Global Production Networks, New Trade Technologies and the Challenge for International Institutions

Date01 February 2020
DOI10.1177/0015732519886781
Publication Date01 February 2020
AuthorRichard Pomfret
SubjectArticles
Global Production
Networks, New Trade
Technologies and the
Challenge for
International Institutions
Richard Pomfret1
Abstract
In the twenty-first century, production processes and international trade in
goods and services are being revolutionized by developments in information and
communications technology. For many products, global production networks have
rendered the label Made in Country X meaningless. With an increasing number
of services, both for end-users and as inputs, being provided online, it becomes
increasingly difficult to locate where value-added is being produced. This article
seeks to document the impact of new technologies on international trade and to
analyse the policy implications at the national and global level. A turning point is
identified in the mid-1990s; up to 1995 there is no statistically significant relationship
between internet usage and trade, but after 1997 the relationship is statistically
significant. Use of the internet reduced trade costs, increased the size of trade
flows and permitted greater fragmentation along global value chains. It also created
opportunities for new international transactions, for example, based on ‘big data’.
The article concludes with analysis of attempts to reach WTO agreements with
respect to e-commerce and digitalization and of alternative fora in which these
issues are being addressed, and relates the outcomes to the phenomenon of
mega-regionalism.
JEL Codes: F02, F68, 038
Keywords
Global value chains, digital trade, trade agreements
Article
1 Institute for International Trade, The University of Adelaide, Adelaide, Australia.
Corresponding author:
Richard Pomfret, Institute for International Trade, University of Adelaide, Adelaide, SA 5005, Australia.
E-mail: richard.pomfret@adelaide.edu.au
Foreign Trade Review
55(1) 21–41, 2020
© 2020 Indian Institute of
Foreign Trade
Reprints and permissions:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/0015732519886781
journals.sagepub.com/home/ftr
22 Foreign Trade Review 55(1)
In the twenty-first century, production processes and international trade in goods
and services are being revolutionized by developments in information and com-
munications technology (ICT), which have raised new challenges for policymak-
ers.1 For many products, the global value chain (GVC) phenomenon has already
rendered the label ‘Made in Country X’ meaningless for goods that were ‘Made in
the World’. With an increasing number of services, both for end-users and as
inputs into GVCs, being provided online, it becomes increasingly difficult to
locate where value-added is being produced. This article seeks to document the
impact of the new technologies on international trade and to analyse the policy
implications at the national and global level.
The internet does not recognize national borders. The phenomenon is apparent
in Southeast Asia, where many online service providers to GVCs are ‘born global’
with offices in Bangkok, Manila, Jakarta or in any other city with reasonable con-
nectivity and are totally footloose (ASEAN, 2016, pp. 147–148). The clustering
of online service providers is also a common phenomenon, with Silicon Valley as
the usual prototype. In a large country like India there can be large within-country
variation in the extent and nature of participation in GVCs, with some locations
providing unskilled labour and others, notably Bengaluru, providing state-of-the-art
hi-tech inputs (UNIDO, 2018).
Definition and Measurement of the Digital Economy
UNCTAD’s World Investment Review 2017 defined the digital economy as ‘the
application of digital technologies to the production and trade of goods and ser-
vices’. Such a definition invokes measurement problems and also raises major
difficulties in terms of how data flows are covered by world trade law and of how
and where revenues associated with data flows should be taxed. Ironically, the
challenge arose immediately after the creation in 1995 of the World Trade
Organization (WTO) and formalization of world trade law under GATT, applying
to goods, and GATS, applying to services. Problems of jurisdiction were soon
apparent (e.g., trade in a book is covered by GATT but sale of an e-copy of the
same book is covered by GATS).2 Since 1995, the WTO has been an important
institution in establishing trade law and managing disputes but has had a disap-
pointing record in pushing world trade law into new areas such as e-commerce
and the digital economy.
Ylhäinen (2018) provides a concise review of challenges to measuring the
digital economy. The rapid reduction in price and increase in quality of digital
products and services make it likely that the fall in real quality-adjusted prices and
hence the increase in real output is underestimated. Free services are by definition
not included in national accounts, although the value of apparently free services
such as Google can be captured by advertising revenue; this is similar to an older
argument about measuring the GDP contribution of free-to-air commercial TV.
The assumed link between GDP per capita and well-being becomes more tenuous
as digitalization makes some intermediaries redundant (e.g., travel agents, bank

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