• 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: 14 November 2022 - 12:57
    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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Political polarisation: the phenomenon that should be on everyone’s lips

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• Society has become notably more polarised in recent years. In the US, this manifests itself through a wider gap between the views of Republican and Democrat voters. In Europe, we have identified an increase in disagreements over fundamental issues such as immigration and European integration.

• Political parties have also become more polarised in advanced economies, most notably in the last decade.

The degree of political polarisation in a society is a key variable that quantifies the extent to which public opinion is split into two opposing extremes. This is a very important variable to take into account: the greater the polarisation, the more difficult it is to generate a broad consensus amon groups with different views in order to undertake reforms that allow society to achieve progress. As such, a high degree of polarisation can lead to irreconcilable positions, making it difficult to reach agreements.

When we read the press, it is easy to get the feeling that polarisation has increased considerably in recent years. Is this really the case? To find answers, it is worth delving deeper and differentiating between polarisation among voters and among political parties, as they do not necessarily go hand in hand.

Let us start by analysing polarisation in society. In the US, a highly contentious debate has arisen in academic circles over whether there has really been an increase in polarisation among the electorate. At first glance, one might think not: according to several studies,1 the distribution of society’s preferences on various topics (economic, social and moral) has remained very stable over the past 20 years and no significant radicalisation is noted in the positions.

However, if we dig a little deeper, as the Stanford economist Matthew Gentzkow has done,2 we can see that polarisation has in fact increased. The reason for this is that the correlation between voters’ preferences and those of the political party they identify with has increased significantly over the past 20 years. Two examples are particularly illustrative. Firstly, 20 years ago it used to be relatively common to find Republican voters in favour of immigration or Democrat voters against it. Secondly, it was much more common for people to have conservative views on some issues (such as economic issues) and liberal views on others (say, social issues). In contrast, nowadays American voters have embraced the ideology of the party with which they sympathise in all aspects. The consequence of this trend has been a widening of the gap between the preferences of voters of the two main parties (see first chart) and greater antipathy towards the other side: in 1960, the percentage of voters of each party that would be displeased if their child married a person of the other party was insignificant, yet it has risen to 20% today. In other words, the polarisation of the electorate has increased quite clearly.

To analyse the polarisation of society in Europe, we use the European Social Survey (ESS), one of the most comprehensive surveys for analysing the political inclinations of European citizens. If we analyse how the distribution of Europeans’ political preferences have changed between 2006 and 2016 along a spectrum ranging from 0 (far left) to 10 (far right), we observe significant stability: preferences for more extreme options have increased ever so slightly, but the changes are minor (see second chart). However, it would be a mistake to draw hasty conclusions if we consider that polarisation can manifest itself in specific topics, even if it does not do so in the traditional ideological spectrum of a world that may no longer respond to the classical left-right cleavage.

In order to determine the degree of political polarisation, we construct a disagreement index that measures the degree of disagreement in society on specific economic and social issues. The results, presented in the third chart, leave no room for doubt: society currently presents a significantly higher degree of disagreement than in 2004 on topics as varied as immigration, multiculturalism, European integration, trust in parliament and satisfaction with the government. The only variable where we obtain greater consensus is on the need for public policies to reduce inequality, a finding that should not come as a surprise considering the scars left by the 2008 financial crisis.

This greater degree of disagreement over fundamental issues can be partly explained by the fact that positions on some issues have become aligned with the ideology – an explanation similar to what has happened in the United States. As an example, on the issue of migration, we note that there is currently a significant positive correlation between conservative ideological positions and rejecting immigration, something not seen in 2004.

In fact, the ESS conveys other interesting examples of how polarisation in society has increased. For example, in 2014, the percentage of Europeans who advocated tougher conditions for receiving refugees stood at 29%, but in 2016, in the midst of the wave of refugees, this percentage rose to 39%. Another example: in 2016, 18% of Europeans had boycotted products in the last year, compared to 12% in 2010.

Society itself also has a perception of growing polarisation. This is reflected in a global survey conducted in 2018 by the market research company IPSOS, in which 59% of respondents felt that their country was more divided than 10 years ago. This percentage was notably higher in certain countries such as Spain (77%), Italy (73%) and the US (67%). In addition, as can be seen in the fourth chart, the main factor to which the greater division was attributed was precisely the tensions between people belonging to different political ideologies.

Having established that there is greater polarisation among voters, it is not surprising to see that polarisation among political parties has also increased (see fifth chart). In fact, some academics, such as Stanford University political scientist Morris Fiorina, defend the hypothesis that it is precisely the greater polarisation among political parties that has set the pace and has led to a wider gap emerging between the various sensitivities in society. An important element that we can glimpse is that, in most countries, there has been a particularly marked increase in polarisation among political parties in the past 10 years. In advanced countries, for example, the polarisation of political parties has gone from 3.5 points in 2007 to 4.1 points in 2017. To give the reader an idea, in 2002, a parliament with a low level of polarisation – such as Germany’s – had an index of 2.7 points, while in 2017, a France that was highly polarised between Macron and Le Pen had an index of 5.1 points.

Before ending this article, it is worth starting to characterise the increase in political polarisation that we have identified in society. We can already identify two geographic patterns that are highly symptomatic and which, due to their structural nature, make us believe that political polarisation is here to stay.3 On the one hand, it has been documented that, in the US, voters currently live surrounded by people with the same political affinity, resulting in more homogeneous groups: in 1976, less than 25% of American citizens lived in districts in which there were overwhelming victories for one of the candidates («landslides»), while in 2004 the percentage already stood at almost 50%.4 On the other hand, there is growing evidence of the existence of a gap in electoral behaviour and preferences and values between people living in rural areas and those in urban areas, both in the US and in Europe. In the US, for instance, people living in rural areas believe that 73% of the people living in these areas share the same values as them, but that only 41% of urban residents share them.5 In Europe, there are several studies that document clearly differing voting patterns in the countryside and in the city, with a particularly powerful example occurring in the geographical distribution of the British vote in the 2016 Brexit referendum.6

In short, politics is in vogue, and if there is one phenomenon that stands out today it is the high degree of political polarisation we are witnessing. This is a phenomenon that has been slowly incubating, and which is now an established reality that shows no sign of fading in the short term. Greater polarisation can increase citizens’ interest in and commitment to politics, but it can also make it difficult to achieve the consensus needed to carry out structural reforms. It is for this reason that this phenomenon represents one of the cornerstones of the current political ecosystem.

Javier Garcia-Arenas

1. For further details, see P. Fiorina Morris and J.S. Abrams (2008). «Political Polarization in the American Public». Annual Review of Political Science 11:563-588.

2. See M. Gentzkow (2016). «Polarization in 2016», Working Paper, Stanford University.

3. F or an in-depth analysis of structural factors, see the article «The deep roots of polarisation, or on the need to recover the lost story» in this same Dossier.

4. See B. Bishop (2008), «The Big Sort: Why the Clustering of Like-Minded America is Tearing Us Apart», Editorial Houghton Muffin.

5. See K. Bialik (2018), «Key findings about American life in urban, suburban and rural areas», American Pew Research.

6. See G. Jennings and G. Stoker (2017), «Tilting Towards the Cosmopolitan Axis? Political Change in England and the 2017 General Election», The Political Quarterly.

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