• 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(s) for tomorrow’s world

In the world that lies ahead of us, which varieties of capitalism are likely to work the best? As for the rest of them, is there hope for change and evolution?

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At this point in the Dossier, we trust we have convinced the reader that the different varieties of capitalism offer a combination of differing economic and social outcomes. No particular one of them is, a priori, inherently better than the others, as everything will depend on the historical context: some are better equipped for certain situations, while they will fare worse in other circumstances. So, in the world that lies ahead of us, which varieties of capitalism are likely to work the best? As for the rest of them, is there hope for change and evolution?

Tomorrow’s world began yesterday

We are writing, still, under the impact of the COVID-19 outbreak and its halo of uncertainty, incomparably greater than that of old times. In this context, is it possible to identify any key aspects of the medium- and long-term future that will not be overwhelmed by the vortex of recent events? With all possible prudence, we believe that reviewing the lessons of the past provides us with two major conclusions. The first is that history reminds us that major shocks, including pandemics like the current one, have structural effects. In other words, they change the long-term dynamics.1 The second is that such shocks act in many spheres, but particularly in the institutional sphere.

After all, the different varieties of capitalism are the result of a particular combination of a number of institutional elements. Therefore, the question that needs to be considered now is what kinds of pressures will the different varieties suffer as a result of the transmission of this shock. It is time to raise questions such as whether the varieties that rely the most on coordination through the market, a high degree of labour flexibility or a less prominent role of regulation and public intervention (liberal economies) will work the best. Or will it be those characterised by less market-mediated coordination, a more regulated labour market and a greater role of public intervention (coordinated - or social - market economies) that will fare the best? Alternatively, perhaps the «hybrid» varieties (quasi-liberal and quasi-coordinated economies) will yield better results in the future.

  • 1. In this regard, see the Dossier «The world after COVID-19» in the MR05/2020.
Critical spheres of change: economic dynamism, resilience and equity

In recent months, various analyses have been produced that identify different aspects of our economy, society and politics that will change as a result of the pandemic. In particular, there is expected to be an acceleration in certain trends, such as digitalisation, with the emergence of new ways of working and consuming. It is also expected that we will see changes in the ways we produce, with a shift towards less globally fragmented value chains. These analyses also mention the increased role of governments and public action in order to help withstand the economic shock and provide greater resources to the health system.

We could go on, but this list is already sufficient to illustrate three major spheres that encompass what we might call demands, or requirements, on the system: economic dynamism, resilience and equity. These three spheres are by no means self-contained compartments, but defining them as separate blocks can help us to understand them better.

The sphere of economic dynamism is critical in any economic system since, in our view, if it is not met then the system simply collapses. Communism failed because its efficiency level and, consequently, its growth levels were very low. Capitalism, on the other hand, is predominant because it tends to be efficient and, as a result, capable of delivering sustained economic growth over time. This demand will therefore persist in the future, as it did in the past.

A second sphere is that of resilience, which underlies many of the aforementioned changes. This relates to ensuring that the economic system is stronger than it was in the past. This resilience operates at different levels, such as the shift towards local suppliers (viewed as less vulnerable) and the relocation from major corporate headquarters to smaller units (even employees’ own homes). But it also encompasses public policy decisions, such as bolstering healthcare resources or economic interventions to support private liquidity and funding needs. This sphere of resilience is relatively new and has accelerated following the pandemic, although some elements had already begun to emerge in recent years.

Finally, the last sphere is that of equity. Strictly speaking, many economic systems have been able to generate sufficient economic growth for long periods without addressing equity issues. However, at least since the Great Recession of 2008-2009, it has become clear that society understands that a certain degree of inclusiveness of growth is indispensable. The COVID-19 crisis, in our view, intensifies the demand for prosperity for all (or at least for many), as demonstrated by the measures, either currently being conceived or already implemented, that should promote inclusive growth.

Differing pressures on the different varieties of capitalism

Are the different varieties of capitalism ready to meet the demands of dynamism, resilience, and equity? In order to answer this key question, we have associated a wide range of socio-economic characteristics compiled in the article «The promises of the varieties of capitalism, or on the impossibility of having it all» with the three spheres mentioned above (see chart).

As expected, the different varieties are not all in the same position to meet the demands set out above. Quasi-liberal economies (which, according to our classification, include Spain and the Nordic countries, among others) appear to be in the best position, as they offer good results in all three spheres: they have the best starting point in terms of economic dynamism and equity, and the second best in terms of resilience. Liberal economies appear to have resilience levels similar to quasi-liberal economies, but with lower levels of growth and equity. Finally, quasi-coordinated and coordinated economies seem to be subject to greater tensions since, while both varieties exhibit a similar level of economic dynamism, coordinated economies are in a relatively worse position in terms of equity, while quasi-coordinated economies fall short of the other varieties in terms of resilience.2

This diagnosis certainly tells us which varieties are in a better or worse position to deal with the shock in the short term, but this may not necessarily be the case in the long term, since one of the fundamental elements of capitalism is its capacity to adapt.

  • 2. These results are different from those we identified in the analysis in the previous article, from which quasi-coordinated economies emerged better off. However, the two analyses differ, since here we are focusing on the economies’ position as it stands today. With all the necessary caution, our interpretation is that, looking ahead to the future, the current position in the various spheres is more relevant than that derived from the historical analysis performed previously.
Varieties of capitalism: position in key spheres in the future
On the possibility of change in capitalism

As we have seen in the article «Capitalism, variety is the spice of life», in recent decades state-dominated capitalism has disappeared and the more «pure» varieties, such as liberal and coordinated capitalism, have lost representatives in favour of «hybrid» models. This suggests that change is not just a theoretical possibility, it is a historical reality. Under normal conditions, the institutions that make up the varieties of capitalism evolve slowly. However, when major disruptions occur, that evolution accelerates or, in dramatic cases, new varieties may even appear. Once again, building future scenarios is fraught with uncertainty, but the past can provide us with some lessons.

When we review the institutional history of capitalism over the last two centuries, we can identify three major phases.3 The first one begins in the mid-19th century and continues, with notable ups and downs, up until the inter-war period. This is a world in which capitalism takes the form that we usually describe as laissez-faire, that is, with few regulatory and institutional counterweights to the market and, in most countries, a non-existent or only an incipient welfare state. In the financial sphere, it is the time of the gold standard.

After the Second World War, the system mutates and significant elements of public intervention are introduced (for instance, the welfare state is developed in Europe). Furthermore, the system of multilateral institutions is developed and the foundations for today’s economic and financial globalisation begin to be laid. This is the time of Keynesian economic policy.

Finally, following the collapse of the Bretton Woods system and the supply shocks of the 1970s and 1980s, capitalism is reformed with a decline in the role of public intervention in the economic system, a shift away from Keynesian policies in favour of the supply-side economy, and the introduction of what, in a previous Dossier, we referred to as the liberal consensus.4

From this brief review we can draw a simple but powerful conclusion: since approximately 1850, capitalism has repeatedly transformed itself, partly in response to a wide variety of shocks and trends, and with each transformation the institutional fabric that sustains it has also undergone profound changes. This capacity to adapt has been the key to its survival, and we believe that this time should be no different.

  • 3. On this note, see, for instance, J.G. Ruggie (1982). «International regimes, transactions, and change: embedded liberalism in the postwar economic order». International organization, 36(2), 379-415.
  • 4. See the Dossier «The threat of the illiberal shift» in the MR01/2020.