Does vertical specialisation increase productivity?

This paper investigates the impact of global value chain (GVC) participation on productivity. It uses data on trade in value‐added from the World Input‐Output Database. The results based on a panel estimation covering 13 sectors in 40 countries over 15 years suggest that participation in GVCs is a significant driver of labour productivity. Backward participation in GVCs, that is, the use of imported inputs to produce for exports, emerges as particularly important. An increase by 10% in the level of GVC participation increased average productivity by close to 1.6%.     

Trade and Innovation in Services: Evidence from a Developing Economy

Studies on innovation and international trade have traditionally focused on manufacturing because neither was seen as important for services. Moreover, the few existing studies on services focus only on industrial countries, even though in many developing countries services are already the largest sector in the economy and an important determinant of overall productivity growth. Using a recent firm‐level innovation survey for Chile to compare the manufacturing and ‘tradable’ services sector, this paper reveals some novel patterns. First, even though services firms have on average a much lower propensity to export than manufacturing firms, services exports are less dominated by large firms and tend to be more skill intensive than manufacturing exports. Second, services firms appear to be as innovative as – and in some cases more innovative than – manufacturing firms, in terms of both inputs and outputs of ‘technological’ innovative activity, even though services innovations more often take a ‘non‐technological’ form. Third, services exporters (like manufacturing exporters) tend to be significantly more innovative than non‐exporters, with a wider gap for innovations close to the global technological frontier. These findings suggest that the growing faith in services as a source of both trade and innovative dynamism may not be misplaced.     

Open Skies over the Middle East

The dynamism of air traffic markets in the Middle East obscures the persistence of restrictions on international competition. But how important are such restrictions for passenger traffic? This paper uses detailed data on worldwide passenger aviation to estimate the effect of air transport policy on international air traffic. The policy variable is a quantitative measure of the commitments under international agreements. The paper analyses, for the first time, not only bilateral agreements, but also plurilateral agreements such as the one among Arab states. The analysis finds that more liberal policy is associated with greater passenger traffic between countries. Higher traffic levels appear to be driven by larger numbers of city‐pairs being served, as well as by more passengers travelling along given routes. To demonstrate the quantitative implication of the estimates, two liberalisation scenarios in the Middle East are evaluated. Deepening the plurilateral agreement among Arab states would lead to a 30 per cent increase in intraregional passenger traffic. Widening the agreement to include Turkey would generate significantly larger gains because current policy vis‐à‐vis Turkey is much more restrictive.     

Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization

Two aspects of global imbalances – undervalued exchange rates and sovereign wealth funds – require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund has not been effective in dealing with undervalued exchange rates. This paper proposes new rules in the World Trade Organization to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The World Trade Organization would not be involved in exchange rate management, and would not displace the International Monetary Fund. Rather, the authors suggest ways to harness the comparative advantage of the two institutions, with the International Monetary Fund providing the essential technical expertise in the World Trade Organization's enforcement process. There is a bargain to be struck between countries with sovereign wealth funds, which want secure and liberal access for their capital, and capital‐importing countries, which have concerns about the objectives and operations of sovereign wealth funds. The World Trade Organization is the natural place to strike this bargain. Its General Agreement on Trade in Services already covers investments by sovereign wealth funds, and other agreements offer a precedent for designing disciplines for these funds. Placing exchange rates and sovereign wealth funds on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups.     

Trade in International Maritime Services: How Much Does Policy Matter?

Maritime transport costs significantly impede internationaltrade. This article examines why these costs are so high insome countries and quantifies the importance of two explanations:restrictive trade policies and private anticompetitive practices.It finds that both matter, but the latter have a greater impact.Trade liberalization and the breakup of private carrier agreementswould lead to an average of one-third lower liner transportprices and to cost savings of up to US$3 billion on goods carriedto the United States alone. The policy implications are clear:there is a need not only for further liberalization of governmentpolicy but also for strengthened international disciplines onrestrictive business practices. The authors propose an approachto developing such disciplines in the current round of servicesnegotiations at the World Trade Organization.