CHAPTER 4

Regional Trade Agreements: A Hope

or a Threat to the Global Trade?

Vladimir Zuev

Regional Trade Agreements: Global

Trading System Radical Re-Shaking
In this section, we explore the growing role of the Regional Trade Agree-
ments (RTAs) for the international trading system. The analysis reveals the
fast-growing number of the regional agreements and a change in their
nature. As a result of recent developments, regionalism and regional inte-
gration have reached new heights in their evolution. The fast spread of
the RTAs does not lower down the necessity to reform the multilateral
trading system. Moreover, it helps to demonstrate the main avenues of
these reforms, increasing the chances to introduce them at the WTO
level. The RTAs legal framework becomes all the more important as a
policy decision determinant for the business community all around the

V. Zuev (B)
Higher School of Economics, Moscow, Russia
e-mail: vzuev@hse.ru

© The Author(s), under exclusive license to Springer Nature 51

Switzerland AG 2022
A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance
During De-Globalization, International Political Economy Series,
https://doi.org/10.1007/978-3-031-13757-0_4
52 V. ZUEV

world, not alone in purely trade policy matters, but in many other trade
related issues.

Regionalisation—Regionalism—Regional Integration and Regional

Trade Agreements (RTAs)
The starting point of the analysis in this chapter is the concept of region-
alism as it embraces, but not exclusively resides in, the process of the
creation of the RTAs. Though quite recently, J. Bhagwati defined region-
alism as ‘preferential trade agreements among the subset of nations’
(Bhagwati, 1993). Such definitions belong to history, as today regionalism
is not only about trade.
There is a big variety of thinking on regionalism and we have to iden-
tify where we depart from. The broad understanding of the term ‘region’
in international relations is not linked to a geographical identity or terri-
torial proximity any longer. It used to be that way half a century ago.
A well-known definition of the region was given by J. Nye: ‘a limited
number of states linked together by a geographical relationship and by
a degree of mutual interdependence’ (Nye, 1971). For modern region-
alism, it does not matter whether the number of states is ‘limited’. As
experience reveals, regional agreements could embrace states both in small
and big numbers. ‘Geographical relationship’ could be a factor to facilitate
a regional agreement, but not necessarily, as many regional agreements are
formed by states from different geographical locations. ‘A degree of inter-
dependence’ was never defined by scholars. Thus, it could be high or low
and in case it was low, it never hampered reaching a regional agreement.
However, the narrow understanding of the term ‘region’ is still widely
used, e.g., in the World Trade Organization (WTO) RTAs database.
We understand Regionalism as a policy, as a specific gover-
nance response to the challenges of regionalization and globalization.
Concluding RTAs represent just the trade policy part of this response. The
logic of the current trends would suggest regionalism as a process leading
to globalization of regions, or even to a ‘regional world order’, or rather
to several ‘regional Worlds’ (Acharya, 2014). The process of regional-
ization could be pushed forward by any kind of links, i.e., economic,
political, and cultural between actors all over the globe, creating a new
political and economic geography, building up new, economic and polit-
ical regions, and arriving at a new level of interdependence. The number
 4 REGIONAL TRADE AGREEMENTS … 53

of extra-regional RTA connections is roughly four times bigger than intra-

regional ones (WTO | Regional Trade Agreements, 2021a, 2021b), which
testifies that regionalism has become a global phenomenon.
Sorting out the understanding of the interrelated definitions, we
should bear in mind that most RTAs have been concluded in the form
of a Free Trade Area (FTA). An FTA breeds the first form of regional
economic integration, leading to another important definition, Regional
integration. Regional integration embodies more intensive interactions
compared to regionalization as the term integration has a deeper meaning
i.e., ‘bringing separate parts together’.
With this idea in mind, it will be appropriate to recall the study of B.
Balassa published 60 (!) years ago (Balassa, 1961). Anniversary is always
a good occasion to revise the major points of the theory. Can the validity
of this theory be questioned today, as the contemporary concept of a
‘region’ is interpreted very differently half a century from its inception?
The original concept of the Economic integration forms looked as
follows, in accordance with the criteria of the level of discrimination in
trade: (1) Free trade area, (2) Customs union, (3) Common market,
(4) Economic union and (5) Full economic integration. It looks like a
paradox, but despite the huge intensification of regional links, the theory
on the forms of regional economic integration is almost identical to what
it looked like 60 years ago, except for one thing. Balassa did not foresee
the creation of the Monetary Union. It is definitely a form of integra-
tion, but it was not mentioned in his classification. As a solution to this
inadequacy, the scholars started to refer to the Monetary Union jointly
with the Economic Union, by describing this form of integration as ‘Eco-
nomic and Monetary Union’. Some researchers perceived the Monetary
union as a specific form of an Economic union: ‘The extreme case of an
Economic Union could be a Monetary Union’ (Hosny, 2013). However,
the meaning of these terms is absolutely different. The Economic Union
refers to the coordination of macroeconomic policies, while the Mone-
tary Union suggests merging them together. Coordination lies only at the
starting point of unification. The unified monetary policy is miles away
from a ‘mere’ coordination of policies.
For me, it was a puzzle for a long time, why setting up any common
economic policy apart from the trade and monetary policy was not treated
as a form of economic integration. Let us remember that a common trade
policy was considered by Balassa and his followers as an important element
of the economic integration that made a difference between an FTA and
54 V. ZUEV

a Customs Union. Hence, a common trade policy stepped forward in the

classification of the forms of integration. If everybody accepts a common
trade policy as a step to integration, then, why not consider a common
agricultural or regional policy or any other common economic policy as
a form of integration? Creating a common policy is no less important for
the process of working out relationships between states than eliminating
barriers to trade. If we can agree on that, the classification would look
different.
The evolution of the forms of Economic integration, according to the
criteria of the level of discrimination in trade and the level of coordination
of policies could be presented as follows: (1) Free trade area, (2) Customs
union, (3) Common policy, (4) Common market, (5) Economic union,
(6) Single policy, Monetary Union and (7) Full economic integration. In
this renewed list of forms, apart from the added form of the common
policy, the case of the Monetary Union does also have a special meaning.
As we remember, before the Monetary Union was introduced, there was
another form of economic integration in the European Union (EU)—
the common monetary policy with the common monetary unit—The
European Currency Unit (ECU). We come to an important method-
ological point that allows us to distinguish between regional cooperation
(regionalism) and regional integration. Integration is not only about elim-
ination of barriers. The maturity of cooperation matters. States agreeing
to have their national policies coordinated to a certain extent does not
imply integration. Coordination happens everywhere in the world, even
between the states in a conflict. If states create something common, for
instance a common policy or a common institution, that is the first step
to integration. Out of something purely national, states manage to create
something common. However, they still could preserve their national
policies and institutions sovereign and intact. When states go further to
substitute national policies with single elements, for instance the intro-
duction of the Euro as a single European currency, only then a deep form
of integration manifests itself. As a result, national structures and policies
become merged, or integrated in a single whole, registering the peak of
the economic integration process.
Another important distinction that we have to take into account is the
demarcation line between a regional economic organization (RO) and
an RTA. An organization, whether regional or global, appears when its
member-states or other actors come to agreement upon a statute with a
set of rules, norms and procedures, fixed mechanism, and an institutional
 4 REGIONAL TRADE AGREEMENTS … 55

structure with common goals to be achieved. Different RTAs could be

the building blocks within a regional organization. However, a regional
organization is a more developed structure than an RTA. A RO aims at
different levels of either formal cooperation like in the majority of inter-
national organizations, or setting up a more ambitious target, the one of
integration. With these basic definitions and concepts in mind, we can
move on forward to develop the topic of the role of the RTAs for the
international trading system.

