Although international trade and investment are often thought of as two sides of the same coin, the relationship is complex and has evolved over time. Global value chains (GVCs), for example, have sharpened the interdependencies between trade and foreign direct investment (FDI), as companies combine trade with investment to organise the supply of inputs, to expand in new markets, to access knowledge, and to provide services to consumers.
As such, restrictions and distortions to cross-border trade and investment have an impact beyond their respective policy areas and can have significant spill-over effects, magnifying costs in the domestic and global economy. However, policy makers do not usually take a comprehensive or co-ordinated policy approach to establishing rules that govern trade and investment; absent more policy coherence between the two, we will not have the expected economic and social gains, and may even lead to undesired effects.
Trade, invest, or partner? Different strategies for different objectives
To support policy makers in this endeavour, the OECD is working to analyse the interlinkages between trade and investment, to develop new evidence on firm strategies in GVCs, and to outline policy considerations for comprehensive trade and investment policy. One element of this analysis has been to map core linkages between trade and investment provisions in regional trade agreements. Another element has been to provide new evidence on the prevalence of multinational enterprises (MNEs) in world production at the aggregate level, while also looking through the use of firm-level data at specific trade and investment relationships in the production network.
What we have found so far is that trade and investment is not a binary choice for businesses (i.e., firms don’t choose between trading or investing, but often do both), and that strategies vary greatly across and within industries. For example, some industries are strongly engaged in FDI activities (e.g. food and banking sectors), while others rely more heavily on trading goods and services (e.g. automobiles or telecommunications equipment); others still deploy both trade and FDI with equal intensity (e.g. apparel and footwear, or internet services). Having a better understanding of the relative intensity of trade and FDI across various sectors can help policy makers prioritise measures and anticipate effects across economic activities.
Beyond trade and investment, our work also highlights the rising importance of strategic partnerships. These can take the form of non-equity, contract-based cross-border relationships (such as licensing, contract manufacturing, services outsourcing, management contracts, R&D agreements, integrated product offerings, joint-ventures and strategic alliances). These partnerships are not always well covered by international disciplines on trade and investment. Moreover, the evidence points to a number of reasons why firms engage in FDI activities in global value chains, from developing capabilities, to accessing knowledge, to mitigating risks to diversifing their activities, to name a few. There is also the question of how FDI policy can address this diversity of objectives.
How can policy makers ensure that trade and investment policies work with (and not against) business objectives?
In this environment, it is important for policy makers to take stock of evolving business strategies and to improve the coherence of trade and investment policies. Trade agreements increasingly include investment provisions and address a broader spectrum of policy issues that also influence firm strategies, including competition policy, state intervention, taxation and subsidies, financial flows, currency exchange rates, intellectual property rights protection, the movement of professionals, and data flows. Such an approach allows for greater policy coherence within trade agreements.
But policy coherence needs also to be strengthened across different types of international agreements – for example between regional trade agreements and bilateral investment treaties – and between international rules and domestic regulations. More focussed policy attention to clarify regulations that apply to trade and FDI flows can help ensure a level-playing field across the different types of cross-border business relationships.