Increasingly, trade is conducted indirectly, through global value chains (GVCs). Think of a camera sensor that is exported to a second country to be installed in a smartphone, which is then sold in a third country. The Trade and Development Chart shows that indirect trade, via GVCs, is growing faster among lower-middle-income countries than among upper-middle and high-income countries.
Indirect trade fosters development by allowing firms to exploit efficiency gains through specialization and giving them access to new technologies. Simple, transparent, non-discriminatory trade rules can help foster GVC participation and encourage foreign direct investment. But there are tradeoffs: Indirect trade, because it involves more partners along the value chain, is more vulnerable to global shocks arising in various places, such as natural disasters or conflicts. On the other hand, it can also enhance resilience to domestic shocks, such as economic downturns. On balance, the advantages, which also include access to a larger supplier and customer base and market diversification, tend to outweigh the disadvantages.
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