The Growing Role of RTAs in International Trade

According to the WTO, more than 700 RTAs have been notified by 2021.
Around half of them (350) continue to be in force (WTO | Regional
Trade Agreements, 2021a, 2021b). The RTAs dynamics over the past
20 years shows that the number of registered RTAs has almost tripled,
and the number of RTAs in force—has doubled.
The push for the multiplication of the RTAs can be explained in many
ways. One factor—is the slow progress in trade liberalization at a global
level, which is being compensated for at a regional level. Another expla-
nation is that major economies are seeking reliable regional partners
to support themselves against increasing global competition. Regional
projects are also more feasible than global ones. It is more realistic to
find a common denominator at a regional rather than at a global level
between countries with different trade policies.
Reliance on the RTA is growing worldwide. All countries, even the big
ones conclude RTAs to support their trade activity (EU, United States
of America (USA), Canada, China, Russia, Japan). European countries
are the leaders in the RTAs creation. However, if we put North, South,
and Central America together, the total for the notified RTAs—165, will
be practically the same as for Europe—168. It is also of interest, if we
bring together countries from East Asia, West Asia and the Middle East,
we arrive to a figure—162 RTAs (WTO Secretariat/RTA Section 2021).
Hence, we come to a rather balanced global redistribution of the RTAs
between Europe, America, and Asia.
However, if we take a single trading entity, the EU will be an absolute
leader in the RTAs. In 2021, the EU participated in 49 such agree-
ments. About 3/4 of the EU foreign trade is conducted with the FTA
partner countries. Switzerland and Iceland signed 31 agreements. Other
leaders in RTAs are Norway (30 agreements), Chile (29), Liechtenstein
56 V. ZUEV

(29), Singapore (25), Mexico (22), Turkey (22), Peru (19), South Korea
(18), Ukraine (18), and Japan (17) (WTO | Regional Trade Agree-
ments, 2021a, 2021b). Numerous trade agreements between states from
different continents have formed an interconnected global network of
RTAs that are contributing to the creation of the new ‘global region-
alism’ (Zuev, 2020). This trend outlines the importance of participation
by any country in the process of the formation of FTAs networks.
Goals and forms and methods of regional interactions of states differ
to a great extent. Free trade area is the most widespread type of RTAs.
About 80% of all agreements are concluded in the form of an FTA. Most
frequently FTAs are covering trade in goods. However, since the start of
this century agreements on services are also on a fast rise. This tendency
reflects the growing role of services in international trade. It is not only
the number of the RTAs that is constantly growing. The share of trade
within and between RTAs is impressive and continues to be on an upward
trend.
The share of inner trade within the major regional organizations is not
necessarily high. In most cases, it is not even higher than trade with third
countries. Actually, only within the EU, inner trade is by far larger than
trade with third countries. We could suggest that the deeper the level
of integration within the organization, the higher the share of the inner
trade between members of this entity should be. A well-integrated unions
like the EU or the United States-Mexico-Canada Agreement (USMCA)
do have higher levels of inner trade. While a lower profile ROs, like
Common Market of the South, Mercado Común del Sur (MERCOSUR)
and the Eurasian Economic Union (EAEU) do have much lower shares
of inner trade. The Association of Southeast Asian Nations (ASEAN) is
placed in between, with a relatively low share of inner trade. The national
sovereignty remains much treasured for members of this RO. Hence,
the level of economic integration remains relatively low. There seems to
be a correlation between the degree of integration within the regional
organization (the highest, clearly, is in the EU) and the share of trade
within it (again, the largest share of inner trade is also within the EU).
But this first-glance correlation should be further proven. The counter-
argument to this statement could be the level of complementarity of the
economies of countries within the RO. Less complementary economies
in the ASEAN or within MERCOSUR do continue to rely more on the
extra-regional trade links.
 4 REGIONAL TRADE AGREEMENTS … 57

Another interesting feature is that trade within the RTAs occurred to

be more resistant to economic crisis shocks than trade outside the RTAs,
including the Pandemic shocks. Our recent study showed that external
trade volumes for the EU, restored faster for those trade partners that had
an FTA with the EU, rather than for those that did not have any trade
agreement with the EU (Kalachyhin & Zuev, 2022). During COVID-19
crisis, some trade-restrictive measures have been adopted also within the
RTAs. But they were phased out faster using the mechanisms of interac-
tion within the RTA, and hence, the negative effect on trade was leveled
down sooner. In July 2020, public and private trade experts deliberated
on possible RTAs provisions that could complement national anti-crisis
trade policies (Shirotori et al., 2021). The search for the increased role
of the RTAs at a time of a crisis goes on, and RTAs may become a more
important anti-crisis instrument, eventually.
What is clear, is that the share of inner trade between members of
all major regional organizations is growing (shown in darker color in
Fig. 4.1). In the last decade, the largest increase in the share of inner
trade was registered within the EU, followed by the USMCA. Same trend
could be depicted for most RTAs partners. According to Eurostat, from
2015 to 2020, total EU trade growth with FTA partners was on average
2,5 times higher than with non-FTA partners (European Commission,
2021). A study for the EU RTAs, done in Sweden supports this thinking.
According to the findings, trade effect of EU RTAs increases with the
level of ambition in the agreement. EU custom unions (with Turkey,
San Marino, and Andorra) and single-market agreements (the Euro-
pean Economic Area (EEA), EU-Switzerland) increased trade by 111%
on average. By contrast, no impact was found for economic partner-
ship agreements with countries in Africa, the Pacific, and the Caribbean.
Earlier (1996–2010) EU free trade agreements (FTAs) increased trade by
20% on average, whereas post-2010 EU more ambitious FTAs increased
trade by 37% (Altenberg et al., 2019).
If on top of the inner trade within the leading ROs, we add the extra-
regional trade flows (between different countries having an FTA, between
countries and ROs with an FTA, and within the mega-trade deals), the
share of international trade that is channeled through different types of
RTAs will be, according to different estimates, around an impressive 70%!
It’s definitely appropriate to use the term ‘global’ in conjunction with
RTAs, as all countries at all the continents do conclude regional trade
agreements. RTAs and mega-RTAs connect America with Europe, Europe
58 V. ZUEV

2020 2012

Share of inner trade in total trade, %

80
70
60
50
40
30
20
10
0
EU USMCA ASEAN MERCOSUR EAEU

Fig. 4.1 Leading regional organizations by the share of inner trade in total
trade, 2012–2020 (Sources done by the author on the basis of calculations
from statistics on all five regional organizations. Obtained from: WITS [2021],
UN Comtrade Database [2021], EAEU [2021], Eurostat [2020], Leitner et al.
[2016])

with Asia, Asia with America. Multiple RTAs between countries from
different continents around the globe create an interconnected global
RTA network and could be considered as a basis for the new Global
regionalism.

