• 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

US: what will the new administration bring?

The Democratic candidate, Joe Biden, beat Republican Donald Trump in the recent US presidential election. It seems that the Congress will remain divided, with the House of Representatives in Democratic hands and the Senate in Republican hands. In this political environment and with the COVID-19 crisis ever present, what can we expect from US domestic and foreign policy in 2021?

Content available in
December 16th, 2020
Ilustración de una mascarilla con la estrellas de la bandera de EE. UU.

 

  • US policies will focus on domestic needs: a new fiscal package and increased infrastructure spending are shaping up to be the main areas of actions.
  • In foreign policy, we can expect to see a reconnection with multilateral cooperation agencies and a rapprochement with Europe, while the standoff with China will continue.

The Democratic candidate, Joe Biden, beat Republican Donald Trump in the recent US presidential election. As for Congress, it seems that it will remain divided, with the House of Representatives in Democratic hands and the Senate in Republican hands.1 In this political environment and with the COVID-19 crisis ever present, what can we expect from US domestic and foreign policy in 2021?

  • 1. The final outcome for the Senate has not yet been determined. Georgia still has to appoint two senators (they will be decided in a second ballot on 5 January) and this will determine the future of the Senate.
Domestic policy: fiscal package, green infrastructure, tax rise?

With an economy still severely affected by the economic crisis resulting from the pandemic, domestic policy will be the focus of attention in 2021. One of the highlights will be the new fiscal package to help combat the impact of the COVID-19 pandemic. Based on how the negotiations are currently progressing, this new package is expected to be approved in the coming weeks and to amount to some 1.2 trillion dollars (~6% of GDP). This is a substantial package, which we estimate could contribute between 3.0% and 4.0% to GDP growth in 2021.2 It includes measures such as a renewed extension of unemployment benefit, new aid for businesses (such as new loans under the umbrella of the Paycheck Protection Program) and direct aid for states.

Secondly, for years both Democrats and Republicans have been talking about the need to invest in infrastructure, but they have not managed to make significant progress in this area. Although a divided Congress might still make progress difficult, the current context of the pandemic offers a good opportunity to drive forward at least parts of the president-elect’s infrastructure plan. This is especially the case for the elements related to the climate agenda and green investment, since they would serve to revitalise regions where the crisis has had a significant impact on the productive fabric of the economy.

One example can be found in the states that are closely linked to oil and gas. In recent months, the oil and gas industry has lost over 100,000 jobs (representing 15% of the total number of employees it had at the beginning of the year) and its unemployment rate exceeds the country’s average (around 14% in October, compared to 6.9% nationally). Moreover, the recovery of employment in the sector is being hampered by the prospect of moderate oil prices (in the face of global demand hit by the pandemic). These regions could therefore accelerate their revival if they were to benefit from a plan for the development of alternative infrastructures.3

Finally, in his electoral programme, Biden proposed a tax rise to partially reverse the significant cuts introduced by the Trump administration in late 2017.4 However, in the short term it seems unlikely that the future president will gain sufficient support in Congress.

  • 2. We took a fiscal multiplier of 0.58, estimated by the Congressional Budget Office in reference to the effect of the CARES Act (the fiscal package approved at the end of March 2020 to combat the COVID-19 crisis).
  • 3. In addition, states with close links to the oil and mining sector tend to have Republican senators.
  • 4. With the Tax Cuts and Jobs Act of 2017.
Policies under Biden
Foreign policy: some things will change, but not the position with China

With Biden in the White House, the US will seek to reconnect with various multilateral agencies following the disagreements and withdrawals that occurred during the Trump administration. Indeed, Biden has promised to request for the US to be reinstated in the Paris Climate Agreement on his first day in office, and it will surely not be long before we see the US once again forming part of the World Health Organization, from which it withdrew a few months ago. Yet one of the great unknowns that Biden’s presidency will have to resolve is the extent to which the Trump era has marked a turning point in the US’ capacity to lead proposals in the field of multilateral cooperation.

Biden’s victory has also led to talk of a rapprochement with Europe. After all, the alliances forged between the two regions and other Asian countries led to the «international liberal order», which protected common interests and values for decades. On this occasion, the more-than-likely transatlantic rapprochement will have a lot to do with the US’ need to seek allies in its efforts to curb the rise of China, especially in the technological sphere.5 Nevertheless, although trade and investment relations between the US and the EU remain the closest in the world,6 Europe could find that it is highly constrained, given that the Old Continent faces the next industrial revolution without major technological champions and a high degree of dependence on Chinese technology.

The US-China decoupling process will be an area of continuity under the Biden administration. One only has to look at the «Buy American» slogan proclaimed during the Democratic presidential campaign for evidence of this. However, the way in which the rivalry with China is approached will probably be different under Biden’s mandate. For instance, the new administration is more likely to seek strategic alliances to force change in China. Biden may also try to open new diplomatic avenues with the Asian giant in the fight against threats that are clearly global in nature, such as climate change.

Ultimately, in 2021 US policies will focus on domestic needs, at a time when the COVID-19 crisis is having a serious impact on the economy (that is, a fiscal package and infrastructure spending). As for foreign policy, a reconnection with multilateral cooperation agencies and a rapprochement with Europe can be expected, while the dispute with China will continue (but undoubtedly with a more diplomatic approach).

  • 5. See the Focus «The US-China technology conflict: an initial insight» in the MR11/2020.
  • 6. The EU remains the US’ main trading partner (even without the United Kingdom), and it is also the region with which it maintains the closest relations in terms of foreign direct investment.