• Global value chains: yesterday, today and tomorrow

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    Made in Spain, Made in the USA and even Made in China labels make less and less sense in today’s world. Since firms decided to fragment their production processes and move them to other countries, the label Made in the World probably better represents the nature of most of the manufactured goods we consume. In this article we review the past, present and future of global value chains at a time when pandemic-induced restrictions on travel and supply disruptions have brought them back into the spotlight.

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    The creation of global value chains

    he 1990s saw the beginning of a far-reaching optimisation of production processes beyond the borders of a single country. Companies decided to fragment these processes and carry them out in as many countries (in order to make the most of each country’s advantages of specialisation), giving rise to what are known as global value chains (GVCs). Several factors helped to encourage the creation of GVCs but first and foremost were the advances made in information and communication technologies (ICTs), which enabled the different production stages to be coordinated perfectly. A second factor was the reduction in trade costs, helped by the important free trade agreements reached during that decade,11 as well as by improvements in transportation, especially by air.

    In fact, GVCs have boosted international trade flows to values that were unthinkable a few decades ago: exports of goods and services as a percentage of GDP rose from around 18% in the early 1990s to levels close to 30% just before the pandemic, while the relative weight of GVCs in total trade flows went from around 40% to just over 50% in the same period (see the chart below).12 

    • 11. 1994 saw the conclusion of the largest round of multilateral trade negotiations (the Uruguay Round), in which 123 countries took part. Also in 1994, the North American Free Trade Agreement (NAFTA) was concluded. Both agreements led to a substantial reduction in tariffs worldwide: from levels of around 16% in the early 1990s to 5% today (according to World Bank data, simple averages).
    • 12. The development of GVCs was particularly dynamic between 1990 and the early 2000s, just before the outbreak of the global financial crisis. Since then, the relative importance of these chains in trade seems to have stagnated.

    The importance of global value chains in trade flows

    Last actualization: 04 May 2022 - 09:16
    The pandemic: present impact and future approaches to GVCs

    The COVID crisis has raised many doubts regarding the high degree of globalisation achieved, as well as the adequacy of GVCs. At first, in countries such as Spain, we became aware of the high external dependence (beyond the EU’s borders) of goods which, at that time, were essential.

    In a second phase, with the strong recovery in demand focusing particularly on durable goods and the disruptions in some factories due to the effects of COVID,13 we have been faced with a global supply shortage problem we had not experienced since GVCs were created. And, in this world of global manufacturing, disruption in one stage of the production chain leads to major disruptions throughout the entire process. The longer the GVC, the greater the impact (the bullwhip effect).

    Such disruptions will undoubtedly change people’s minds about GVCs. Although it is still too early to know what changes the future holds, we can suggest some strategic rethinks company directors are likely to pursue in order to increase the robustness of the production chain.

    First, the chains will probably be shorter to avoid the amplifying effect of disruptions. Secondly, they will be more redundant in key components. In other words, there will be alternatives to the production of these components. Thirdly, they will be equipped with new digital technologies that will enable them to detect chain failures early on. And, in terms of logistics, investment in inventories is likely to increase: from just in time to just in case, as stated in a recent article by the Financial Times14 (see the chart below).

    • 13. See the article «Bottlenecks: from the causes to how long they will last» in the Monthly Report of December 2021.
    • 14. See the Financial Times (December 2021). «Supply chains: companies shift from ’just in time’ to ’just in case’».

    Global value chains are likely to be shorter in order to avoid the amplifying effect of disruptions.

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    However, it should be noted that these possible strategic changes, if they occur at all, may be more gradual and less far-reaching than we might have assumed after the shock of the pandemic. One of the reasons is that such changes would entail an increase in costs, with the evident impact on prices consumers would have to pay. In a globalised world, this could mean a significant loss of competitiveness compared with other countries and/or companies. Furthermore, as Harvard professor Pol Antràs has noted, the configuration of GVCs forces companies to incur large sunk costs, which leads to them being extremely rigid regarding strategic production changes.15 

    In other words, the COVID shock will indeed bring about a change in our approach to the configuration of new GVCs and may certainly lead to some rethinking of the existing chains. But, in the latter case, this rethinking might be less radical and rapid than some are predicting.

    • 15. See Antràs, P. (2020). «De-Globalisation? Global Value Chains in the Post-COVID-19 Age». National Bureau of Economic Research, no. w28115.
    The future of GVCs: plus and minus factors

    In addition to the impact of the pandemic, other factors (mostly new technologies) have the capacity to reshape GVCs and we present a brief review (see the diagram below).16

     

    Automation and 3D printing

    Although automation is a process that has been going on for centuries, today’s robots, equipped with artificial intelligence and at a cost that has decreased substantially over the past few decades, represent a full-fledged revolution. The improved productivity of these new robots may result in some of the manufacturing processes which had been moved to emerging countries in order to take advantage of low labour costs now returning to advanced countries. In other words, we would be shifting from an offshoring to a reshoring trend, which would entail a certain reversal in the globalisation of supply chains.

