• 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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Have democracies achieved better control over social interactions?

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Álvaro Leandro
Àlex Ruiz
February 16th, 2021
Gráfico de barras formado por pilas de monedas de 1 y 2 céntimos de euro

For now, we have reached the half-way point in our attempt to answer the question of whether democracies are proving more or less successful in the fight against the pandemic. In the previous article1 we have presented empirical evidence that at least they have not been weak. On the contrary, they have been more «aggressive» in imposing more stringent lockdowns and have been more ambitious in terms of testing. However, what we are really interested in is not stringency, but effectiveness. It could be that democracies have been more aggressive in their anti-COVID health policies because they are rather ineffective in achieving the desired social behaviour, namely the reduction in mobility (which, as we know, leads to the decline in social contacts and the breakdown of the chains of contagion). This is a rather more complex question than that addressed in the previous article, since more factors potentially intervene. So let us take it step by step.

In specific terms, the question we are interested in answering is whether, with the same intensity of lockdown restrictions or testing, two countries with different degrees of democracy have achieved different reductions in mobility among their population.2 Again, the result of our empirical analysis is favourable towards democratic countries. The desired behaviour (a reduction in social interactions and mobility) has occurred to a greater extent3 in more democratic countries with an equal application of the tools at hand.4

  • 1. See the article «Have democracies been more lax with lockdowns and testing?» in this same Dossier.
  • 2. An initial, preliminary analysis has been performed to determine whether the increase in the stringency of lockdowns corresponds to a reduction in mobility using the following panel regression with fixed effects: \(Mobility_{i,t}=\alpha_0+\alpha_1Stringency_{i,t}+u_i+u_t+\mu_{i,t}\) where \(Mobility_{i,t}\) is a measure, developed by Google, of the reduction in mobility in country i and on day t compared to the previous year and \(Stringency_{i,t}\) is a measure, developed by Oxford University, of the severity of the lockdown measures. The regression analysis confirms the expected relationship and, therefore, that the more stringent the lockdown measures, the greater the reduction in mobility. In short, the tool chosen by countries «works» in achieving the desired social outcome.
  • 3. The difference in favour of democratic countries is of a relatively small magnitude (see first chart), but the results are statistically significant.
  • 4. To perform this analysis, the regression described in note 1 above is expanded by adding an interaction between \(D_i\), a measure of the political system in the country on a scale ranging from 0 to 100 based on data from Freedom House, and \(Stringency_{i,t}\). In this regression, \(Mobility_{i,t}=\alpha_0+\alpha_1Stringency_{i,t}+\alpha_2\;\left[Stringency_{i,t}\times D_1\right]+u_i+u_t+\mu_{i,t}\), the coefficient \(\alpha_2\) can be interpreted as the differential of the reduction in mobility, for the same degree of lockdown stringency, in democracies compared to more authoritarian countries. A significant coefficient is obtained, with an \(R^2\) of 0.645.
Relationship between mobility and the stringency of restrictions in less and more democratic countries

However, this relationship is only a top-level one. In the first article of this Dossier we have encountered the notion that a democracy’s success depends on three different aspects: the political one, the capacity of the state and the cultural one. Now it is time to find out whether what we have interpreted as the good performance of the more democratic countries in reducing mobility could in fact be due to the degree of efficiency of public policies or to the prevalent type of sociocultural behaviour – that is, the importance of individualism or collectivism (working on the basis that, in the former case, stricter tools are required since the degree of social «discipline» is foreseeably lower).

With these sophistications, the results are maintained. Firstly, when we try to explain mobility in terms of the degree of democracy and state capacity, we find, as expected, that the greater the administrative capacity to implement public policies, the greater the reduction in mobility. For instance, according to our results, if the lockdown stringency index (measured on a scale between 0 and 100) were to increase by 10 points in two identical countries, but where one had the administrative capacity of Spain and the other that of Colombia (which is significantly lower), then the mobility index would fall by around 5.6 points in the country with the greater administrative capacity, while it would fall by only 5.1 points in the second country, assuming the same conditions apply in both of them. In spite of the control arising from the capacity of the state, being more democratic continues to have a positive correlation with the desired social behaviour, that is, a reduction in mobility.5

Something similar occurs with sociocultural elements and, in particular, with the importance of individualism in a country.6 Generally speaking, the greater the degree of individualism – and always taking the stringency of lockdown measures into account – the worse the result in terms of control over mobility. Repeating the previous exercise, mobility would fall by around 6.7 points in a country with the degree of individualism of Spain (51/100), while it would fall by only around 6.1 points in a country with the degree of individualism of the US (91/100). This makes sense, since in societies in which the collective element or the importance of the group are greater, the expected level of discipline is also greater than in more individualistic societies. However, when we incorporate the degree of democracy into the analysis, we once again see that democracies are more effective in achieving the reduction in mobility.

  • 5. An interaction between \(Stringency_{i,t}\) and \(Eff_{i}\), a measure of state capacity developed by the World Bank, is added to the regression described in the footnote above, such that the final regression is: \(Mobility_{i,t}=\alpha_0+\alpha_1Stringency_{i,t}+\alpha_2\;\lbrack Stringency_{i,t}\times D_1\rbrack+\alpha_3\;Stringency_{i,t}\times Eff_i\rbrack+u_i+u_t+\mu_{i,t}\). Significant coefficients are obtained both for \(\alpha_2\) and for \(\alpha_3\), with an \(R^2\) of 0.736.
  • 6. The impact of culture on the relationship between the stringency of lockdown measures and the reduction in mobility in each country is analysed using the following panel regression with fixed effects: \(Mobility_{i,t}=\alpha_0+\alpha_1Stringency_{i,t}+\alpha_2\;\lbrack Stringency_{i,t}\times Individualism_i\;\rbrack+u_i+u_t+\mu_{i,t}\), where \(Individualism_{i}\) is a measure of the individualistic/collectivist culture in the country, according to an analysis by Hofstede (2001). A significant coefficient is obtained for \(\alpha_2\), with an \(R^2\) of 0.779.
Relationship between mobility and the stringency of restrictions in less and more individualistic countries

In other words, although states with a greater capacity to effectively implement policies and countries with more collectivist tendencies have been better at controlling mobility, even when we incorporate these factors democracies continue to do so better than autocracies.

Do these results mean that democracies are saved and can rest easy? Clearly not. For starters, the human drama we are living through does not allow us the luxury of such complacency. Moreover, being better in relative terms may not be enough for citizens. Exercises like the one presented in this article, well-publicised, should help us to make a less critical reading of the true state of democracy. But let us not be fooled, citizens will express their dissatisfaction with the response from democracies based on far more transcendental elements than the obligatory and necessary effort of economists and technicians to interpret the world properly. What history will ultimately decide is what role this health crisis has in the broader context of the political crisis. In other words, it will help to shed some light on the question of whether or not the pandemic can act as a spark to ignite the regeneration of democracy. This judgement is still a few years away, but we can attempt to explore the matter now – a tentative exercise which we conduct in the next article.

Álvaro Leandro
Àlex Ruiz
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