GVCs for LDCs: A multilateral initiative to boost trade along global supply chains for least developed countries

Alessandro Antimiani, Lucian Cernat 24 June 2021

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The multilateral trading system and the body of trade rules enshrined in the WTO rulebook have been the cornerstone for trade-led economic development in recent decades. Trade and foreign direct investment (FDI) flows have created an amazingly efficient web of global supply chains that have generated a steady increase in global prosperity, economic development, and poverty reduction. Exports by the group of least developed countries (LDCs) are often covered by existing unilateral preferential schemes in most OECD countries and developing countries. One of the best examples of this has been the EU’s Everything but Arms (EBA) scheme. Virtually all OECD countries and many emerging economies have put in place several similar unilateral preference schemes.

However, despite such a favourable context, LDCs have retained persistently low participation in world trade. Despite the growing trend of world trade in the last decade, LDCs have not benefited from such a trend. Their share of world trade remained relatively stagnant during the last ten years and has experienced a slight decline since 2013 (Figure 1). 

Figure 1 Share of world exports by least developed countries (%)

Source: Antimiani and Cernat (2021).

This low level of participation is even truer in global value chains (GVCs). Most LDCs have achieved limited export diversification and have been dependent on exporting a few commodities or specific products (minerals, agricultural products). Despite this concentrated export structure, many third countries’ exports contain a non-negligible share of LDC value-added, notably textiles, processed food, and energy intensive products (Figure 2). 

Further, due to the Covid-19 pandemic, LDCs show the weaker recovery growth rate (14.1%) compared to developing (34%) and developed (14.1%) countries. "The least developed countries today are undergoing the worst recession in 30 years," UNCTAD Secretary-General Mukhisa Kituyi wrote in the foreword to the 2020 UNCTAD LDC report. "Their already low standards of living are falling. Their stubbornly high poverty rates are rising further, reversing the slow improvement they had achieved prior to the pandemic. Progress towards achievements on nutrition, health and education are being undone by the onslaught of the crisis” (UNCTAD 2020: xv).

An additional problem for LDCs is that the preference margin between most-favoured nation (MFN) tariffs and the ones offered to their exports in unilateral preferential schemes, even when duty and quota-free, is continuously eroded by the growing number of free trade agreements (FTAs) being concluded around the world.

Figure 2 Share of LDC value added in sectoral exports, by main exporting regions

Source: Antimiani and Cernat (2021).

The ‘GVCs for LDCs’: A new initiative

Instead of preferential schemes based on ‘direct’ LDC exports, under the new ‘GVCs for LDCs’ initiative, WTO members would offer duty-free access to LDC value-added that ‘travels’ inside finished products exported worldwide by any other WTO member. Hence, LDC exports will remain duty-free across the entire global supply chain, thus fitting the ‘Made in the World’ logic that the WTO has been advocating for several years.

The ‘GVCs for LDCs’ would offer additional and untapped potential not only for greater participation of LDCs in global trade but also for those exporters that incorporate LDC value-added in their products. This potential stems from the fact that LDCs remain dependent on exports of upstream products that are further processed along the global supply chains and (re-)exported as part of processed products manufactured in non-LDC countries. 

When looking at the composition of LDC exports, roughly 25% of LDC exported value-added is in fact further processed and embodied in third country exports. Given that the value-added exported by LDC ‘travels’ further down the global supply chain as part of third-country exports still facing tariffs, a global preferential scheme based on LDC value-added would allow products originating in any WTO members to receive an ‘LDC preferential treatment’ proportionate to the value of LDC content embodied in their exports, thus stimulating the demand along global value chains for LDC products. For instance, consider the case of tropical fruits (e.g. mangos) exported by LDCs. Currently, such products are offered duty-free and quota-free in certain preferential schemes for LDCs (e.g. the EU Everything but Arms). As such, nothing can be done to offer additional preferential market access for LDC exports of tropical fruits to Europe or any other country with an ‘EBA-like’ scheme. But if the LDC tropical fruit is embedded in a third country processed food export (e.g. yoghurt or ice cream) which faces a 15% most favoured nation tariff in another third country, the LDC mangos are also indirectly subject to the 15% tariff. Under the ‘GVCs for LDCs’ initiative, the LDC tropical fruit content value will be deducted from the dutiable value of the processed food items, leading to an increase in trade and a boost to LDCs exports of mangos along the supply chain. Therefore, unlike existing unilateral schemes, the ‘GVCs for LDCs’ multilateral scheme can offer a further boost to LDC exports and a more significant global positive impact, increasing exports for both LDCs and non-LDCs.

This ‘GVCs for LDCs’ scheme will be based on a uniform set of value-added rules of origin (possibly with a harmonised minimum content requirement), which will ensure that the tariff reduction will be proportionate to the LDC value-added content. Furthermore, the benefits from the ‘GVCs for LDCs’ do not come just from the direct preference margin faced by the downstream third-country exports. Another important source of welfare gains for LDCs comes from the fact that LDCs will face a significant increase in the global demand for such ‘made in LDC’ intermediate inputs that confer a preferential tariff margin to third-country downstream products, and consequently a price premium for LDC originating intermediates.