    On the other hand, 3D printing is a technology that could result in GVCs becoming shorter and, along with this, to the reshoring of part of the manufacturing activity. In fact, with this technology, it is not necessary to send physical products; all that’s required are the computer files to manufacture them! However, there is still no clear evidence in this respect. In fact, a paper published by the World Bank shows a strong increase in trade flows following the adoption of 3D technology in hearing aid production, something we would not expect with a shortening of GVCs.17 Although this is a very specific case, it does reveal some interesting effects that need to be considered. In particular, the hearing aid sector adopted 3D printing for almost all its parts when this became technologically feasible (about 10 years ago) and, since then, trade flows linked to the sector have increased by 60%. The main reason for this growth is that 3D printing has led to a huge reduction in the production cost of hearing aids and an improvement in terms of quality, resulting in a sharp increase in demand for the product. And with greater demand, international trade in hearing aids has intensified.

    • 16. Based partly on Canals, C. (2020). «Revolución tecnológica y comercio internacional 4.0». Geopolítica y Comercio en tiempos de cambio. Published by CIDOB.
    • 17. See Freund, C. L, Mulabdic, A. and Ruta, M. (2020). «Is 3D Printing a Threat to Global Trade? The Trade Effects You Didn’t Hear About». World Development Report.
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    The electric car

    Another case that also warrants particular attention is that of electric cars, which have the potential to alter some of the most relevant GVCs (those of the automotive sector), as well as to considerably reduce international trade. The reason is that classic combustion-engine cars require a large variety of parts and gears that are often manufactured in different countries to maximize the competitive advantages of each location. In fact, the automotive sector is responsible for a substantial part of the world’s trade flows of intermediate goods. However, the electric car, with its much simpler mechanics (far fewer parts that are also less subject to wear and tear) could lead to a reduction in these classic intermediate flows and, consequently, to a radical change in the structure of automotive GVCs.

    The production of batteries, a key component for the new electric vehicles, will also determine the future of numerous trade flows, which in this case will focus on raw materials such as lithium, nickel and cobalt.

     

    Digital technologies and the emergence of new services

    The continuous evolution of ICT, hand in hand with 5G and blockchain technology, will continue to push down logistics costs and, with it, boost the trade flows of goods and services and participation in GVCs. For instance, 5G will support the development of the Internet of Things, which will enable faster and more secure tracking of shipments in the case of goods, and better connections in the exchange of services. Likewise, blockchain has the potential to greatly facilitate international payments.

    On the other hand, these digital technologies will also encourage the emergence of new products, especially services, whose organisation could be decentralised and located in different countries, creating new GVCs in the image and likeness of the chains already established for the production of manufactured goods.

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    History reminds us that technological development and international trade are not independent of geopolitical developments.

    Geopolitics

    Finally, it should not be forgotten that geopolitics has always played an essential role in international trade. In this respect, the USA’s intention to «decouple» from China, especially in the field of technology, could bring about a very significant change in world trade and in how GVCs are managed, especially in the technology sector. Even more so because the US is not alone in wanting to put more distance between itself and other economies. For instance, Europe also seems willing to reduce its external dependence in some technology segments, such as semiconductors, with the European Chips Act.

    In summary, although we do not expect any radical or abrupt change in the form taken by GVCs since they tend to be relatively stable over time, we might see a change in trend in the next few years due to the various 4.0 technologies. In addition to these ongoing trends, factors such as the Coronavirus crisis will further exacerbate certain technological dynamics. However, history reminds us that technological development and international trade are not independent of geopolitical developments. And in this respect, trade-technology tensions between the US and China will play a decisive role.

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Capitalism, variety is the spice of life

Capitalism is no longer merely the dominant economic model but almost universal. Nevertheless, are all the countries conventionally considered to be based on capitalism truly capitalist?

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The US and Germany are very different - that much is clear - but they share a common trait: both are capitalist countries. In fact, if we take a quick look at all the countries of the world, it is easier to identify those that are not capitalist: essentially North Korea and Cuba.1 Therefore, capitalism is not merely the dominant economic model - it is practically universal. That being the case, when we look at the economic reality in more detail, questions begin to arise: is an economic system in which free dismissal is commonplace (the US) really the same as another in which it is heavily regulated (practically all of Europe)? Is one where public social spending amounts to 31% of GDP (France) the same as another where it barely exceeds 11% (South Korea)? We could go on, but the scepticism seems justified: in reality, are all the countries that are conventionally regarded as capitalist really so? The short answer is yes, the economy can be organised in a wide range of institutional forms while still operating under the logic of the market. In other words, capitalism can take significantly different forms without altering its underlying nature.

