Trading Costs and Competitiveness in Global Value Chains

When firms trade in “tasks” rather than in final products, the weight of tariffs and transportation costs on factory prices and on international competitiveness is magnified. With goods crossing national borders many times before reaching the final consumer, these trading costs are also accumulating. Understanding this cascading effect and its implications on competitiveness is particularly relevant when designing trade and industrial policies. The paper shows that mitigating arrangements commonly used in developing countries, such as EPZs or draw-back schemes, have only limited effects when GVC up-grading through deeper domestic inter-industrial linkages is the policy-makers' main objective. Services producers do also pay the trading costs when purchasing intermediate inputs required for their functioning. More importantly from a global trade in tasks perspective and its increasing "servicification", their international competitiveness and the competitiveness of the exporting firms they supply with their services are reduced. This conference paper was mainly prepared for didactic purpose