RTAs Growing Maturity: Meeting Global Challenges, Becoming

Comprehensive and Sustainable
The hope to fill in the gaps in global trade regulation depends more
than ever before both on the expansion of the RTAs and especially on
the changes occurring in their substance. Elimination of barriers creates
common spaces by demolition of economic frontiers. Another way to a
common structure—to construct it anew. A distinctive feature of modern
RTAs is that they do contain this second way of building common
spaces by introducing common instruments, standards, and norms. The
old-time and well-established ROs, such as the EU, ASEAN, USMCA,
MERCOSUR, African Union, and others, do also have common insti-
tutions and policies. This form of the regional integration is widely
acknowledged. What can be regarded as a new trend, relates to the
extra-regional RTAs that are mostly done in the form of the FTAs. They
 4 REGIONAL TRADE AGREEMENTS … 59

also provide for not alone elimination of different barriers to trade, but
for creation of common mechanisms of interaction. The nature of the
modern RTAs has become more extensive, embracing new areas and
disciplines, not fully covered by the WTO. This trend manifests the
growing role of the regional trade policy as a tool to meet the current
economic challenges. The examples are numerous: it could be setting up
a common legal framework for the protection of the Intellectual Prop-
erty Rights (IPR), or for the protection of investors rights; introducing
common technical and quality regulations, or labor and environment
standards; adhering to the competition laws; building up common dispute
settlement bodies or procedures. They also take care of e-trade, human
rights, small enterprises, cybersecurity, they respond to the energy tran-
sition, they take into account climate agenda (Haas, 2016). Intra and
extra-regional RTAs have become the strong driving power of modern
regionalism not just because they continue to abolish barriers to economic
interaction. Though it continues to be an important function of the
RTAs, as barriers that were not sufficiently treated previously, like the
Non-Tariff Barriers (NTB), started to be actively incorporated into the
newly formed RTAs. A notable change in the RTAs function is that they
turned out to be the drivers of the integration by building up common
mechanisms, policies, spaces, etc. in a positive stream of integration
activities.
Analyzing the contents of the recent RTAs, we see that most frequently
their chapters are devoted to such items as: services (in 64% of agreements
signed since 2001), e-commerce and digitalization (33%), movement of
people (50%), export restrictions (51%), environment (59%), competition
(71%; including rules on monopolies), intellectual property rights (72%),
transparency (80%), sanitary and phytosanitary measures (SPS—82%),
technical barriers to trade (82%), and investments (85%). The coverage of
trade related issues in the current RTAs is becoming more comprehensive,
embracing many new chapters and provisions.
Another change in the substance of the current RTAs is that they
are becoming SDG-focused. Almost all recent RTAs include at least
one reference to maintaining Sustainable Development Goals (SDGs).
RTAs frequently refer to the multilateral environmental agreements;
clean energy and waste management; policies which harm forests, water
resources and downgrade biodiversity; aim sustainable management and
rule-making procedures (WTO & UN Environment, 2018). Some trade
blocks do more to advance the Sustainable Development (SD) agenda.
60 V. ZUEV

For instance, the EU has included labor and environmental standards in

its FTAs with third countries for about 10–15 years already. Since FTA
with Korea in 2011, these have been included in a trade and sustain-
ability separate chapter. The European Union has also included a chapter
on Trade and Sustainable Development (TSD) in its latest trade agree-
ments. The EU-MERCOSUR mega-deal provides for a separate chapter
on the SDGs. According to the post-Brexit trade agreement with the
United Kingdom (UK), signed in 2020, parties can impose trade sanc-
tions in case levels of sustainability in trade are not sufficient. On February
18, 2021, the European Commission published a Trade policy review
(European Commission, 2021). The Commission plans reinforcing the
sustainability dimension of existing and future agreements, strengthening
the enforcement of trade and sustainable development commitments.
Hence, the sustainability is likely to become more enforceable through
the EU trade policy, including through the RTAs as its main instrument.
The sustainability provisions are also found in mega-trade agreements
such as the Comprehensive and Progressive Agreement for Trans-Pacific
Partnership. To assist SDGs implementation in RTAs, the United Nations
(UN) Environment branch, has developed a Sustainability Toolkit for
Trade Negotiators as advisory services (WTO and UN Environment,
2018). The methods of environmental provisions in RTAs continue to
evolve. Bringing the environment and sustainable development into RTAs
has become a typical element of regional trade policy.
Digitization of the economy and trade has become another big issue
dealt with in the current RTAs. For instance, the reshaped USMCA
contains a set of digital rules and provisions, if compared with the former
North American Free Trade Agreement (NAFTA). The digitization has
been intensified since 2020 because of COVID-19. E-commerce was
expanding at a time of pandemic isolation. In 2019, the first Digital
Trade Agreement (DTA) was done by the United States (US) and Japan,
aimed at building up and regulating common digital trade framework.
E-commerce regulation is being provided for in many RTAs in the
form of specific provisions. By 2021, in the Asia–Pacific region three
DTAs were signed and one agreement was under negotiation. The first
trade agreement with a dedicated chapter on e-commerce was the New
Zealand-Singapore FTA signed in 2000. Within the last two years from
2019 to 2020, about half of all trade agreements (eight out of the 17)
included specific e-commerce provisions. That is a clear demonstration of
the growing role of the e-commerce regulation within the current RTAs.
 4 REGIONAL TRADE AGREEMENTS … 61

At the start of 2021, there were 65 regional trade agreements in place

with e-commerce provisions (UN ESCAP, 2020).
Some RTAs include a dedicated chapter on electronic commerce, or
provisions on digital commerce in the chapter on IPR, or provisions
related to digital rights management, or to data protection and local-
ization. We can have an idea about the substance of the regulation in
this area by looking at the list of provisions included in the chapters
on e-commerce: electronic trade rules and market-access commitments,
facilitating digital trade; prerequisites for telecommunications services
provision; intellectual property rights protection; elimination of customs
duties on electronic trade; de minimis thresholds for low-cost parcels;
non-discrimination of digital imported products; the cross-border elec-
tronic transfer of information, data localization and cybersecurity; elec-
tronic authentication and e-signatures; paperless trading; e-invoicing;
e-payments; consumer protection; personal information protection; open
government data access; unified e-system the ‘single window’; usage of
source code for software; digital identities; standards and conformity
assessment for digital trade; rules for artificial intelligence in trade; dispute
settlement. Hence, this part of the regulation in the RTAs has become
virtually comprehensive.
On the other hand, many RTAs just reproduce the moratorium
reached within the WTO on customs duties for e-commerce transactions
and provide for cooperation between regulatory authorities without going
into any details. However, these arrangements within the RTAs may have
a special meaning for the trading system as if the multilateral moratorium
is not extended one day, there would be an RTA-level base for it. That
could be considered as a limited scope substitute. With the growing role
of digitalization, there are all the reasons to suggest that future RTAs
will be further oriented to various forms of regulation on trade in digital
goods and services, compared to traditional goods and services.
The leading economies became leaders in forming the current RTAs
agenda, bringing more items into it. It can be demonstrated by the
example of the EU, pushing forward the green agenda, being the leader
in environmental provisions incorporation into numerous RTAs. The
USA emphasizes RTAs rules on the protection of the intellectual prop-
erty rights that usually go beyond what is required by WTO. Many US
FTAs contained provisions related to digital rights management. Digital
provisions are frequently included into the RTAs upon the insistence
of the developed economies. The illustration is in a number of RTAs
62 V. ZUEV

between an advanced economy that insisted upon e-commerce provisions

as a condition for the agreement with less developed countries such as
with Cambodia, Georgia, Guatemala, India, Indonesia, and others. In
general, RTAs between advanced economies have a broader coverage and
a deeper penetration into the ways and means the topics are treated.
The EU concluded several RTAs with a chapter on trade in services
(telecommunications or financial services) and e-commerce (Wu, 2017).
All in all, we can conclude that recent RTAs do have a broader
and deeper coverage of different topics. In other words, their maturity
is growing. The current economic challenges are increasingly met by
the trade regulative response within the modern RTAs. The RTAs are
more focused not alone on trade liberalization, they start responding
to environmental, climate, digitalization, crisis management, and other
important concerns of the current economic agenda.

