• 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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Globalisation at a historic crossroads: deglobalisation or reglobalisation?

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Globalisation, defined as the global integration of markets for goods, services, capital and people, is a phenomenon with very old roots and which still has a lot of life left in it. Most studies agree that we are currently in the aftermath of the so-called second wave of globalisation and that, in the event of a new drive towards greater globalisation, we could shortly enter into the third wave. Each wave is associated with a particular process of technological change: the first took place between 1870 and the Great Depression and is associated with the Industrial Revolution; the second lasted from the end of the Second World War up to the present day and is associated with the ICT revolution; and the third, if it occurs, will be heavily driven by the digital revolution. Globalisation is currently at a crucial inflection point, as it is facing major challenges on which its development over the next few years will depend. We must therefore be aware that the current environment is somewhat unstable and that the challenges we face must be addressed if we want to make progress towards achieving a more robust form of globalisation.

Today, globalisation has reached heights never seen before: the globalisation index drawn up by the Swiss Economic Institute is at an all-time high and three of its four key pillars (goods, capital and people, but not services) also reflect the extent of globalisation. Similarly, total trade flows as a percentage of GDP in the 1970s exceeded the previous all-time high seen in the first wave of globalisation in 1913. This was a result of the liberalisation of the trade of goods and, despite a slowdown in recent years attributed to cyclical factors (the Great Recession) and structural factors (the fragmentation of some global supply chains), trade flows remain at high levels today. Services, on the other hand, continue to be the major sticking point: despite them growing as a percentage of total exports from 9% in 1970 to 25% today, regulatory barriers remain high in many sectors (such as financial services and telecommunications). Many economists have suggested1 establishing more ambitious free trade agreements to boost trade in services, which would be particularly desirable at a time when technological change is making it easier for many services to be exported and imported. With regards to the financial element, this shows very high levels of integration, despite a slight slowdown following the financial crisis that has curtailed cross-border banking flows.

Globalisation of people is also key and has become an area of particular interest in the public debate, both due to its economic impact and due to the human drama of the refugee crises (33,000 migrants lost their lives between 2000 and 2017 in the Mediterranean while attempting to reach Europe, according to the United Nations). Although the number of migrants as a percentage of the total population has remained stable at around 3% over the last 100 years, its number in absolute terms has grown to 244 million, of which 19% reside in the US and 23% in the EU. Most of the migrant flows have been from emerging countries towards developed countries, and 40% of migrants have university studies. This trend has arisen in a context of competition for global talent that has led to a brain drain in the emerging economies.

Having briefly covered the various components of globalisation, we must analyse what challenges it is facing today. The first challenge is to strengthen the major global institutions (the IMF, the Bank for International Settlements - or BIS - and the WTO), which were created after the Second World War and have supported the current wave of globalisation. The IMF, for example, should modernise its corporate governance mechanisms to give greater weight to the emerging economies, which have grown dramatically precisely thanks to globalisation. It is hardly justifiable that the OECD countries have 64% of the decision-making power in the fund, when they only represent 46% of the world’s GDP, or that China’s share of the power amounts to only 6% when it now accounts for as much as 19% of the global economy. As for the BIS, the greater interconnectedness of the global financial cycle suggests that this institution and other financial bodies should play a more active role, with a view to facilitating greater coordination on monetary and macrofinancial policy. Finally, the WTO should play a more important role in helping China to integrate more harmoniously into global trade.

