Greening Of Global Value Chains, A Challenge For Developing Economies

That makes it imperative for these low-income countries to proactively engage in countering the emerging discourse on green trade policies at regional and multilateral forums.

Greening Of Trade

Increasingly, climate-conscious trade policies are reshaping GVCs, shifting the focus from cost to sustainability, resilience and agility.

The greening of manufacturing value chains is occurring through several steps. High-tech sectors — such as wind energy, semiconductors, solar powered vehicles and electric vehicles — are consolidating in regional blocs, driven by strategic and security imperatives. The United States, Japan, South Korea, Australia and India are together advancing green industrial policies to enhance their manufacturing capacities in these sectors, facilitating energy transitions and reducing reliance on China-centric supply chains.

Left Behind

Meanwhile, labour-intensive manufacturing sectors, including garments, leather, rubber and furniture, are also under the shadow of green trade measures. Many developing and low-income economies participate in GVCs that focus on low value-added manufacturing in such sectors. 

There is growing consensus that green trade measures will impact the exports of these goods from developing countries. However, the implications for governance structures and value chains remain unclear.

The rise in green trade policies is driven by changing consumer behaviour, new preferences, increased demand for climate-friendly products, environmental activism and evolving policy landscapes that highlight the importance of reducing environmental footprints in production and trade. The proliferation of green trade measures in developed economies, particularly in the EU, aims to restrict market access, which could significantly affect the exports of developing countries.

The New EU Trade 'Wall'

The EU Green Deal is especially noteworthy, emphasising green trade policies such as Carbon Border Adjustment Measures, Deforestation Regulations, Timber Regulations and Due Diligence Directives. These regulations have the potential to alter the geography of GVCs in low-value-added manufacturing sectors like garments, leather, rubber, tea and coffee. It is crucial to understand how green trade measures will influence the governance structure and power dynamics between suppliers and lead firms.

Green trade policies are introducing new requirements in the value chain through various parameters, such as labour standards, new design, traceability, and specifications. These requirements are driven by "green lead markets” that are at the forefront of promoting environmentally friendly and ethical value chains. 

It is important to note that many of these new conditionalities are shaped by lead firms, mostly located in advanced economies, which incorporate public environmental laws and private environmental certifications like the Roundtable on Sustainable Palm Oil, Global Recycled Standard, and the Forest Stewardship Council (FSC) that are already accepted in their home countries. These standards extend well beyond buyer-supplier relationships, involving governmental agencies, certification bodies, donor agencies and civil society organisations.

Consequences Of Power Dynamic Assymetry

Sustainability requirements pose significant challenges for value chain suppliers, particularly over the complexity of information, codification and competence-related constraints. This complexity increases the risk of information asymmetry, which could alter governance structures in the manufacturing countries. 

The concept of value chain "governance" describes how some firms in the chain establish and enforce standards under which others operate. It typically refers to the intricate relationships among lead firms, suppliers, service providers and regulatory institutions that either operate within or influence the value-added activities required to bring a product to the market. 

Buyer-driven greening of value chains could potentially shape the power dynamics in which developing countries participate. Green trade measures may undermine the bargaining power of suppliers and their entitlements within these chains.

Green trade measures can act as double-edged swords. First, they may create "green entry barriers" for suppliers in developing countries. Changes in governance structures due to green trade measures affect the suppliers' capabilities to adhere to environmental and ethical standards, jeopardising their positions in GVCs, and potentially excluding them from these networks.

Second, they may create "green windows of opportunity" for suppliers in developing economies to engage in GVCs. Some firms may develop sustainable capabilities to leverage potential opportunities offered by global green trade, but this is contingent on receiving adequate financial and technical support. 

Can The State Drive Greening Of Supplier Economies?

That makes the role of the State in facilitating the environmental upgrading of suppliers, especially lower down in the value chains, increasingly important.

Green trade measures are strengthening the position of lead firms in value chains, allowing them to transfer the "hidden costs" of sustainability compliance onto the suppliers. Lead firms introduce sustainability requirements and demand greater visibility along the value chain to effectively monitor value-added activities and associated commercial gains.

This may lead to significant redistributive consequences up the chain by increasing the entry costs for suppliers in developing countries. The widespread implementation of sustainability measures has enabled lead firms to capture economic rents, exacerbating the power imbalances between them and their suppliers.

In light of this, it is clear that while green trade measures are aimed at addressing environmental and ethical issues in GVCs, they are effectively emerging as policy instruments. This could lead to green trade protectionism, reconfiguring the geography of value chains and undermining potential opportunities for developing economies to ascend the value chain ladder.