  • 1. Nominally communist countries are more numerous, but in practice they are hybrid systems, with easily identifiable elements of capitalism. A prime example is Vietnam - or even Venezuela.
Free market economy versus coordinated market economy

In the academic literature, these different forms are referred to as varieties of capitalism. Indeed, the very evolution of this body of literature sheds some light on the subject we are interested in, namely the reflection on the anomalies (such as low growth, rising inequality, etc.) that capitalism seems to accumulate, as set out in the previous article of this Dossier. In our view, we are better prepared to delve deeper into this debate if we are able to identify forms of capitalism that are better prepared to deal with these problems.

The first great distinction offered by the literature is quite logical, since it proposes the existence of two major varieties. The first, which typically embodies the US, is known as the liberal market economy and, as set out in the first table, is characterised by elements such as a greater predominance of coordination through the market, a highly-flexible labour market
and a less important role of regulation and public intervention. The second major variety is known as a coordinated market economy or, alternatively, a «social market economy». This variety is characterised, inter alia, by less market-mediated coordination, a more regulated labour market and a greater role of public intervention.2

  • 2. See P.A. Hall and D. Soskice (Eds.). (2001). «Varieties of capitalism: The institutional foundations of comparative advantage». OUP Oxford.
Main characteristics of the key varieties of capitalism
A world of diverse capitalisms in transition

While attractive for their simplicity, these two categories seem overly simplified, as it is too rigid a structure to accommodate the multiplicity of forms of capitalism that exist, particularly since it has become the dominant productive model following the fall of the Berlin Wall. As the former communist economies develop towards different forms of capitalism and the liberalising processes of Europe’s economies within the framework of the EMU accelerate, as globalisation expands and incorporates more countries and, finally, as the technological revolution accelerates, it becomes apparent that hybrid forms of capitalism take on greater importance.

Thus, it is possible to detect varieties that share many of the liberal characteristics but not all of them (which we refer to as quasi-liberal market economies), and others that resemble social market economies but with differences (which we call quasi-coordinated market economies). In addition, a more detailed review of the past shows that there has been a variety which is commonly referred to as a state-dominated economy and which, characterised by an important role of the state in coordination mechanisms, has been relevant in certain countries.

In short, it is possible to use this latest academic literature to paint an updated picture of today’s capitalist world that allows us to understand it better.3 Specifically, the taxonomy proposed is built using a series of variables that reflect the disparity of institutional arrangements that can be used to organise a market economy (e.g. the degree of worker protection, the importance of financial markets, labour relations, etc.). By means of a segmentation exercise, countries that have similar indicators in these areas can be identified and the five varieties of capitalism discussed above can thus be proposed: liberal, coordinated, quasi-liberal, quasi-coordinated, and state-dominated market economies (see the results in the second table).

As can be seen in the second table with our updated classification of countries assigned to the different varieties of capitalism, the growth of hybrid varieties of capitalism becomes apparent, namely quasi-liberal and quasi-coordinated varieties. In particular, it is important to note that countries that are typically coordinated have relaxed some of their most characteristic aspects through reforms that introduce liberal elements. The prime example of such hybridisation is surely Germany, which went from being an archetypal coordinated market economy to being quasi-coordinated following the major liberalising reforms of the 2000s (in particular, the so-called Hartz labour-market reforms, which made it significantly more flexible). Another interesting element to note about the transitions between varieties is the disappearance of the variety we call the state-dominated market economy. This is largely the result of the liberalisation process which took place in economies such as Spain and Portugal as part of their full integration into the European market and the subsequent privatisations that took place in the transition towards the creation of the single currency.

In short, if these trends are a reasonably good representation of the world over the past 30 years, upon reviewing them the reader may well find themselves raising the questions that we addressed in the first article of the Dossier. Which of these varieties are capable of generating better growth rates on a sustained basis? Which ones are better at limiting the tendency towards inequality? Which ones are more innovative? Paradoxically, the academic world has paid relatively little attention to this relationship between varieties of capitalism and economic and social outcomes. While there are some exceptions,4 the questions that are relevant to the ordinary citizen have not been sufficiently studied. We, on the other hand, cannot afford to ignore such an important issue. Let us, therefore, seek to shed some light on the outcomes of the different varieties of capitalism in the next article. Some surprises await us.

  • 3. See M.R. Schneider and M. Paunescu (2012). «Changing varieties of capitalism and revealed comparative advantages from 1990 to 2005: A test of the Hall and Soskice claims». Socio-Economic Review, 10(4), 731-753.
  • 4. See D. Acemoglu, J. Robinson and T. Verdier (2012). «Can’t We All Be More Like Nordics? Asymmetric Growth and Institutions in an Interdependent World». NBER Working Paper 18441. National Bureau of Economic Research. Working Paper 18441. National Bureau of Economic Research.
Variation of capitalism: member countries