Trade and investment

trade policy brief

Trade and investment

February 2020

Trade and investment are increasingly intertwined in global value chains, but are often dealt with separately in policy-making.

I ncreasingly, trade agreements include investment provisions and address a broader set of policy issues that influence firms’ strategies.

To facilitate international operations of firms while ensuring their positive contribution to societies, policy coherence is needed between trade and investment.

What’s the issue?

The trade-investment nexus is central to a better understanding of the global economy and global value chains (GVCs). Understanding GVCs, in turn, is necessary for designing and implementing the appropriate policies to address challenges such as inclusive growth, climate change or the digital economy. Firms increasingly combine trade and investment, as well as strategic partnerships, in order to access new markets, reduce costs, innovate or become more efficient. This new business reality no longer fits into traditional policy frameworks addressing trade and investment in isolation.

The OECD has launched new work in order to understand firm strategies and interdependencies between trade and investment in GVCs. According to new OECD data, companies involved in international investment (i.e. multinational enterprises) account for 64% of world trade (Figure). This share includes exports by foreign affiliates of multinational enterprises, but also exports by the parent company and its domestic affiliates. This overlap between trade and investment is a defining characteristic of GVCs.

Firms involved in international investment (i.e. multinational enterprises) account for 64% of world trade 100% 90% 80%

36%

70%

Exports by firms not involved in international investment

60% 50%

Exports by domestic multinational enterprises

34%

40%

Exports by foreign affiliates of multinational enterprises

30% 20% 10% 0%

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30%

E xp o r t s

tad.contact@oecd.org

@OECDtrade

Trade and investment Moreover, OECD work highlights a high level of heterogeneity in firm strategies, as well as complex business models. In addition to trade and investment, firms also co-operate and control activities of partners through contractual relationships. Broadly categorised as ‘strategic partnerships’, these non-equity relationships encompass inter alia licensing, contract manufacturing, services outsourcing, management contracts, R&D agreements, integrated product offerings, joint-ventures and strategic alliances. Trade, FDI and strategic partnerships are then used in different combinations to access foreign markets, organise the supply chain, acquire knowledge or diversify risks. These complex and heterogeneous interlinkages observed in firm strategies highlight the importance of ensuring a level playing field and call for policies that are more coherent across different areas such as trade, investment, intellectual property, taxation or competition.

In collaboration with the World Trade Institute, the OECD has also developed a new database on provisions related to GVCs in preferential trade agreements. This dataset highlights the new approaches that countries are developing to better take into account the business reality in their trade and investment agreements.

What should policy makers do?

By including investment chapters in their trade agreements, countries increasingly acknowledge the linkages between trade and investment. However, beyond investment chapters, there is a broad range of relevant disciplines that influence firm strategies. As such, negotiating comprehensive economic agreements can help ensure that firms can access markets through the most efficient strategy and that regulations across different policy areas are consistent.

Further reading • Andrenelli, A., et al. (2019), “Micro-Evidence on Corporate Relationships in Global Value Chains: The Role of Trade, FDI and Strategic Partnerships”, OECD Trade Policy Papers, No. 227, OECD Publishing, Paris, https://doi.org/10.1787/f6225ffb-en.

• Cadestin, C., et al. (2019), “Multinational enterprises in domestic value chains”, OECD Science, Technology and Industry Policy Papers, No. 63, OECD Publishing, Paris, https://doi.org/10.1787/9abfa931-en.

• Andrenelli, A., et al. (2018), “Multinational production and trade in services”, OECD Trade Policy Papers, No. 212, OECD Publishing, Paris, https://doi.org/10.1787/16ec6b55-en.

• Cadestin, C., et al. (2018), “Multinational enterprises and global value chains: New Insights on the trade-investment nexus”, OECD Science, Technology and Industry Working Papers, No. 2018/05, OECD Publishing, Paris, https://doi.org/10.1787/194ddb63-en.

• Cadestin, C., et al. (2018), “Multinational enterprises and global value chains: the OECD analytical AMNE database”, OECD Trade Policy Papers, No. 211, OECD Publishing, Paris, https://doi.org/10.1787/d9de288d-en.

However, comprehensive trade and investment disciplines can also add a new layer of complexity as overlapping obligations and institutional arrangements co-exist.

This can create inconsistencies or policy contradictions that can generate unnecessary costs for business and governments. It is therefore important to mitigate potential adverse effects of inconsistency or conflict between overlapping arrangements. A number of comprehensive RTAs, particularly more recent agreements, more proactively address such overlaps and clarify the applicable disciplines.

While trade and investment agreements can help to enhance co-operation, a number of policies that can support firms in their efforts to become more competitive are domestic. In order to establish a conducive domestic policy environment, policies related to access to capital, skills, R&D incentives and the simplification of administrative procedures are key, as well as the development of physical and virtual infrastructure.

www.oecd.org/trade

tad.contact@oecd.org

@OECDtrade