implications of globalised value chains in the ... egs.pdf · upgrading in gvcs and the...

Implications of globalisedvalue chains in the environmental industry for trade policy

Przemek KowalskiSenior Economist, Trade and Agriculture Directorate, OECD

Value of the Environmental Goods Agreement25 October , 2016St. Regis Hotel, Beijing,

2Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

1st Unbundling 2nd Unbundling

Geographical separation of production and consumption across international borders (traditional trade)

Separation of production segments: unpacking of factories across international borders

Spurred by: reductions in transportation costs

Spurred by: reductions in ICT and coordination costs

Trade policy: mainly about selling (market access)

Trade policy: mainly about producing or connecting factories (trade-investment-service-knowledge-IP)

What is really new with GVCs?

Baldwin (2012)

Two waves of globalisation

3Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

GVCs’ development since the early 1990s

GVC Index: ratio of imports of intermediate products to final demand, 1995=100, Source: Haugh et al. (2016)

4Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

The globalised solar PV panel supply chain

Source: Trina Solar

5Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Average foreign value content in exports by sector

>80% of HS codes on the OECD Combined List of Environmental Goods (CLEG)

6Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Upgrading in GVCs and the “smiley” curve

Environmental Goods and Services (?)

Mundabi (2008) for EGS

In some EGS value chains, like those for PV-solar and wind-energy, most of the value added is concentrated in downstream activities.

7Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Silicon PV system cost breakdown

Source: OECD (2015)

Permitting costs, legal costs, engineering, financing, distribution, and post-module value-chain mark-up

8Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Silicon PV system cost breakdown (2)

Source: OECD (2015)

9Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Region by region trade weighted trade costs (AVE)

Trade costs remain significant, although tariffs account only for up to 1/10th

Source: OECD (2015) after Arvis et al. (2013) using the trade cost measure proposed in Novy (2010). Trade weighted average costs of trade by region for the year 2010.

E28 ECA ESA LAT MEN NAM PAC SAS SEA WCAE28 35ECA 67 62ESA 112 146 104LAT 110 159 189 94MEN 76 108 93 135 50NAM 66 102 125 92 72 15PAC 90 141 148 149 70 73 8SAS 95 139 162 184 61 89 107 92SEA 88 118 155 129 69 72 80 104 69WCA 108 165 94 128 115 105 143 100 162 104

10Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Trade costs are amplified in fragmented production systems

The final price of a product with value added of 100, where n Is the number of border crossing , by different import tariff rates

Source: OECD (2013).

11Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

And they are often concentrated upstream

Note: “Tiers” refer to the different stages of production, with "Tier 1" representing the immediate inputs to the producer of the final good, "Tier 2" representing the inputs to the production of "Tier 1" inputs, "Tier 3" representing the inputs to the production of "Tier 2" inputs, etc.

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Decomposition of cumulative tariffs in EGS-related sectors

12Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Effective tariffs are higher due to foreign content

Sour

ce: O

ECD

(201

3).

13Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

• Possibility to specialise in segments of value chains without mastering the whole process

• Engaging in GVCs requires a co-ordinated reduction of fragmentation-related costs of production (tariffs, NTBs, infrastructure, etc.)

• Engaging in GVC requires co-ordination of trade, investment, services, competition and innovation and IP policies

• Less clear whether and, if so how, to influence the nature of participation?

What have GVCs changed for policy making?

14Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

• It is about accessing inputs: EGA’s plurilateralliberalisation extended on an MFN basis

• Tariffs can be low but their effects can add up along the value chain and because of foreign content

Key questions:

• To what extent will the EGA go beyond end-use or final products to include intermediates?

• What is the possibility of including NTMs?• What is the possibility of including relevant

services?

Some implications for EGA negotiations

151515Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Access all of the information from the Trade & Agriculture Directorate at:

www.oecd.org/tad

You can reach us via e-mail by sending your message to the following address:

tad.contact@oecd.org

We invite you to connect with us on Twitter by following:

@OECDtrade

We look forward to hearing from you!Contact: Przemyslaw.Kowalski@oecd.org

Thank you!

16Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

• Development of the OECD Trade in Value Added Database

• Additional countries, additional refinements (factors of production, ownership, firm size, etc.)

• Mapping participation GVCs• Countries, sectors, regional, global, inter-regional, inter-sector links

• GVC implications for specific issues and polices• Trade policy implications (tariff, NTM escalation, RoO)• Innovation and knowledge based capital development• Investment policy implications (restrictions and FDI promotion)• Labour market implications (skills, regulations, inequality)

• Country-specific analysis and advise• TiVA country notes, GVCs Diagnostics

OECD’s work on GVCs

17Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Foreign sourcing is one of the key determinants of domestic value added embodied in exports

Dependent variable is the domestic value added in exports. Estimations are in changes (country-sector fixed effects). Period of analysis is 1995-2011

18Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Foreign sourcing is determined by structural characteristics, commercial policies…

Source: estimations based on OECD TiVA Database, 2015, Kowalski et al. (2015)

19Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

High income Developing Total

-0.15 -0.10 -0.05 0.00 0.05 0.10 0.15

Logistics Performance Index (customs)

Intellectual property protection (index)

Infrastructure, availability and quality

Broadband subscription (per '000)

Tax rate (total)

Quality of Electricity supply (index)

FDI restrictiveness Index (net)

R&D expenditure

Institutional quality

Tertiary graduates (share of workforce)

Access to loans (index)

Technical occupations (share)

Product Market Regulation

Services Trade Restrictiveness Index

.. and certain trade-related domestic policies

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20Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

backward and forward GVC linkages as % of gross exports

Understanding the differences in GVC integration across countries

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Source: OECD TiVA Database, 2015

21Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

What are EGS ?

>80% of HS codes on the OECD CLEG

22Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

• Relatively new and fast growing market (esp. core EGS)• Significant role of state as a consumer, regulator and

investor (R&D)• Some segments require geographical proximity (e.g.

certain wind turbine components)• Some markets segments vertically integrated (solar, PV)• Contrary to popular belief, only some segments capital

and knowledge-intensive• Distinguished shape of the “smiley” curve

Interesting characteristics of EGS in GVC context

23Trade and Agriculture Directorate | Organisation for Economic Co-operation and Development (OECD) | www.oecd.org/tad | tad.contact@oecd.org

Vertical integration and production volume to gross margin in the solar industry

Source: China Greentech Initiative, 2011.