The establishment of global value chains since 1990 to the point where a majority of trade takes place within them is now widely recognised by trade specialists, and increasingly apparent to political leaders. The reasons for their establishment, the volume of trade covered, and their implications are still being discussed.
While this discussion happens, the political conversation in many developed countries is already moving to whether the process can be changed, specifically either in terms of economic resilience or restoring manufacturing jobs. Such a conversation is being felt in new attitudes to trade policy, and further challenges are likely.
This article will outline the new global value chains, the reasons for their establishment and dominance, and their implications. From this baseline we can consider what this means for trade and economic policy going forward, particularly in the light of clear unhappiness among politicians about certain current economic outcomes.
The changing global trade
There are various estimates as to how much of global trade takes place within global value chains, including from the OECD at 70% and a 2013 UNCTAD / WTO / OECD report at 80%. Using the OECD definition as where “the different stages of the production process are located across different countries”, considering both goods and services inputs, and technology advances in all sectors, these figures could even be an understatement.
The example of a supply chain most commonly used is the automotive sector, with 30,000 parts and associated services like satellite navigation going into one car. However there are so many other examples, including increasingly in the services sector. Modern primary commodity production is optimised by technology developed in other countries, we can consider leading universities and much broadcasting and film production to be examples, and most international business to consumer transactions are facilitated by leading global platforms.
Much of the establishment of global value chains has happened since 1990, with a huge increase in the figures for exports in absolute terms and as a percentage of GDP between 1993 and 2008 largely ascribed to single country production being replaced by global sourcing. It was always the case that countries traded raw ingredients and components, but nothing like on the scale established during this time.
The rationale for global value chains
Establishing and operating global value chains involves cost, in managing complexity, different suppliers, and the integration of them. There is a degree of risk involved, in that poor decisions can affect global production, whether because suppliers are unreliable or the countries in which they are located have trade or labour issues. Finding suppliers and investing in production thus requires considerable research. It isn’t therefore a decision to be taken lightly, particularly as companies will have some loyalty to their home country, not least in expecting that government to provide assistance with others where required.
Yet companies still think that cost is worthwhile. That tells us that the potential benefits are significant, from lower costs and improved products. Both are important in the supply chain consideration, in terms of the most cost effective repetitive tasks, as well as bringing the best specialisms possible. This applies to both services and goods, for contact centres and skilled engineers, as well as all manner of different parts.
We can see the work of the multinationals, whether service or goods provider, or increasingly both, as combining any number of elements from across the world in a package that will keep them ahead of their competition. If that seems familiar to many people, so it should do, for it is fantasy football or similar games played on a much larger scale with real resources.
Implications of supply chain dominance
If multinational companies running their supply chains are the predominant actors in world trade that means in turn that national governments are not in that position. National economies are thus at the mercy of global production, with few direct controls. Typically we hear a lot about countries needing to have good transport infrastructure and skills to allow for varied participation in different supply chains. Specialist clusters are likely to be helpful. Being the home or major regional presence of a multinational is also likely to be important, as is a reliable legal and regulatory system. However none of these can guarantee specific production in specific locations.
That is significant. Locally important production may be particularly vulnerable, at the mercy of participation in one, or hopefully more, large supply chains for their continued existence. In areas formerly specialising in mass manufacturing this has been a particular problem, many were in decline before the advent of global value chain dominance, and remaining individual facilities may not be well sited as suppliers to global facilities.
Added to the problems is that manufacturing productivity has risen so significantly that even any much discussed reshoring of manufacturing may fail to create large numbers of new jobs in developed countries. Consumers have benefitted from increased competition and productivity in terms of an unprecedented choice of high quality products at affordable prices, but as workers they are in a global competition.
Future trade and economic policy
The growth of global value chains was doubtless aided by a large degree of global consensus on trade policy, towards open markets, during the period of growth from 1993 to 2008. That consensus was already fraying before it obviously came to an end in 2016 with the votes for Brexit and Trump. That both the UK and USA have struggled with the implications of global value chains has not reduced the desire of others to follow, most notably the EU through the concept of “Open Strategic Autonomy”. With China, India, and Brazil never fully committed to open trade we can see that a change has come in global trade consensus, perhaps not to full-blown protectionism but certainly towards market interventions.
All countries still however face the challenge of how to exercise control on private sector players. The global competition between multinationals has not changed, even if the implications of COVID-19 in areas like shipping costs and availability will cause many to examine the resilience of their supply. The changing global politics of trade will also make it harder for companies knowing that barriers are likely to rise, both to goods and services, for example through more restrictions on data. On the upside governments increasingly aware of the importance of attracting supply chains are likely to be more generous in offering state aid, though this in turn will cause issues at the WTO.
This all points towards a period of global trade policy difficulty, that the post-2016 troubles including with the WTO appellate body were the start of this rather than an aberration from a fully functioning global system. Similarly we are already seeing some changes to global value chains, not least as China consumes more of what it produces. It is likely that companies will respond at least in part to government urging to concentrate their supply chain more, even if that cannot mean a return to previous levels of manufacturing employment.
Adding in other issues of general concern, most obviously the fight against climate change, a period of uncertainty and instability in global economic and trade policy seems likely. It isn’t obvious how countries will manage to come to agreements that end this, but that has to be the main focus for the new WTO DG and it seems clear that the new Biden administration also recognise the need for progress. At the very least it would be good to restate core principles of non-discrimination and fair competition at the WTO, underpinned by a functioning dispute settlement system, but even this may be a stretch.
Global value chains have been the story of trade since 1990, one that coupled trade openness with new technology to deliver remarkable change of huge benefit to consumers and multinational businesses. The impact on individual countries, regions, and groups of workers was not always so positive, and the stresses have now led to a different political moment. Currently this moment looks like an only slightly rule-bound competition between countries, in which global value chains will evolve against the backdrop of a struggling WTO. However it feels far too early to predict with any certainty.