The RTAs and the Multilateral Trading System: Increased

Fragmentation and Protectionism or Continued Globalization
and Liberalization?
One core principle of the WTO trading system is non-discrimination.
However, RTAs are an exception to this rule. RTAs are somehow discrim-
inatory as only their signatories enjoy favorable market-access conditions,
put forward by these agreements. The partial solution to this problem is
the WTO notification procedure. In order to be recognized by the WTO,
a regional trade agreement has to be notified in a due way. It should aim
facilitating trade between its parties and should not raise trade barriers
vis-à-vis third-parties. From this perspective there is no formal conflict
between the RTAs multiplication and the multilateral trading system.
According to many scholars, regionalism is not opposed, but comple-
mentary to free trade. Especially after the concept of regionalism has been
transformed into a ‘new regionalism’ often referred to as an ‘open region-
alism’ (Laursen, 2003). However, with time, and at economic crisis times
and during the Pandemic, some RTAs become restrictive toward third
countries and it is not controlled in a due manner by any multilateral
institution. The WTO authority lies more in the sphere of monitoring
trade. It produces trade monitoring reports of its members and joint
reports together with the Organization for Economic Co-operation and
Development (OECD) and the United Nations Conference on Trade and
Development (UNCTAD) on trade and investment measures for G-20
 4 REGIONAL TRADE AGREEMENTS … 63

economies. Trade policy reviews on individual countries and ROs are also
done. But in case of restrictions revealed, there are no sanctions.
The hope for the global trade regulation breakthrough lies and
depends more than ever both on the expansion of the RTAs and espe-
cially on the changes occurring in the coverage of areas of cooperation.
Modern RTAs are different from what they were only a decade ago. As we
have showed, they deal not only with lowering down tariffs and quantita-
tive restrictions on trade, but they go beyond that. This is what is called
‘WTO plus and WTO extra’ topics, which comprise non-tariff barriers,
intellectual property rights protection, public procurement, investment
regimes, ecology and environment protection and many others. These
issues are not dealt with to the same extent at a multilateral WTO level,
as it is difficult to reach a consensus between many members. However,
the absence of solutions at a multilateral level looks less a tragedy for
the global trade regulation as the number and the role of the RTAs is
constantly growing and the quality of the regulation advanced within
them is on a continuous upward trend. If we take digital trade, we find
that the RTAs number dealing with digital trade is moving to a hundred.
New international regulative frame originated and pushed forward by the
RTAs could be considered as a compensation for the absence of a compro-
mise at a multilateral level. The nature does not tolerate an empty space.
There is always something to fill it in. This is exactly the case for the
global and intra-regional trade regulation.
Having said this, does not mean there is no need for a progress in
trade regulation at the multilateral level. Even the global regionalism is
not sufficiently global to fully substitute the WTO multilateral framework.
Thus, countries will have to find a compromise for the reform of the
WTO (already in progress) to restore its authority to the benefit of the
re-shaken global trade regulation. According to OECD experts, services,
investment, transparency, and e-commerce are the areas that show the
most significant degree of similarity across different RTAs. Hence, these
particular areas are the first ones to create a common ground for speeding
up negotiations at the WTO level. A link RTA—WTO should operate this
way too.
Regionalism is working both ways. Regionalism and globalism could be
both opposing and complementary, counterbalancing or complementing
each other (Hettne, 2005). On the one hand, regionalism fills in the gaps
of the multilateral system, becoming more comprehensive and global.
Regions ‘are increasingly fundamental to the functioning of all aspects
64 V. ZUEV

of world affairs from trade to conflict management, and can even be said
to now constitute world order’ (Fawn, 2009). On the other hand, global
multilateral system is becoming fragmented in certain areas of governance
into more robust regional coalitions to deal with the current challenges
in a more effective way. ‘.. regions and regionalism are taking a quasi-
autonomous role in shaping global policies and in addressing issues..
previously tackled in the framework of global multilateral institutions’
(Barbieri, 2019). International trade is definitely the case illustrating such
a dual impact of regionalism by the fast spread of the RTAs.
Mega-Regional Trade Agreements (MRTAs) represent a new level of
RTAs’ development in terms both of the scope and the substance. They
are done between large and important trading partners, or between the
regional organizations (EU—MERCOSUR), or between a regional orga-
nization and a big economy (EU—Canada, EU—Japan). Mega-RTAs
follow the RTAs path by regulating a wider and more complex range
of issues. As R. Baldwin puts it, twentieth century RTAs were helping
to ‘sell things’ by reducing barriers for goods to cross borders, twenty-
first century RTAs (including mega-RTAs) are there to help ‘make things’
by enabling factories … to insert themselves into global value chains …
(Baldwin, 2014). Mega-RTAs represent another step forward in creating a
large base for common regulatory standards for investment and business
activities. They generate incentives for other states to become partners
with actors in a MRTA. Economies of scale working. Third countries
try to achieve compatibility with mega-RTAs rules, simplifying the access
to the large markets. The trend to create MRTAs has all the chances
to further intensify the process of multiplication of the standard RTAs.
Hence, the most likely scenario in the coming years is a follow up trend
of the new RTAs multiplication.
Does the trend of the RTAs multiplication lead to a fragmentation
in the international trading system? To a certain extent—yes. As benefits
of the newly created RTAs are only available to members. The focus of
scholars and the WTO was traditionally made upon the level of liberal-
ization of trade. If no extra-barriers to trade were created by the newly
formed RTA and some barriers were phased out within an RTA, that was
considered in accordance with the WTO rules. The logic was understand-
able: the overall level of liberalization of international trade was due to be
higher as a result of intensified liberalization within the regional parts of
the trading system. However, taking into account the focus of the current
RTAs—not so much on dismantling the barriers to trade but on building
 4 REGIONAL TRADE AGREEMENTS … 65