The second challenge is to achieve better distribution of the overall benefits. It is important to emphasise that the globalisation of recent decades has had a positive effect overall: it has helped millions of people out of poverty in emerging countries, while in advanced economies it has generated substantial gains in the population’s well-being, as consumers have been able to enjoy a wider variety of consumer goods and at more affordable prices. However, it is fair to add that, despite these benefits, globalisation has also harmed some specific sectors: according to the MIT economists Acemoglu and Autor,2 10% of the manufacturing jobs that were lost in the US between 1999 and 2011 (amounting to 560,000 jobs) were due to greater commercial competition with China. In any case, we must ask ourselves why the debate surrounding a more inclusive model of globalisation, which manages to compensate the losers and prevent them from being excluded from the new economy, is hotter today than ever. The answer is that, when an economy’s exposure to globalisation is limited, the benefit of greater integration is high, given that there is a marked increase in the aggregate real income of the economy. However, when globalisation has already reached a more advanced stage, there is less scope to increase the size of the cake, so to speak, while the relative magnitude of the losses suffered by the sectors that are adversely affected increases. This is the reason for the growing importance of promoting measures such as active labour market policies or income protection policies during the period of unemployment endured by those who are adversely affected by the process of change.

Finally, a third challenge posed by globalisation inextricably involves adopting mechanisms that help the process of technological change we are witnessing to be both successful and inclusive. Clearly, the digital revolution forced us to reformulate the current process of globalisation and will result in different forces working in different directions. On the one hand, the rise in the use of robots could dramatically reduce the rate of job offshoring (according to Deloitte, the cost of a robot is expected to represent 10% of the cost of an onshore employee and 35% of an offshore employee). On the other hand, the increased scalability of production at the global level could lead to the emergence of global corporate giants, which could be potentially detrimental for competition and the pace of innovation.

If globalisation and its institutions do not tackle these challenges as a matter of urgency, populist political options that advocate reversing globalisation could gain momentum. Several studies3 show that they have already begun to reap the first benefits: both in the US and in the EU, the areas most affected by the increase in imports from China have seen a much greater rise in the support for populist parties - so much so that some political scientists are already going as far as to state that the political debate, which has traditionally focused on the axis of left and right, will switch to a fierce struggle between globalists and populists.

Before concluding, it is important to analyse how the first wave of globalisation was derailed, to see if we can draw any lessons from it. The regression began at the end of the 19th century when the governors of the time decided to give in to the pressures exerted by a very select group of sectors (such as the agricultural lobbies) which were demanding an increase in tariffs. At the same time, countries such as the US, Canada, Australia and Argentina were not able to properly manage the levels of mass migration from Europe, which led to them closing their borders in the second decade of the 20th century. Some authors4 consider that the anti-globalisation sentiment among many segments of the population was one of the factors that led to the First World War between 1914 and 1918. Finally, the Great Depression gave the final blow to the first wave: countries reacted by implementing protectionist policies on a large scale, which led to a substantial worsening of the economic crisis of 1929, with far-reaching global repercussions. Not in vain, according to the economist Jakob Madsen,5 the volumes of real trade at the global level fell by 33% between 1929 and 1932, with almost two thirds of the decline being caused by the protectionist policies that were implemented.

In short, in this article we have recognised that globalisation is facing an historic crossroads and that now is the time to tackle the remaining challenges that have cast doubt over it. What is certain is that we are cautiously optimistic: the current system of global governance has a wide range of tools at its disposal to forge a more modern and inclusive form of globalisation. However, unless progress is made along that path, we run the risk of the shadow of the past becoming the nightmare of the present. Our ability to avoid tripping over the same stone twice depends on it.

Javier Garcia-Arenas

CaixaBank Research

1. See R. Staiger and A. Sykes (2016), «The Economic Structure of International Trade-in-Services Agreements», NBER Working Paper.

2. See D. Acemoglu et al. (2016), «Import competition and the great US employment sag of the 2000s», Journal of Labor Economics.

3. See I. Colantone and P. Stanig (2017), «The Trade Origins of Economic Nationalism: Import Competition and Voting Behavior in Western Europe», American Journal of Political Science.

4. See M. Bordo (2017), «The Second Era of Globalization is Not Yet Over: An Historical Perspective», NBER Woking Papers.

5. See J. Madsen (2001), «Trade barriers and the collapse of world trade during the Great Depression», Southern Economic Journal.

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