Global Value Chain (GVC) Configuration.

 

Current trends*

Integration into GVCs has long been understood as a potential pathway for industrial upgrading. By tapping into international production and trade networks, developing countries have been able to enhance their industrial capabilities, generate jobs and boost economic growth. However, successful integration has always relied on a range of factors, including domestic conditions and the broader International Trade System. As global supply chains rapidly evolve, driven by geopolitical, economic and environmental dynamics, developing countries now face new challenges and opportunities in securing their place in GVCs. A series of shocks to international trade flows in recent years has prompted many countries and firms to reassess their trade and production practices. The COVID-19 pandemic was a major catalyst, causing widespread disruptions in production, transportation and labour markets. Even as economies began to recover, supply chains continued to face challenges such as transportation bottlenecks, fluctuating demand and imbalances in local labour markets. Additionally, events such as the obstruction of the Suez Canal in 2021 and the recent shipping disruptions in the Red Sea have highlighted the vulnerability of global trade networks to external shocks. Large-scale regional conflicts have also had significant global repercussions on supply chains and international trade. The armed conflict in Ukraine, coupled with economic sanctions on Russia, has disrupted energy supplies and the export of agricultural commodities and fertilizers. Europe’s energy supply chain was upended as it began reducing its reliance on Russian oil and gas, leading to price volatility and market uncertainty. Meanwhile, Ukraine’s role as a major grain exporter has been severely impacted, which has severely affected many lower-income regions that rely on these imports. The ongoing conflict in Middle East has further compounded disruptions to International Industrial Supply Chains. 

Climate change has become a significant factor in GVC disruptions. The increasing frequency of extreme weather events such as floods, hurricanes, droughts and heatwaves has impacted every stage of the supply chain, from production to transportation. For instance, droughts in Europe and China have lowered water levels in major rivers, disrupting shipping routes and hydroelectric power generation. In Taiwan, Province of China, frequent water shortages have delayed in semiconductor production, a critical component for numerous industries. As climate change intensifies, its impact on supply chains is expected to grow, with economic losses from disruptions projected to reach 1.5 per cent of global GDP by 2040 and 2.5 per cent by 2050. Tensions between the United States, the European Union and China, among others, have led to a resurgence of tariffs and trade restrictions, prompting shifts in the production and sourcing of critical goods, from grains to semiconductors and lithium for batteries, to new regions. This competition is driving firms to relocate their operations as governments seek to strengthen economic autonomy and reduce reliance on adversarial powers. These shifts are reconfiguring GVCs, with companies diversifying their production locations to mitigate risks. Globalization has been slowing in recent years. After decades of rapid expansion, international trade and economic openness began to decline following the 2008 financial crisis (see Figure 8). This trend, also referred to as “slowbalization”, marks a shift away from the fast-paced global trade growth of previous decades. Trade openness (measured as global exports and imports as a share of global GDP) has stagnated, with countries increasingly prioritizing regional trade and domestic production to enhance supply chain resilience. This reconfiguration is altering the traditional patterns of global trade, with significant implications for industrial development worldwide

Rising geopolitical and economic competition has fuelled the growing trend of “reshoring”, with countries relocating production back within or closer to their own borders or to friendly partners. This shift is driven by concerns over supply chain security, the wish to reduce reliance on foreign production, and domestic political considerations. As global trade slows, export-led industrialization, which has been a key driver of growth for many developing countries—particularly in Asia— may become more challenging. With labour-saving technologies and reshoring trends gaining traction in advanced economies, policymakers in developing countries now face a more complex global landscape, where traditional models of export-led growth are becoming less reliable, and new strategies are needed to maintain industrial competitiveness.

Despite the challenges posed by these trends, greater supply chain diversification presents New opportunities for developing countries. As multinational firms seek to mitigate the risks associated with concentrated production, they are increasingly distributing their operations across multiple regions. This shift allows developing countries to integrate into GVCs from which they were previously excluded. Countries such as Viet Nam, Malaysia and Mexico have already experienced a rise in foreign direct investment (FDI) as firms diversify their supply chains, creating opportunities for industrial upgrading and job creation. Several examples demonstrate how supply chain diversification can boost industrial development in emerging economies. For instance, Chinese solar manufacturing firms have expanded into Southeast Asia, while India has attracted investment from smartphone manufacturers through targeted industrial policies. Similarly, firms in Japan and the Republic of Korea are investing in semiconductor production in Southeast Asia, helping to strengthen the region’s capacity in high-tech industries. The regionalization of GVCs, where production is increasingly concentrated within specific regions rather than distributed across the globe, offers new opportunities for developing countries to strengthen their industrial sectors. Nearshoring has emerged as a key trend in global production, opening up opportunities for developing countries, particularly those located within proximity to major global markets, to attract investment, expand production capabilities, and deepen their integration into regional value chains. Initiatives such as the African Continental Free Trade Area (AfCFTA) highlight the potential for regional tradeagreements to strengthen industrial capabilitiesand promote sustainable development.