Global value chains and their effect on the environment

1. GLOBAL VALUE CHAINS AND
THEIR IMPACT ON THE
ENVIRONMENT

2. Introduction
At the Introduction to the course, Trading for Development in the Age of Global
Value Chains - WDR 2020, it was taught that a Global Value Chain (GVC) breaks up
the production process across countries. Firms specialize in a specific task and do not
produce the whole product.
According the Organisation for Economic Cooperation and Development (OECD),
"Firms try to optimise their production processes by locating the various stages across
different sites. The past decades have witnessed a strong trend towards the
international dispersion of value chain activities such as design, production,
marketing, distribution, etc." (https://www.oecd.org/sti/ind/global-value-chains.htm)

3. Effects
Because of the dispersed nature of activities in GVCs, they impact the environment in
both positively and negatively. In this era of increased concern on the effects of carbon
emissions on the world, it is necessary for economic actors to be aware of the effect that
GVCs are having on the environment.
These effects include:
1. Scale effects
2. Composition effects
3. Technique effects

4. Scale Effects
This refers to the rapid growth of economic activity occasioned by GVCs. As GVCs
grow, this increases economic activity, which in turn leads to an increase in carbon
emissions. This is especially true for countries that have transitioned from the
commodities stage to the Limited Manufacturing stage of GVCs.
Increased GVC activity also results in increased transport of goods between participating
countries, which results in higher carbon emissions from these transport activities. There
is immense pressure on organisations within the transport industry, such as the
International Maritime Organisation to work towards reduction in carbon emissions
resulting from transport.

5. Scale Effects (Cont…)
There has also been an increase in waste resulting from GVCs, who produce more advanced
products at a faster rate, and who have to package semi-finished goods that are used as inputs
further down the production cycle.
“In 2018 the Center for Biological Diversity estimated that swirling convergences of plastic
make up about 40 percent of the world’s ocean surfaces and that at current rates they could
outweigh all the fish in the sea by 2050”. (WDR-2020)
On the flip side, as the economy improves in most of these countries, Improvement of living
standards leads to a demand for better environmental laws, which in turn results in reduced
emissions. International actors have also called for enhancement in circular production techniques
where waste from electronic products are recycled into new products.

6. Composition Effects
It has been hypothesized that, as countries become more and more stringent in their laws and
regulations around pollution and carbon emissions, more and more industries are likely to relocate
to areas where these laws and regulations are weak, a phenomenon called the Pollution Haven
Effect. This is based on the fact that industries will relocate to these areas to keep their cost of
production to a minimum.
However, according to the World Development Report 2020, “Environmental regulations are as
small part of the costs”, and “polluting industries—paper, metals, cement, and refineries—tend
to be costly to relocate, and production is tied to local factor or product markets. Paper plants
locate near the trees, and cement plants near their customers. It is therefore not obvious that
countries with lax regulations will have a comparative—or even an absolute—advantage in
polluting goods”

7. Composition Effects (Cont…)
GVCs in the agricultural sector allow for sourcing of raw agricultural products from
countries or areas that are abundant and help save those that are low in the same
resources. Arid countries that may struggle to feed their population benefit from such
GVCs.
However, there is a risk that counties that host this stage of such GVCs may subsidize
such activities, running the risk of depleting these natural resources if they are over-
exploited.

8. Technique Effects
The environment stands to benefit the most from the Technique effects of GVC
participation. Consumers are demanding greater transparency and responsibility from
lead firms in GVCs.
This results in the lead firms taking greater care to ensure that their production
techniques have the least possible impact on the environment. Even where these lead
firms have partnered with other firms to provide goods and services at different stages of
the value chain, they demand that these firms engage in responsible production
techniques.

9. Technique Effects (Cont…)
GVCs also have a positive impact on the environment by fostering innovation,
which leads to the production of green goods and by making these goods more
affordable. An example of this is the increase in use of solar energy, as opposed to
fossil fuels in a variety of activities that range from powering homes to the transport
sector.

10. Conclusion
‘All in all, we envision and pray for a situation where the
harmful environmental impact of scale and composition
effects, brought about by Global Value Chains, shall be
outweighed by the benefits brought about by technique
effects.’
Walter Namasake, 2020