Accumulating Trade Costs and Competitiveness in Global Value Chains

WTO Working Paper ERSD-2017-02

42 Pages Posted: 6 Feb 2017

See all articles by Antonia Diakantoni

Antonia Diakantoni

Trade Policies Review Division - World Trade Organization (WTO)

Hubert Escaith

Independent; World Trade Organization (WTO)

Michael Roberts

World Trade Organization (WTO)

Thomas Verbeet

World Trade Organization (WTO)

Date Written: January 23, 2017

Abstract

Trade costs such as applied tariffs, transportation and insurance costs are amplified as they pass through the multiple production steps associated with modern supply chains. This so called "cascade effect" arises since trade costs accumulate as intermediate goods are imported and then re-exported further downstream, going through different processing nodes before reaching the final consumer. Moreover, the financial impact of these trade costs is magnified in the "trade in tasks" rationale which governs global value chains (GVCs). Specialised processing firms need to recoup the associated trade cost applying to the full value of the good from the smaller fraction of value-added created at each consecutive productive stage. This large relative weight of transaction expenses on the profitability of individual business operations explains why trade along GVCs is particularly exposed to trade costs. The paper reviews the implications of trade costs on competitiveness at industry, national and global levels. The financial implications of trade costs at firm and sectoral level are based on trade in value-added data for 2011. The multilateral welfare effects of reducing discrete trade costs are identified using a network analysis approach, which goes beyond the traditional bilateral dimension of international trade and identifies where trade facilitation investment would have the highest social returns from a GVC perspective. The authors conclude that while the direct benefits of trade facilitation will be proportionally higher for those countries that are not well integrated into international trade because of their high trade costs, the global benefits of trade facilitation investments will also be high if they are undertaken by key traders that lie at the core of global value chains.

Keywords: Global Value Chains, Trade in value-added, International input-output analysis, Trade costs, Trade facilitation, Competitiveness, Effective rate of protection

JEL Classification: C67, F13, F14, F23, F61

Suggested Citation

Diakantoni, Antonia and Escaith, Hubert and Roberts, Michael and Verbeet, Thomas, Accumulating Trade Costs and Competitiveness in Global Value Chains (January 23, 2017). WTO Working Paper ERSD-2017-02, Available at SSRN: https://ssrn.com/abstract=2906866 or http://dx.doi.org/10.2139/ssrn.2906866

Antonia Diakantoni

Trade Policies Review Division - World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland
+41 22 739 5857 (Phone)

World Trade Organization (WTO) ( email )

154 Rue de Lausanne
CH-1211 Geneva 21
Switzerland
+417395426 (Phone)

Michael Roberts

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

Thomas Verbeet

World Trade Organization (WTO) ( email )

Rue de Lausanne 154
Geneva 21, CH-1211
Switzerland

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