The Proliferation of Global Value Chains: Trade policy considerations for Indonesia

The proliferation of Global Value Chains (GVCs) has led to increasing fragmentation of production processes across countries.

Trade in intermediates has now surpassed trade in final goods and services, and global trade is increasingly conducted in the form of tasks instead of final products. These shifts require a paradigm shift in policy-making.Like many other nations, Indonesia aspires to improve its position in GVCs by moving towards higher value-adding activities. A number of measures have recently been introduced, including some that some critics view as "protectionist" and self-defeating. At the same time, there is a growing recognition that GVC participation will not automatically confer benefits, and that conscious policy choices are required.This paper argues that there is scope for policy intervention, but the approach must be holistic and coherent. With the aim of facilitating the development of an informed strategy for Indonesia's participation in GVCs, the paper discusses key areas affecting potential outcomes of that participation.It starts by looking at key internal and external factors affecting value chain governance, as governance determines the power relations and allocation of resources along a value chain. It then looks at key factors affecting firms' technological capabilities that are necessary for upgrading.