The document discusses global value chains (GVCs) in the context of the new North American trade agreement (USMCA). It notes that GVCs allow for specialization and firm-to-firm relationships that increase productivity. It then outlines some of the key provisions impacting GVCs in the USMCA, including increased regional content requirements for automotive and metals industries. The USMCA also includes new wage requirements for automotive workers and changes some customs documentation requirements. The pandemic is expected to further increase the importance of the USMCA by shortening supply chains.

1. GVC in the New North America trade agreement (USMCA)
Global value chain trade exhibits two features that distinguishes it from traditional trade and that
allow firms engaged in global value chains to raise productivity and income. This makes global value
chain trade a more powerful force than traditional trade in supporting growth and poverty reduction.
The first feature is what we call hyper specialization. Breaking up the production processes. The
second feature is firm-to-firm relationships. In global value chains there is a relationship between
firms. Since for production the buyer often requires customized parts and components from its
suppliers.
The key determinants of backward GVC participation, (manufacturing) in the order of importance,
1. factor endowments (L, land, k, specialisation)
2. geographical location, (trade channels, near hubs,
3. political stability,
4. tariffs and FDI inflows,
5. domestic industrial capacity.
More-complex value chains tend to have especially strong regional linkages, although the expansion
of GVCs has been both global and regional. Europe is the most integrated region, with four times as
many regional linkages as global linkages. In East Asia, linkages are more regional than global, and
the regional linkages have intensified substantially since 1990. By contrast, GVCs in North America
depend somewhat more on global partners than regional partners, and integration has been
increasing on both fronts.
The United States-Mexico-Canada Agreement (USMCA), which went into effect July 1, 2020, contains
multiple provisions that will affect supply chains. Analysts found around 55% of the language in the
USMCA is similar to NAFTA, while 45% is changed. “Moreover, this includes significant changes to
bedrock industries like textiles and auto,”
Particularly to encourage U.S. investments in the automotive sector. Examples are the increase in the
regional value content. Which under NAFTA was 62.5%, has been increased to 75%. Similarly, at least
70% of steel and aluminium purchases must originate within North America.
Another provision within the USMCA stipulates that a certain percentage of labour used in passenger
vehicles must come from workers earning an average of USD 16 per hour. This provision, which had
no predecessor within NAFTA, promises to be significant, given that the average Mexican auto
worker’s wages hover around USD 3 per hour. “It will require auto supply chain professionals to either
to wages paid or to where most of the vehicles are made.

2. The USMCA changes some of the maximum shipment value at which products can enter while taking
advantage of lower taxes and/or fees. This should make it less expensive for companies to move small
quantities of products throughout North America.
NAFTA required exporters to complete a Certificate of Origin form, the USMCA requires companies to
identify the name and contact information for the certifier, importer, exporter, and producer and a
description of the goods and their tariff classification. This will reduce administrative work.
The importance of the USMCA likely will increase, given the impact of the COVID-19 pandemic. “The
pandemic will shorten supply chains and bring many back to North America,”
GVC participation is determined by fundamentals such as factor endowments, market size, geography,
and institutional quality, but these fundamentals need not dictate destiny.
When production in one country relies on inputs from another country, then economic activity in the
two countries is linked. Although international trade in finished products cannot be associated with
any change in the synchronization of GDP across countries, trade in intermediate inputs can be.
Adoption of technologies that save on labour can spur job creation through three indirect channels
that are more challenging to conceptualize and measure. First, productivity gains in supplier
industries can yield steep increases in the demand for labour because of input-output linkages.
Second, productivity growth can boost final demand. And third, such growth may lead to
compositional shifts in the structure of the economy and could support jobs by spurring the growth
of sectors with high labour shares.

4. In the age of GVCs, this new wave of protectionism is likely to have significant costs: The hyper
specialization in tasks and parts across borders means that trade costs are incurred multiple times;
protective measures against any country have knock-on effects on all its trading partners in the value
chain; GVCs also amplify the costs of trade policy uncertainty because firms are more reluctant to
make further investments in new or existing relationships with foreign suppliers; significant tariffs
on inputs can force firms to incur large costs to reshape their existing supply chains, thereby causing
potentially long-lasting disruptions in global investment and production.
New production technologies have promoted North-South trade, although the effects are
heterogeneous across countries and sectors. This is because the spread of automation in richer
countries can improve productivity and income, thereby raising the demand for inputs and final
goods from countries with large pools of low wage labour as a comparative advantage.