up common spaces (see “Regional Trade Agreements: Global Trading

System Radical Re-Shaking” section of this chapter), the newly created
mechanisms will be available only to members of the RTA. It does not
formally confront the WTO rules. The more these common mechanisms
become important, the more they would lead to another kind of fragmen-
tation within the international trading system. This time fragmentation
could be not identified upon the level of liberalization of trade within the
global system, but it will emerge through a difference in the degree of
coordination of policies within the trading blocks and RTAs. The trick is
that the higher the level of coordination of policies, the more advantages
the countries will mutually enjoy from the system that provides opportu-
nities for such a coordination. And the WTO can’t do anything about it
but to further continue to accept the notifications of the incoming new
RTAs.
Many scholars may be worried on the prospects for a new phase of
fragmentation within the international trading system, the way they were
worried about the existing fragmentation in the levels of trade liberal-
ization. My guess is that contrary to these worries, the incoming ‘new’
fragmentation could bring about a hope for a progress at a multilateral
level within the WTO. It looks as a controversial statement: how could
yet another fragmentation in the global trading system bring back positive
developments into the multilateral trade negotiations?!
I suggest a following logic. ‘Defiant’ states could easily block multi-
lateral negotiations using or rather abusing the consensus rule within the
WTO. They can’t do that standing outside the RTAs, or belonging only
to a small number of RTAs. And RTAs are becoming the dominant rule-
makers within the international trading system. ‘Maverick’ states could
continue blocking consensus decisions within the WTO, but they can’t
do so within the multiple RTAs. And if these against-multilateral-trade-
solutions’ states are becoming increasingly marginalized, they should
normally loose motivation to continue blocking decisions within the
WTO, as the dominant part of trade will be handled anyway by a set
of rules within the growing RTAs network. Hence, there is a chance for
the multilateral trading system to rebecome solid the way it used to be.
The chances for the multilateral system renewal are strong with the RTAs
on a rise.
We demonstrated that RTAs have become a foundation for building
up the new global trading system with many new distinctive features.
66 V. ZUEV

This system was formed parallel to the existing multilateral framework.

However, it remains strongly linked to it in many various ways. RTAs are
guided by the WTO principles and apply its norms, being at the same
time a best practice case for the WTO and fostering multilateral trade
links in a particular way.

Acknowledgements for the assistance of the Faculty of the World Economy and
International Relations of the Higher School of Economics.

References
Acharya, A. (2014). Global International Relations (IR) and regional worlds: A
new agenda for international studies. International Studies Quarterly, 58(4),
647–659.
Altenberg, P., Berglund, I., Jägerstedt, H., Prawitz, C., Stålenheim, P., &
Tingvall, P. (2019). The Trade Effects of EU Regional Trade Agreements –
Evidence and Strategic Choices. https://www.kommerskollegium.se/global
assets/publikationer/rapporter/2019/publ-trade-effects-eu-rta.pdf. Accessed
15 November 2021.
Balassa, B. (1961). The theory of economic integration. G Allen & Unwin Ltd.
Baldwin, R. (2014). Multilateralising 21st century regionalism. OECD.
Barbieri, G. (2019). Regionalism, globalism and complexity: A stimulus towards
global IR? Third World Thematics: A TWQ Journal, 4(6), 424–441. https://
doi.org/10.1080/23802014.2019.1685406
Bhagwati, J. (1993). Regionalism and multilateralism: An overview. Trading
blocs: Alternative approaches to analyzing preferential trade agreements.
http://ctrc.sice.oas.org/trc/Articles/Regionalism/dm_ch2.pdf. Accessed 20
November 2021.
EAEU. (2021). EAEU Legal Portal. https://docs.eaeunion.org/en-us. Accessed
12 December 2021.
European Commission (2021) Communication: Trade Policy Review – An Open,
Sustainable and Assertive Trade Policy. COM(2021) 66 final.
Eurostat. (2020). Intra-EU trade in goods – Main features. https://ec.eur
opa.eu/eurostat/statistics-explained/index.php?oldid=452727. Accessed 12
December 2021.
Fawn, R. (Ed.). (2009). Globalizing the regional. Cambridge University Press,
Cambridge.
Haas, P. M. (2016). Regional environmental governance. In T. A. Börzel &
T. Risse (Eds.), The Oxford handbook of comparative regionalism (1st ed.,
pp. 430–456). Oxford University Press.
 CHAPTER 5

How Do Global Value Chains Challenge

Traditional International Business Policy?

Ari Van Assche

Introduction
Global value chains (GVC) have taken the policy world by storm (Gereffi,
2019). In the past decade, virtually all leading international organiza-
tions including the International Labor Organization, the Organization
of Economic Cooperation and Development, the United Nations Confer-
ence on Trade and Development, the World Bank, and the World Trade
Organization (WTO) have dedicated at least one flagship publication to
GVCs. The WTO has gone a step further by launching the “Made in the
World” initiative ten years ago to deepen the understanding of the role of
GVCs in international trade and their implications for the world economy.
Yet, despite the huge enthusiasm about the topic of GVCs in policy
circles, there remains substantial ambiguity how the adoption of GVC
thinking alters trade policy recommendations. Is it old wine in new bottles

A. Van Assche (B)

HEC Montréal, Montréal, Canada
e-mail: ari.van-assche@hec.ca

© The Author(s), under exclusive license to Springer Nature 69

Switzerland AG 2022
A. Karhu and E. Haaja (eds.), Global Trade and Trade Governance
During De-Globalization, International Political Economy Series,
https://doi.org/10.1007/978-3-031-13757-0_5
70 A. VAN ASSCHE

as some scholars have argued? Or does the reality of GVCs really lead to
new policy thoughts?
The goal of this chapter is to study these questions. In Sect. “Trifecta
of Tasks, Linkages, and Firms”, we discuss which new elements the GVC
framework brings to thinking about international trade by emphasizing
the role of the trifecta of tasks, linkages, and firms. In Sect. “The Trifecta’s
Influence on Trade Policy Narratives”, we then analyze how the enlarged
focus on this trifecta has influenced policy thinking in four leading trade
narratives in which GVCs play a central role. We use Sect. “Discussion
and Concluding Comments” to make some concluding comments about
the influence of GVCs on trade policy.

Trifecta of Tasks, Linkages, and Firms

Global value chains (GVCs) have revolutionized the way that production
processes are organized. Thanks to improvements in communication and
transportation technologies, companies have abandoned the practice of
producing goods or services entirely in a single country and within their
own organizational boundaries. Through offshoring and outsourcing,
they have sliced up their value chains and dispersed activities to locations
and actors where production can be conducted most efficiently.
In a recent article, Carlo Pietrobelli, Roberta Rabellotti, and I laid out
a framework that evaluates the impact of GVCs on our thinking about
international business policy (Pietrobelli et al., 2021). The main message
of the paper was that GVCs alter our reasoning about trade by elevating
the role of tasks, linkages, and firms. In this Sect., we briefly discuss how
GVCs have raised the importance of this trifecta. In the next section, we
then explain how the trifecta has influenced different narratives that relate
GVCs to public policy.

