Global value chains drove growth in developing nations

July 17, 2025 (MLN): To specialize in specific stages of production rather than manufacturing complex final goods, developing countries used global value chains (GVCs) as a pathway to prosperity for decades.

Through this model, countries like Bangladesh supply fabric for European fashion brands, and Vietnam assembles smartphones for markets in South Korea and North America, according to the World Bank.

Over half of global trade is now conducted through GVCs, with participation particularly increasing in lower-middle-income countries.

The benefits are well-documented: GVC involvement accelerates productivity, spurs job creation, and often leads to better wages and working conditions as firms strive to meet international standards.

However, this progress is now under threat from growing trade-policy fragmentation.

Country-by-country trade deals risk undermining the Most Favored Nation (MFN) principle, a cornerstone of the global trading system since 1947 under the General Agreement on Tariffs and Trade.

MFN ensures equal market access for all 163 members of the World Trade Organization, a principle that has underpinned the growth of GVCs by ensuring predictability and fairness.

While preferential trade agreements, such as the US-Mexico-Canada Agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the Regional Comprehensive Economic Partnership, can reduce barriers, they also introduce complications.

When countries are not included in such agreements, they may attempt to route exports through third countries to gain access, prompting the introduction of complex rules of origin.

Verifying the origin of goods is relatively straightforward for products like steel, but becomes complex for multi-sourced items like smartphones.

These rules of origin raise compliance costs for firms, which must revise internal processes, train staff, and hire external experts.

Customs authorities, in turn, face heavier operational demands including investigations, cooperation, and audits, according to the World Bank.

The World Bank estimates that rules-of-origin compliance costs represent about 4.5% of the customs value of goods traded under preferential agreements.

This poses particular challenges for small and medium-sized enterprises (SMEs), which often lack the scale and resources to meet these requirements, potentially leading to reduced participation in GVCs and greater market concentration.

Moreover, high compliance costs increase the temptation to bypass rules.

A 1% increase in the preference margin, the difference between preferential and standard tariff rates, leads to a 0.39% increase in attempts to use preferential rates, according to recent data by Gonciarz and Verbeet (2025).

After nearly eight decades of trade built on non-discrimination, rising tariffs, complex rules, and fragmented policies could reverse hard-won gains for developing economies, undermining the very poverty-reducing potential that made GVCs a vital engine for global development.

 Copyright Mettis Link News