The report captioned ‘Asian Development Outlook 2014 (ADO 2014) Update-Asia in Global Value Chains (GVCs)' says: “Cross-border production arrangements work only where the cost of moving goods between countries is low. Public policy can help by instituting low and predictable tariffs, reducing transport costs through investment in infrastructure to ease port congestion and speed inland transport, streamlining customs procedures, and harmonizing product standards.”

As put ADB President AKEHIKO NAKAO in the Foreword to the Report, “Although not all barriers can be overcome, policy makers should keep in mind that small savings in trade costs - through lower tariffs, predictable taxes, improved infrastructure, or smoother logistics—can have outsized benefits within value chains.”

The report has cited a study by scholars Koopman et al. that calculated the magnification effect on GVCs using tariffs in 2004. The study shows that two-stage production magnifies tariffs in Asia considerably, by 18%–80%. These effects would be even larger with more than two stages of production and incorporating nontariff barriers such as transportation and coordination costs.

The Report says that a small reduction in trade costs can therefore generate incentive to form GVCs and a disproportionately large rise in trade as a whole. As with tariffs, low and predictable rates for other taxes, including value-added taxes collected at the border, benefit GVC.

According to the Report , GVCs thrive only where tariffs are low and predictable. The PRC, for example, allowed processing firms to import components duty-free. This policy helped boost growth and productivity in the processing sector, supporting firms' efforts to shift quickly from simple labor-intensive manufactures to more sophisticated high-technology goods.

Yet, even if tariffs are low today, uncertainty about future rates can dissuade firms from investing in GVCs. The authorities can make tariffs more predictable by normalizing trade relations with partners, lowering bound tariffs under the WTO, and eschewing temporary trade measures. As with tariffs, low and predictable rates for other taxes, including value-added taxes collected at the border, benefit GVCs.

The Report concludes: “Asia can boost income and employment by building on its reputation as the world's workshop. Over the past 2 decades, the region has established itself as a global leader in GVC development and manufacturing—accruing the dividends of faster output, income, and employment growth as a result. Policies that enhance free trade in goods and services, and that foster the regional integration of markets for goods and their components, can further cement this reputation. Looking ahead, Asia is well positioned to deepen, broaden, and upgrade its role in global production networks.”