Tasks
The first novelty of the GVC framework is its shift of attention from
industries to tasks (or value chains stages). Traditionally, trade economists
and practitioners treated comparative advantage as a phenomenon that
drives countries to specialize in industries. This is because much of trade
theory is built on the “national production paradigm” whereby final
goods are considered tradable in world markets but production inputs are
non-tradable (Van Assche, 2017). The emergence of GVCs has shattered
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 71

this paradigm by demonstrating that production processes are nowadays

globalized as well. This matters because it means that countries can partic-
ipate in a finer-grained international division of labor than was previously
considered. Countries no longer need to specialize in entire industries but
can rather “hyperspecialize” in those value chain stages or “tasks” of an
industry in which they have a comparative advantage (Grossman & Rossi-
Hansberg, 2008). Empirical evidence backs this up. Timmer et al. (2018),
for example, combined value-added trade data with occupational employ-
ment data to show that, within industries, developed countries specialize
in knowledge-intensive headquarter activities (e.g., R&D and marketing)
while despecializing in labor-intensive fabrication activities. In contrast,
developing countries predominantly specialize in fabrication activities.
The focus on tasks has redirected the attention toward the type of
tasks that generate most development opportunities. A highly influential
concept in this respect is the “smile of value creation.” It suggests that the
disproportionately high knowledge intensity of tasks at the two extremes
of the value chain (R&D upstream and marketing downstream) implies
that they capture a disproportionately high portion of the value added
generated in GVCs. In contrast, the low knowledge intensity of assembly
activities in the middle of the chain means that they generate little value
added, putting them at the bottom of the smile curve.
Recent studies have provided empirical support for this conceptualiza-
tion (Van Assche, 2020). Dedrick and Kraemer (2017) used teardown
reports to showcase the existence of “smile curves” in smartphone value
chains. Lead firms such as Apple, Huawei, and Samsung, which are
responsible for the R&D, product design and brand equity, captured
around one-third of total value added. Assembly activities in developing
countries only captured 3–4 percent of total value added. Rungi and Del
Prete (2018) uncovered a similar story in their analysis of the financial
data of two million European firms. After controlling for firm hetero-
geneity, they detected a U-shaped relationship between the value-added
content of a firm and its distance from final consumption.
The existence of the “smile of value creation” implies that countries
nowadays vie to increase their competitiveness in higher value-added
activities. Developed countries seek to develop policies that allow them
to maintain their position at the extremes of the smile curve while devel-
oping countries look for the optimal policy mix to move up the smile
curve.
72 A. VAN ASSCHE

Linkages
A second novelty that the GVC framework uncovers is the importance of
international production and knowledge linkages for a country’s perfor-
mance. In traditional trade thinking, international linkages were generally
ignored since companies were believed to concentrate their entire produc-
tion process within the same country (national production paradigm). For
firms that participate in GVCs, however, international linkages become
critical for performance. Collaborating with strong suppliers that can
produce components cheaper at a higher quality can boost domestic firms’
productivity while working with weaker foreign value chain partners can
stifle performance (Grossman & Rossi-Hansberg, 2008). Furthermore,
international linkages to foreign partners can act as a powerful conduit
for accessing foreign knowledge that can be leveraged to improve tech-
nological and operational capabilities (Ambos et al., 2021; Turkina & Van
Assche, 2018). Countries therefore seek to develop an optimal policy mix
that allows them to strengthen the benefits that international linkages
provide without making them too vulnerable to foreign shocks through
international linkages.

Firms
A third novelty of the GVC framework is that it highlights the impor-
tance of firms. GVC scholarship recognizes that the power in GVCs is
unequally distributed in the favor of lead firms which can determine the
terms and conditions of GVC participation for other firms (Dallas et al.,
2019). Lead firms have the power to impose the product, social or envi-
ronmental standards that GVC partners need to meet and can use various
types of carrots (e.g., knowledge transfer) and sticks (e.g., supplier exclu-
sion) to ensure that partners are in lockstep. An influential literature has
built on these ideas to discuss the importance of GVC governance for
economic and social upgrading (Barrientos et al., 2011; Gereffi et al.,
2005). Other studies have built on this power asymmetry argument to
call for lead firms to step up the plate and develop private governance to
upgrade local suppliers, ensure fair treatment of workers, adopt environ-
mentally sustainable business practices, and build resiliency (Van Assche &
Brandl, 2021).
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 73

The Trifecta’s Influence

on Trade Policy Narratives
How does the elevated role of tasks, linkages, and firms challenge tradi-
tional trade policy? In this section, we address this question by analyzing,
comparing, and contrasting the policy recommendations that arise from
four major policy narratives that have recently emerged related to GVCs:
The GVC participation narrative which focuses on the importance of
participating in GVCs to boost economic development; (2) the resilience
narrative that concentrates on GVCs’ impact on a country’s economic
resilience against global economic shocks; (3) the economic upgrading
narrative that focuses on the fastest pathways for countries to increase
their value capture in GVCs; and (4) the sustainability narrative that
focuses on improving local social and environmental conditions in GVCs.

GVC Participation Narrative

The GVC participation narrative is a perspective that is most closely
aligned to traditional trade thinking. As we will see, it enriches trade
theory by embracing the concept of tasks and linkages in GVCs, but it
also promotes neoliberal policies that are at the heart of conventional
trade policies. Because of the widespread support that the narrative enjoys
in many international organizations, it can also be called the establishment
narrative.
The starting point of the narrative is that countries increase their partic-
ipation in GVCs for reasons that are similar to those evoked in traditional
trade theory. According to this perspective, GVC participation primarily
strengthens economic development by allowing countries to “hyperspe-
cialize” in those tasks in which they have a comparative advantage, letting
domestic resources flow to their most productive use (Grossman & Rossi-
Hansberg, 2008). This is beneficial for developing countries which can
embark on a fast track to industrialization by allowing them to enter
GVCs through the concentration on simpler production stages that suit
their existing level of capabilities. It is also advantageous for developed
countries which can specialize in high-value-added tasks such as R&D
and marketing that generate more value capture.
Due to the establishment narrative’s focus on the benefits of deeper
international division of labor which is also at the heart of traditional
74 A. VAN ASSCHE

trade policy thinking, it proposes many of the same neoliberal poli-

cies that international organizations have traditionally embraced (World
Bank, 2019). Specifically, it emphasizes two policy pillars that aim to
strengthen the functioning of the market in the global trading system:
market-enabling policies and connectedness policies (Pietrobelli et al.,
2021).
Market-enabling policies address the market distortions that prevent
the allocation of private resources toward comparative advantage sectors
and value chain activities. Eliminating such market distortions is thus
considered instrumental to facilitating GVC participation and promoting
a country’s functional specialization in those GVC activities in which a
country has a latent comparative advantage.
Connectedness policies aim at improving GVC participation by
reducing the cost for local firms to receive or transmit goods and informa-
tion across borders, thus turning them into more attractive GVC partners.
On the goods side, this includes trade liberalizing policies such as the
elimination of tariff and non-tariff barriers as well as policies aimed at the
introduction of competition in transport services and at the improvement
of port structure and governance. On the information side, there are poli-
cies that strengthen companies’ ability to transfer data cheaply, freely, and
safely across borders, such as those aimed at fostering competition in the
telecommunications sector and at improving the quality of the wireless
network infrastructure.
The recognition of the sequential nature of linkages in GVCs has
nonetheless led to new neoliberal policies that go beyond traditional
policy. For example, the recognition that the same component may cross
borders multiple times as it journeys along a GVC implies that the
elimination of downstream trade restrictions in GVCs can substantially
boost the participation of upstream producers in GVCs. This logic is
at the basis of the “Global Value Chains for Least Developed Coun-
tries (LDCs)” initiative that I recently promoted with Gary Gereffi and
Stephanie Barrientos in an open letter to the Director General of the
World Trade Organization (WTO) (Van Assche et al., 2021). Under
this Initiative, WTO members would complement existing preferential
schemes based on “direct” LDC exports with a multilateral scheme that
would extend a proportional duty-free treatment to the LDC value-added
that is incorporated in exports across the globe. Hence, LDC value-added
exports would remain duty-free throughout their journey along global
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 75