Untapping the global value chain potential for LDCs

To assess the main economic effects of our multilateral scheme, we used the Global Trade Analysis Project (GTAP) dynamic computable general equilibrium (CGE) modelling framework. For this analysis we used two different specifications of the GTAP model: GDyn, the dynamic version (Corong et al. 2017, Ianchovicina and Walmsley 2012, Ianchovicina and McDougall 2000) and the GTAP-VA, the value-added module extension (Salvatici et al. 2018). To simulate the possible impact of a ‘GVCs for LDCs’ initiative, we applied a multilateral scenario, where a tariff cut is introduced according to the level of LDC valued-added content in exports, i.e. each country receives a cut in tariffs, on a multilateral basis, on its exports according to the LDC valued-added embodied in the goods exported. The proportionate tariff reductions worldwide (based on share of LDC value-added contained in third country exports) takes into account not only intermediate goods but also the value of mode 5 services originating in LDCs.1

Looking at total trade effects, it is worth pointing out that global trade would increase by $23 billion, and the share of LDC in world trade would increase by roughly an extra tenth of their current share of world trade. In terms of LDC valued added, the initiative could enhance the LDC value-added embodied in their own exports and export by other countries. Figure 3 contains the sectors with the most significant increase in their own LDC domestic value-added. LDC will increase the valued added embodied in their exports by more than $5 billion, with some sectors (textiles, metal products, other primary, wood, and chemicals) showing the highest results. The LDCs would increase on average by 2% their domestic value-added content in their exports thanks to this new multilateral initiative. Furthermore, and probably most relevant, the ‘GVC for LDC’ initiative could reduce the excessive specialisation of LDCs in agrifood production, increasing the role of these countries in supplying intermediate inputs for a wide range of manufacturing sectors.

Figure 3 Top ten LDC sectoral exports with the highest increase in value-added ($ million, 2025)

Source: Antimiani and Cernat (2021)

However, this does not lead only to LDC direct export gains. Since the initiative offers preferences at multilateral level for products incorporating LDC inputs, LDCs will also increase their value-added embodied in third countries export, improving especially the value chain integration between LDCs and other developing countries exporting to world markets.

Conclusions

Despite the rebound in trade in recent months, the long-term effects of the Covid-19 pandemic will likely be felt for years to come. The United Nations International Trade Centre (UNITC) estimates that global export potential in 2025 is now 3.4% lower than before the pandemic, due to downward revisions in GDP growth forecasts. Estimates of export potential fell across all geographic regions, with Africa (-7.0%) and LDCs (-6.4%) being most affected (UNITC 2021). The ‘GVCs for LDCs’ multilateral scheme outlined herein shows that there is considerable room for the global trading system and new multilateral initiatives to offer additional impetus for the participation of LDCs in international trade. Equally significant, the increase in LDC exports is at nobody's expense: all countries benefit from an increase in their GDP and economic welfare, given that this new multilateral initiative creates new market opportunities for all countries incorporating LDC inputs in their exports.

This ‘GVCs for LDCs’ multilateral scheme could be further refined, both in analysis terms and with regard to concrete trade rules and procedures that apply to global supply chains. Rules of origin would be a critical element in the success of this initiative, and hence sufficient consideration needs to be given to the specific mechanisms and procedures that would govern such a scheme. There is also great potential for new digital technologies, such as blockchain, to facilitate paperless rules of origin procedures need for product traceability along global supply chains (Cernat 2020). There is hope that such trade and technology initiatives can lead to significant development synergies, including in LDCs.

Authors’ Note: The opinions expressed herein are those of the authors and do not necessarily reflect an official position or the views of the European Commission.

References

Antimiani, A and L Cernat (2021), “Untapping the full development potential of trade along global supply chain: “GVCs for LDCs” proposal”, Journal of World Trade 55, forthcoming.

Cernat, L (2020), “Blockchain for Trade: the next gold standard or the fool’s gold?”, European Centre for International Political Economy (ECIPE), October.

Corong, E L, T W Hertel, R A McDougall, M E Tsigas and D van der Mensbrugghe (2017), “The Standard GTAP Model: Version 7”, Journal of Global Economic Analysis 2(1): 1-119.

Ianchovichina, E and R McDougall (2000), “Theoretical Structure of Dynamic GTAP”, GTAP Technical Papers No. 17, Centre for Global Trade Analysis, Department of Agricultural Economics, Purdue University.

Ianchovichina, E and T Walmsley (2012), Dynamic Modelling and Applications in Global Economic Analysis, Cambridge University Press.

Salvatici, L, A Antimiani and I Fusacchia (2018), “Value Added Trade Restrictiveness Indexes. Measuring Protection Within Global Value Chains”, Departmental Working Papers of Economics - University 'Roma Tre' 0238, Department of Economics - University Roma Tre.

UNCTAD (2020), The Least Developed Countries Report 2020: Productive capacities for the new decade, United Nations: Geneva.

UNITC (2021), "Monthly Brief on the Global State of Trade", May 2020, United Nations International Trade Centre: Geneva.

Endnotes

1 The methodological approach is fully described in Antimiani and Cernat (2021).

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Topics:  Development International trade

Tags:  least developed countries, global value chains, trade, Tariff, multilateral, WTO, GVC

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