, GVCs.

GVCs require a strong global institutional framework to address the new challenges and opportunities that they present. In this context, the European Commission is committed to working closely with the World Trade Organisation and seeks to place the development of rules to govern global trade, including value chains, at the heart of the WTO.

Ultimately, the aim of the European Commission's trade and development policies is to ensure that the widest number of people benefit from trade, through better inclusion of the disadvantaged in business models and value chains. This means making sure that trade and investment policy is effective and tackles real issues based on an up-to-date understanding of the role of global value chains in the world economy.