• Global value chains: yesterday, today and tomorrow

    catalanspanish

    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.

    Plantilla

    plantilla_article_vs05

    Temática
    Pre Titulo
    Miniatura
    Área geográfica
    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.

    p21

    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.
    p22

    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.

    p23

    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.

    Monograficos
    Destacado Economia y Mercados
    Desactivado
    Destacado Analisis Sectorial
    Desactivado
    Destacado Área Geográfica
    Desactivado

Politics is the name of the game: political dynamics and risks in 2019 and beyond

Content available in

One only has to take a look at the media to realise the rapid changes that are taking place in politics at present. In this context of constant transformation and the cult of the here and now that characterises our society, it is sometimes necessary to take a step back from the intense barrage of news and stop to reflect: what are the characteristics of the current political cycle worldwide, and what are its manifestations? This type of reflection, which is less hurried and more thoughtful, is a necessary exercise to try to understand and contextualise the political dynamics we are witnessing.

The importance of politics in economic analysis became particularly important in 2016 due to the unexpected outcome of the Brexit referendum and the victory of Donald Trump in the presidential elections. Following a relatively calm 2017, in 2018 numerous pockets of tension have arisen at the international level, setting a complicated scene for the beginning of 2019. The onslaught of protectionism in the US, the European authorities’ negotiations with the United Kingdom on Brexit and with Italy regarding its budgets, as well as the European elections in May 2019, are some of the most significant challenges for the year to come.

But what factors lie behind these challenges? In this article, we will consider both the general factors (the new state of politics) and the specific factors (some of the specific manifestations of this new arrangement), as well as filling in the gaps in between to analyse how the current status of politics is contributing to today’s forms of governance. In particular, in order to characterise the current political cycle in Western countries, we analysed the trend in three key variables: electoral volatility, political polarisation and democratic quality.

Electoral volatility, polarisation and democracy: evidence and implications for governance

When we analyse electoral volatility, we note a substantial increase in the number of people who have changed how they vote between one electoral process and the next. This is the result of both the switching of votes between existing parties and increased support for new political formations. In fact, between 2010 and 2015, electoral volatility in Western countries has increased by 68%.1

This political environment characterised by greater volatility can have significant repercussions for how those in government act. In particular, greater electoral competition can lead them to propose more nearsighted policies in an attempt to stay in power, even if this leads to adverse consequences in the medium term for the economy as a whole. That said, this could also lead them to focus on policies and reforms that are important for the medium term, if it is clear that they are not going to be re-elected. Which of these two effects dominates? The evidence seems to indicate that it is the former (see first chart). This is not surprising if we consider that it is quite natural for policy-makers to resort to using a wide range of methods to extend their mandate. In effect, the correlation between the Bertelsmann institute’s policy performance SGI index, which measures the degree of reforms that countries need in the medium term, and electoral volatility is clearly negative.

The second factor that we analysed is the trend in political polarisation, understood as the degree to which political parties stray from centrist positions. The results leave no room for doubt: political polarisation has increased significantly in the advanced countries since the financial crisis. This is intimately linked to the increase in volatility and the rise of new populist formations with positions skewed to the right and left of the political spectrum.

The most interesting consequences of this greater polarisation arise in the trade-off between nearsighted policies and serious reforms. In this regard, the report by Bertelsmann2 documents that the increase in polarisation hinders the scope for broad political consensus, thereby hampering the possibility of implementing reforms focused on the medium term. However, this type of conclusion is not entirely novel: back in 2012, a study3 documented that greater political polarisation was linked to lower quality of government. This effect seemed particularly important in young democracies.

In addition, the rise of populism is shrinking the room for promoting longer-term reforms, instead favouring an increase in nearsighted policies such as protectionism. In this regard, a recent study builds an index that measures the degree of economic protection in the policies of European political parties (including trade barriers and immigration), and another that measures the extent to which policies that are important for the long term are left out. The results show that, on average, the economic protection index of populist parties was 34% higher than the average for all European parties, while their index for leaving out important long-term policies is 24% higher than that of the total sample (see second chart).

A final element that seems to define the latest political dynamics is a deterioration in the quality of democracy.4 For example, between 2006 and 2016, the number of electoral democracies in the world did not increase, while non-democratic forms of government gained support. According to Pew Research, 49% of citizens worldwide would take a good view of a government formed by a committee of experts not approved by the ballot box.

From theory to practice: the (geo)political risks of 2019

The risks of a (geo)political nature that we can foresee for 2019 are nothing more than manifestations of this new political environment, which gives rise to a more nearsighted form of governance. Let us start with the rise in protectionist tensions, one of the manifestations that has already accompanied us in 2018 under the «America First» movement and which, for the time being, seems likely to stick around in 2019. Protectionism consists of short-term measures that can increase electoral support among the citizens for whom it provides protection against outside competition. However, in the medium term, isolationist policies tend to have adverse consequences for economic growth. In this regard, global growth could fall by between 0.1 and 0.6 pps over the next few years, and by as much as 1 pp in the case of the US, depending on the magnitude of the protectionist measures that are finally implemented.5 Looking ahead to 2019, the risks related to the trade tensions between China and the US are a particular cause for concern. Specifically, the tensions could intensify to the point that they end up imposing constraints on investment between the two countries, or the US could end up imposing tariffs on the automotive sector.

In Europe, Brexit and the disputes between the European Commission and the Italian Government on budgetary matters are other examples of geopolitical manifestations brought about by the new political trends, where the emphasis is on immediate political yields. However, the increase in short-term satisfaction, which for many voters means distancing themselves from the EU dynamics emanating from Brussels and, to a certain extent, embracing the slogan «My Country First», is offset by disruptive effects in the medium term caused by a head-on collision with the EU.

Another relevant manifestation of the current political cycle is the way in which politics is questioning the main economic and technical institutions of our economies. There are now even academic articles that are bold enough to propose greater populist political interference in monetary policies. This is particularly counterproductive in a context in which the very objectives of the central banks’ monetary policies are being reconsidered.6

Finally, it should be noted that, although the new political dynamics are worrisome, we must not let ourselves get carried away with pessimism. We have two good reasons for this. The first is that these dynamics should serve as a warning call for the more established political parties to put policy issues on the table for serious consideration. The second is that this new scenario could be part of a process involving the maturity and redesign of our political-economic institutions, in which case the current dynamics could be the turmoil prior to a new status quo that is stronger and more inclusive.

Clàudia Canals and Javier Garcia-Arenas

CaixaBank Research

1. The volatility index is a measure of gross flows of votes between parties. It takes three types of volatility into account: volatility explained by flows towards existing parties, that explained by flows towards new parties and that explained by flows to minority parties (with <1% of votes).

2. See SGI 2018 (2018), «Policy Performance and Governance Capacities in the OECD and EU», Bertelsmann Stiftung.

3. See G. Xezonakis (2012), «Party System Polarisation and Quality of Government», Working Paper Series, University of Gothenburg. The study uses a sample of 39 countries between 1984 and 2009.

4. As stated in the Bertelsmann report specified in footnote 2.

5. The most extreme case would be the result of a 10-pp increase in tariffs between the US and all of its trading partners. Estimates by CaixaBank Research based on measurements by the IMF, the Bank of England and the OECD.

6. See C. Goodhart and R. Lastra, «Populism and central bank independence», Open Economies Review 29, no. 1 (2018): 49-68.

 

Etiquetas
    im_1812_d3_01_en_fmt.png
    im_1812_d3_02_en_fmt.png