• 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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Democracy and COVID-19: the decisive moment

The pandemic is having a huge impact on many aspects of our society, with citizens and businesses increasingly demanding that governments rise to the occasion and take effective action. Are our political systems up to the task?

 

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Álvaro Leandro
Àlex Ruiz
February 15th, 2021
Crecimiento económico (226), Política (575), impacto social (999), COVID-19 (957)

The COVID-19 pandemic is having a vast impact on many aspects of our society. The nearly 2 million deaths due to COVID-19 registered to date are not just a statistic, but a veritable human tragedy. Angela Merkel could not have made it any clearer: Germany is facing its biggest crisis since World War II. Substitute Germany with the world, and you will not lose a shred of truth. In this scenario, the demands which citizens and businesses are placing on their governments to take effective measures commensurate with the challenge that lies before us are also great. Are our political systems up to it?

To answer this question it is worth taking a step back to look at the bigger picture. We are at a unique moment in humanity’s political history, for democracy is currently the dominant political system: 59% of the world’s countries enjoy one form or another of democracy, only 13% are autocracies, and the remaining 28% share democratic and autocratic elements.1

  • 1. Of all countries with a population of more than 500,000 inhabitants. Data from the Center for Systemic Peace (Polity IV project).
The world’ political systems

This is good news, but the situation has a less agreeable counterpoint, in that there is growing disaffection among citizens with the way their democracies are functioning. At this point in the discussion, it is worth asking whether this trend is merely a superficial public debate or whether its roots run deeper. Fortunately, an issue as fundamental as democracy itself is being monitored by numerous institutions and academia. The overall results of decades of study are undeniable.

In a recent survey by Foa et al. (2020),2 which is based on more than 25 data sources, 3,500 national studies and spanning a period of around 50 years in advanced countries and 25 years in emerging countries, it is found that, from approximately 2011, the degree of dissatisfaction with democracy has accelerated and now reaches 57.7% of those individuals surveyed (an increase of around 20 points over a 15-year period). Although the trend is fairly widespread geographically, it is particularly pronounced in the US, Western Europe and Latin America. This is what is known in the economic literature as «democratic recession», although given that the underlying trend appears to be of a more structural rather than cyclical nature, it might be more suitable to call it «democratic decline».

Therefore, in a world that is still largely democratic but has a growing discontent with this political system, the fundamental question is whether democracies can cope with the COVID-19 crisis with guarantees of success and thus strengthen their legitimacy and prospects for continuity or, on the contrary, whether this crisis will further accentuate the system’s decline. This issue becomes even more relevant with the growing public perception that the response from autocratic models (read: China) has been more effective in the fight against the pandemic than in other countries with democratic systems.

To address this point, we must revisit the issue of citizens’ dissatisfaction with democracy. Although this discontent is a clear empirical reality, there is less consensus on what the precise causes are. However, although such an analysis is beyond the scope of this Dossier, it is possible to identify an underlying reading which many studies share: the essential problem that is causing citizens’ distancing from democracy is the feeling that it is failing in its essential function to address and solve the problems of the time. For instance, it is perceived to provide an inadequate response both to one-off crises, such as the refugee crisis of 2015, and to longer-term developments, such as demographic decline, the digital transition or combating climate change.

However, while this reading can be generally shared, it has the additional problem that it may be confusing two different situations. The first is that the decision-making process in a political system can make it difficult to make the most appropriate decisions. The second is that the capacity of states, and in particular that of their public administrations, might not be optimal to properly implement the political decisions that are taken.

The political causes of inadequate decision-making to deal with a crisis vary greatly, but there are two circumstances that have been shown to be repeated in democracies. The first is that democracy allows blockages to occur in the decision-making process, and to a greater extent than other political systems. Moreover, such blockages are more likely with greater political divisions in the country.3 The second circumstance, which is also relatively frequent in democracies, is the role of interest groups, which can shift political decisions away from what would be in the public’s general interest.4

As we mentioned, these political causes are different from the state’s ability to implement policies. There is ample evidence, as well as a theoretical basis, to argue that there is a clear relationship between the level of development and that ability. However, it is also true that even states with the same level of development differ in their ability to adequately develop and implement decisive policies. Moreover – and this is a crucial point – there is evidence that sociocultural factors matter in policy implementation. For example, however efficient the government administration may be, in a society that is highly biased towards individualism, policies requiring cohesive collective behaviour or greater voluntary coordination will be less successful than if collectivism were the dominant trait.5

  • 2. R.S. Foa, A. Klassen, M. Slade, A. Rand and R. Collins (2020). «The Global Satisfaction with Democracy Report 2020». Cambridge: Centre for the Future of Democracy.
  • 3. See, for instance, J. March and J.P. Olsen (1984). «The new institutionalism: organizational factors in political life». The American Political Science Review, 78(3), 734-749.
  • 4. On this matter, see M. Olson (1982). «The rise and decline of nations: economic growth, stagflation, and social rigidities». Yale University Press.
  • 5. See Y. Gorodnichenko and G. Roland (2015). «Culture, institutions and democratization». National Bureau of Economic Research, nº w21117.
Dissatisfaction with democracy

Thus, on the subject in question – the response to the COVID-19 crisis and whether or not this episode could accelerate democracy’s decline – it is important to analyse the relationship between decisions aimed at combating the pandemic and political determinants, the state’s capacity and sociocultural traits. To shed some light on these complex relationships between an efficient response to the COVID-19 crisis, the political system and culture, we will perform an empirical analysis, which will be the subject of the following two articles. Don’t miss them, they throw up some surprises.

Álvaro Leandro
Àlex Ruiz
    Long-term trends

    Geopolitics

    We analyse the major geopolitical trends and how they influence the financial markets and economy.