and regional value chains, thus offering firms and workers in LDCs the
needed additional support to participate in global trade.
For instance, consider the case of mangos exported by LDCs.
Currently, such products are offered duty and quota-free in certain
preferential schemes for LDCs (e.g., the EU’s Everything but Arms
program). But if the LDC mango is embedded in the destination coun-
try’s processed-food export (e.g., yogurt or ice cream) which faces a 15%
most-favored-nation tariff, the LDC mangos are also indirectly subject
to this tariff. Under the “GVCs for LDCs” initiative, the domestic value
added of the LDC mango will be deducted from the dutiable value of
the processed food items, leading to a boost to LDCs exports of mangos
along the supply chain. A similar positive trade effect would arise for non-
agricultural products (e.g., copper, aluminum, cotton) and manufacturing
products (e.g., apparel and textiles).
Antimiani and Cernat (2021) estimate that the “GVCs for LDCs”
initiative will increase the value-added embodied in LDC exports by
more than US$5 billion on an annual basis, with textiles, metal prod-
ucts, and other primary goods showing the biggest gains. On average,
LDCs would see their domestic value-added content in exports increase
by two percent and move away from excessive specialization in agri-food
production toward the supply of intermediate manufacturing inputs.

GVC Resilience Narrative

A second narrative that has been front-and-center in recent policy discus-
sions is the GVC resilience narrative. In the face of the Great Recession
of 2008–2009 and the COVID-19 pandemic, many trade sceptics have
clamored that hyperspecialization is endangering countries’ ability to
ensure the supply of essential goods and to develop a resilient economic
system. Proponents of the resilience narrative, then again, have pushed
back against these views by countering that GVCs have in the past
played a central role in building economic resilience and that they need
to be further embraced to build a more robust economic system (Van
Assche, 2021). In this section, we will briefly discuss these two contrasting
viewpoints and identify what new policy recommendations the resilience
narrative generates.
In today’s globally interconnected economies where international link-
ages are prevalent, a disruption in one part of the global economic system
76 A. VAN ASSCHE

can propagate to other countries through GVC linkages (Miroudot,

2020). Recent history provides us with numerous examples. During the
Great Recession of 2008–2009, negative liquidity shocks in one country
caused a chain reaction of financial difficulties throughout GVCs as firms
relied on each other for credit (Bems et al., 2013). In the aftermath of
the 2011 Tohoku earthquake and tsunami, the production of Japanese
automotive and electronics components dried up, creating supply chain
disruptions that affected the price and availability of cars and computers
around the world (Escaith et al., 2011). In the early months of the
COVID-19 pandemic, confinement efforts in China led to the closure
of factories across the globe as companies could not access parts.
These events—combined with recent shortages in essential goods and
supply chain disruptions—have raised the concern among trade scep-
tics that hyperspecialization has overly heightened countries’ reliance on
foreign suppliers and GVCs, thus endangering governments’ ability to
deliver societal well-being. Assertions have been made that GVCs had
become too complex and that they were not designed to operate in
today’s turbulent geopolitical landscape. Calls have therefore become
increasingly loud for GVC-curtailing policies that would make countries
more resilient to global economic shocks through reshoring.
Proponents of the resilience narrative have pushed back against these
arguments by pointing out that the link between GVCs and resilience is
more complicated than trade sceptics portray (Miroudot, 2020). While
it is true that GVCs increase a country’s exposure to foreign shocks, it
also reduces a country’s vulnerability to local disasters. Building a truly
resilient economic system thus requires supply sources to be sufficiently
diversified both between domestic and international suppliers and across
countries, and GVCs play an important role in this (Miroudot, 2020).
Policies that promote reshoring and “buy local” can in this respect be
detrimental by both reducing resiliency and increasing procurement costs
(OECD, 2021a).
Advocates of the resilience narrative instead focus on policy instru-
ments that can help countries strengthen the resilience of the supply of
essential goods without curtailing GVCs (OECD, 2021b). First, they call
for governments to build more slack in the system through domestic
stockpiling so that unforeseen future shocks can be better managed.
Second, they call for heightened government collaboration with the
private sector to promote standards of risk management that reduce the
perils of supply chain disruptions. This may include mandates for GVC
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 77

lead firms in essential goods sectors to develop due diligence strategies

that strengthen awareness, transparency, accountability, and agility. Third,
they call for increased international regulatory co-operation with like-
minded countries to ensure resilient GVCs by reinforcing predictable,
rules-based trade and avoiding unilateral or retaliatory trade measures.
Through cooperation with the private sector and other countries, it is
believed that governments can incite companies to build GVCs that can
ensure resilient supply chains in essential goods.
It is important to point out that the focus on mandated due diligence
strategies is a policy recommendation that builds squarely onto the GVC
framework’s focus on firms. By imposing due diligence principles onto
GVC lead firms in essential goods sectors, governments are imposing a
heightened responsibility on lead firms to develop terms and conditions
for GVC participation that will build resilience, thus ensuring that the
private sector meets broader government expectations.

Value Capture Narrative

The value capture narrative pushes the trade policy discussion further
away from the neoliberal trade policies of the past (Gereffi, 2019). While
this narrative recognizes that GVC participation is an important ingre-
dient for economic development, it cautions that market and coordination
failures often prevent market forces from moving countries to activi-
ties that lead to higher value capture (Pietrobelli & Staritz, 2018). It
therefore advocates that governments should adopt more interventionist
trade policies to ensure a stronger nexus between GVC participation
and industrialization through structural transformation (Pietrobelli et al.,
2021).
The starting argument of the economic upgrading narrative is that
moving up the smile curve is key to economic development and that inter-
national linkages play a central role in doing so. Suppliers’ international
linkages with global lead firms provide access to knowledge that helps
them build the necessary capabilities to move into higher value-added
activities (Gereffi et al., 2005; Morrison et al., 2008). This linkage-
induced economic upgrading can take on different forms: product and
process upgrading, which implies moving vertically along the value chain
to better products or processes as well as the more challenging func-
tional and interchain upgrading, entailing horizontal movement toward
78 A. VAN ASSCHE

new functions or new markets (Humphrey & Schmitz, 2002). A range

of empirical studies have used this upgrading typology to analyze how
GVC participation may trigger economic development, including Bair
and Gereffi’s (2001) study of the apparel cluster in Torreon, Mexico and
Van Assche and Van Biesebroeck’s (2018) study of the export processing
regime in China.
A key talking point of the economic upgrading narrative is that a
supplier’s ability to economically upgrade depends on both the gover-
nance structure of the lead firm (Schmitz & Knorringa, 2000) and the
absorptive capacity of the supplier (Sako & Zylberberg, 2019). First,
governance structure matters. Lead firms are generally willing to tolerate
or even support innovation by their suppliers along the dimensions of
quality, flexibility, and productivity if it helps strengthen the complemen-
tarities between the two value chain partners. In contrast, lead firms may
discourage and even hinder the acquisition of technological capabilities by
its suppliers if in the future this type of innovation risks to encroach on the
lead firm’s core competence. In this respect, the GVC governance litera-
ture has focused on how different patterns of governance may enhance or
hinder different types of economic upgrading, which are themselves often
the result of learning and innovation activities (Schmitz & Knorringa,
2000).
Second, absorptive capacity matters (Sako & Zylberberg, 2019). The
quality of linkage-induced learning depends on local firms’ ability to
absorb, master, and adapt the knowledge and capabilities that lead firms
transfer to them (Morrison et al., 2008). These firm-level processes are
often lacking in developing countries, where firms have low R&D and
innovation capabilities.
Building on these arguments, proponents of the value capture narra-
tive advocate that governments should develop a more interventionist
trade policy stance to boost economic upgrading, with vertical policies
focusing on specific sectors and even firms that can lead to more rapid
economic upgrading. Instead of advocating for market-enabling poli-
cies, they promote greater selectivity in building absorptive capacities
and harnessing governance structures that can lead to stronger economic
upgrading toward high value-added activities (Lee, 2013).
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 79

