by Celso Fuinhas[1]
Hereby we discuss how the participation of the European Union (EU) in global value chains (GVCs) can impact the fight against poverty in Least Developed Countries (LDCs). The analysis of the EU’s participation in GVCs is subdivided into three main areas: i) the implications on the industrial structure, ii) the issue of due diligence, and iii) the limitations imposed on the policy spaces of LDCs. The case of the graphite sector Mozambique is used as an illustration of how these three areas of approach can come together.
The concept of global value chains was initially introduced by Gereffi and Korzeniewicz (1994) as a way of characterizing a new way for firms to organize their international activities that emerged in the 1980s. They consist of a mode of organization in which the productive process (and hence the process of value creation) is dispersed throughout various countries. This differs from conventional trade in which the productive activity is completely within the borders of one country and only after production the international exchange of finished goods takes place. The participation in GVCs can help developing countries alleviate poverty by creating well paid jobs (Shepherd, 2013), and also by upgrading their industrial structure to a state that is compatible with a higher degree of added value (Humphrey, 2004; Ravenhill, 2014). For this reason, the EU’ trade policy could be framed with the objective of maximizing the poverty reducing potential of the incorporation of LDCs in its GVCs. On this point it is important to note that LDCs have, by definition, a low degree of insertion into global value chains. In fact they only account for around 1.15% of all global trade value (WTO) and this is especially true regarding processes with high value added. This means that the participation of LDCs in GVCs is mostly centered around the supply of raw materials to more advanced economies.
One way that the EU approaches its development aid programs is through an Aid For Trade framework. Aid For Trade is based on the facilitation of access to the European market of products produced in developing countries (WTO). This framework can take the form of programs such as the Everything but Arms, that applies to LDCs, or the Generalized Scheme of Preferences, that applies to lower-middle-income countries. Despite the potential that the participation in global value chains has to upgrade the industrial structure of LDCs the opposite might happen instead. The blanket removal of trade tariffs can lead developing countries to specialize in the areas in which they currently have a competitive advantage, that is the production and extraction of raw materials, leaving them stuck in a suboptimal local maximum. Even in cases where tariffs are removed only in areas determined in accordance with the wishes of local governments, there is still a high likelihood of reinforcing the underlying patterns in the industrial structure instead of encouraging their change. Furthermore, due to the highly standardized nature of the exchanges operated inside GVCs (Rodrik, 2018a), most capital employed in global value chains is adapted to the relative factor endowments of the rich world (high capital availability but scarce labor availability), and as such it is not compatible with creating a high number of well-paying jobs.
The decision of firms to shift part of their production process offshore can be driven by the desire to benefit from more relaxed labor and environmental regulations in the host country (Stern, 2003), as is the case in many LDCs. Furthermore, these companies create pressure, either implicit or explicit, to keep those regulations relaxed under threat of leaving the market (De Beule et al., 2022). This raises questions about the environmental and social sustainability of the extension of GVCs to LDCs. At this moment there is no comprehensive due diligence law at the European level that makes European based firms legally liable to environmental and human rights violations that happen outside of the EU. As a result, only 37 % of European firms operating in more than one country follow proper environment and human rights due diligence procedures. This share drops to 16% if we also consider their suppliers (Spinaci, 2023).
Lastly, trade agreements have become increasingly more comprehensive both in terms of breadth and scope. As a result of this increase the trade and cooperation agreements established by the EU with LDCs imply a very strong limitation of the latter’s policy options (Rodrik, 2018b). Moreover, the strict rules associated with the trade agreements can foster integration with the European market at the expense of regional integration.
The graphite sector in Mozambique poses a good example of the problems associated with the incorporation of LDCs in GVCs. Mozambique’s main exports are unrefined fossil fuels, metals, and minerals (Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, 2023). It is the world’s second largest producer of graphite after China. Yet its great reserves of mineral wealth have brought little material wealth to the country, especially to its poorest inhabitants. Practically all the raw materials are exported without being refined (limiting their added value) and the mining sector employs only a very thin slice of the population. This is not sufficient to significantly reduce poverty, while at the same leaves the country subject to harsh environmental exploitation.
To help tackle these issues we propose three different policy options. The first of these is to foster internal integration in LDCs. A practical way of implementing this is through the manipulation of the rules of origin, in order to increase the threshold of value added in LDCs that a given product needs to achieve to have tariff free access to the European market. Furthermore, the EU can use these same rules as a way of promoting the consolidation of raw material extraction and processing in LDCs. The second policy option regards establishing tighter standards of due diligence. Forcing European based firms to follow the same practices on environmental and human rights both outside and inside Europe would significantly improve the impact that they have on developing countries. The third policy option regards the encouragement of regional integration. When value chains are organized at the regional level, it is far more likely that high value-added activities will be executed in developing countries and LDCs (Berger et al., 2020). To encourage regional integration the EU can privilege the establishment of cooperation agreements at regional level and not only on a bilateral level.
References
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Notes
[1] EPOG+ Program, University of Torino and Sorbonne University (Paris)
