participation on overall income and income growth are likely to trickle down to everyone in society. Those directly favoring from GVC integration will use their larger incomes to demand more local goods and services, which will generate novel opportunities for other agents in society, even those with relatively few skills. Furthermore, higher aggregate income can support a deeper welfare state that can ensure that the gains from integration are more evenly spread. Finally, GVC integration in certain regions of a country, can incentivize internal migration within countries, which can be a powerful mechanism to reduce poverty. In practice, it appears that GVCs have contributed to lifting millions of individuals out of poverty in some countries (such as China), but they may have failed to do so in other less developed countries. Chapter 3 of the 2020 World Development Report presents evidence that in Vietnam, poverty reduction was greater in locations with a higher presence of GVC activity.

For particularly underdeveloped countries, it is also often argued that GVCs may facilitate industrialization by reducing the range of required “capabilities” that these countries must be endowed with to be able to produce and export industrial goods. For example, in the auto industry, countries can participate in GVCs even when they might not have any domestic car makers or any domestic provider of car engines. On the other hand, more sophisticated tasks in value chains require skills and capabilities that many underdeveloped countries lack. As a result, the rise of GVCs might lead less developed economies to specialize in relatively low-value added segments of production with little scope for upgrading. In addition, tariff escalation practices by developed economies tend to reduce the value added that can be captured by less developed producers when attempting to remain competitive vis à vis other countries.<sup>9</sup> In sum, it may be simpler to “industrialize”in the age of GVCs, but the returns to doing so might not be as high as they were in the past. Furthermore, these effects interact with the gradual increase in automation, as will be discussed later in the paper.

The impact of trade liberalization on the environment also needs to be reevaluated in a world of GVCs. The transportation of goods across long distances generates CO2 emissions that directly harm the environment, but in GVCs, the same value added is often shipped multiple times before reaching final consumers. Thus, the volume of CO2 emissions generated in transporting goods in GVCs appear to be associated with a larger environmental harm than traditional trade. Similarly, the fact that GVCs foster “hyper-specialization”would appear to indicate that the pollution haven hypothesis might apply particularly intensely to GVCs, as lead firms from large industrialized nations may locate “dirty” production stages in countries where environmental norms are laxer, thus avoiding the cost of stringent environmental regulations.

> It is important to emphasize, however, that there are at least two reasons that suggest that environmental concerns associated with globalization might instead be alleviated in the age of

> 9 Consider the following example. A car assembler in a small, less developed economy faces fixed foreign input costs of $7,000, while a fixed sale price of $9,000 in rich countries. It can thus capture value added of $2,000 per car. Nevertheless, if rich countries set a 20% import tariff on assembled cars, to remain competitive, the car assembler will need to reduce its export price to $7,500, and thus local value added is reduced to $500. Thus, a 20% import tariff on final goods can reduce value added in less developed economies by 75%.

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