Sustainability Narrative
The sustainability narrative similarly promotes policies that are more
interventionist and focus on leveraging the power of lead firms. A
central argument in the sustainability narrative is that GVC participa-
tion, resiliency building, and economic upgrading do not automatically
foster social and environmental upgrading along the GVC. Even if
they create significant economic progress, the benefits often leave many
behind (Lund-Thomsen & Lindgreen, 2014) and lead to environmental
degradation (De Marchi et al., 2019). Barrientos et al. (2011) show
that economic upgrading can, but does not necessarily, lead to social
upgrading which implies accessing better work and enhancing working
conditions, protection, and rights. Similarly, there could be tensions
between economic and environmental upgrading, defined as any change
in the value chain resulting in the reduction of firms’ ecological footprint,
such as in their impact on greenhouse gas emissions, on biodiversity losses
and on natural resources overexploitation (De Marchi et al., 2019).
At the same time, there is a growing acknowledgment that lead firms—
if properly harnessed—can be a powerful vector to promote social and
environmental upgrading. As we have seen, lead firms have the corpo-
rate power to define the terms and conditions of GVC membership and
can use their authority to promote social standards and environmental
stewardship among their suppliers (Van Assche & Brandl, 2021). This
compliance can cascade down to lower tier suppliers if GVC participa-
tion is made conditional on promoting sustainability standards further
down the chain (Narula, 2019). Distelhorst and Locke (2018) find that
firms reward suppliers for complying with social standards, supporting the
notion that lead firms can play a key role in promoting social upgrading.
The ability of lead firms to dictate the terms under which lower-level
actors operate in a GVC has led to a vibrant academic debate about
the role of private governance in filling gaps in global regulation. Many
MNEs have implemented corporate social responsibility initiatives in their
supply chains as a way of independently regulating labor issues, including
the establishment of codes of conduct and the implementation of third-
party monitoring of working and environmental conditions. While several
scholars have pointed out the positive role that private governance can
play in addressing market failures that public governance has difficulties
80 A. VAN ASSCHE

tackling (Scherer & Palazzo, 2011), others have warned that it is rela-
tively ineffective (Locke et al., 2009) and may weaken state regulation
and create parallel regulatory systems (Rossi, 2019).
For this reason, proponents of the GVC sustainability narrative have
called for policies targeting lead firms that can more effectively incen-
tivize them to promote sustainability along GVCs. One instrument that
can be used in this regard is the use of social and environmental standards
in public procurement practices. The 2014 EU Procurement Directives,
for example, includes several far-reaching regulatory features that facili-
tate the monitoring of the respect for human rights and labor standards
of contractors and subcontractors across borders. Another is the develop-
ment of guidelines to which multinational firms need to abide in specific
industries. The OECD Due Diligence Guidance, for example, provides
detailed recommendations to help companies respect human rights and
avoid contributing to conflict through their mineral purchasing decisions
and practices.

Discussion and Concluding Comments

GVCs are challenging traditional trade policies by putting the spotlight
on the trifecta of tasks, linkages, and firms in trade policy development.
Tasks matter because countries nowadays hyperspecialize in slivers of
value chains—tasks—instead of entire industries. Proponents of the GVC
participation narrative argue that a country should rely on neoliberal trade
policies to benefit from hyperspecialization since it allows the country to
functionally specialization in those tasks that are in line with the country’s
latent comparative advantage, boosting economic development. Advo-
cates of the value capture narrative suggest that more interventionist trade
policies are needed to facilitate countries’ economic upgrading into higher
value-added activities.
International linkages matter because a country’s trade performance
nowadays is heavily influenced by its firms’ linkages with foreign value
chain partners. Proponents of the GVC participation narrative suggest
that these international linkages can generate an additional productivity
and knowledge boost to domestic firms and thus promote further hyper-
specialization through neoliberal policies. Advocates of the GVC value
capture narrative point towards the importance of linkage-induces knowl-
edge spillovers for economic upgrading and call for interventionist policies
that can help strengthen developing-country firms’ absorptive capacity
 5 HOW DO GLOBAL VALUE CHAINS CHALLENGE … 81

and the amount of knowledge that lead firms transfer to these firms.
Proponents of the GVC resilience narrative point toward the importance
of diversified supply bases to ensure the resilience of GVCs in essential
goods industries and call for international cooperation to achieve this.
Firms matter because GVC lead firms have the power to set the terms
and conditions of supplier participation in GVCs. Proponents of the GVC
resilience narrative build on this argument to call for governments to
mandate due diligence principles related to resilience so that lead firms
can use their power to make their supply bases more resilient. Propo-
nents of the GVC sustainability narrative make similar arguments to push
governments to mandate due diligence principles that can promote social
standards and environmental stewardship along GVCs.
Taken together, these insights show that GVCs have created a new
global trade reality that require a systemic redesign of trade policies. At
the same time, the differential and sometimes opposing policy recommen-
dations across the various narratives also highlights the need to develop
a more integrative way of thinking about the complex phenomenon of
GVCs and its interaction with public policy.

References
Ambos, B., Brandl, K., Perri, A., Scalera, V. G., & Van Assche, A. (2021). The
nature of innovation in global value chains. Journal of World Business, 56(4),
101221.
Bair, J., & Gereffi, G. (2001). Local clusters in global chains: The causes and
consequences of export dynamism in Torreon’s blue jeans industry. World
Development, 29(11), 1885–1903.
Barrientos, S., Gereffi, G., & Rossi, A. (2011). Economic and social upgrading
in global production networks: A new paradigm for a changing world.
International Labour Review, 150(3–4), 319–340.
Bems, R., Johnson, R. C., & Yi, K. M. (2013). The great trade collapse. Annual
Revue of Economics, 5(1), 375–400.
Cernat, L., & Antimiani, A. (2021). Untapping the full development potential
of trade along global supply chains: ‘GVCs for LDCs’ proposal. Journal of
World Trade, 55(5), 697–714.
Dallas, M. P., Ponte, S., & Sturgeon, T. J. (2019). Power in global value chains.
Review of International Political Economy, 26(4), 666–694.
Dedrick, J., & Kraemer, K. L. (2017). Intangible assets and value capture in
global value chains: The smartphone industry (Vol. 41). WIPO.