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A few further thoughts on the topic of Re-organization of GVCs and de-globalization

Updated: Dec 17, 2022

Dr Mia Mikic is Advisor at Large at Asia Pacific research and Training Network, ARTNet and Advisor at Prism Global Partners.

This post is complementary to the discussion that evolved during the TPRForum webinar on The Reorganization of GVCs before and after COVID-19 on February 18th, 2021, where Mia was discussant. The focus of this blog is to unpack some aspects of de-globalization (understood as part of GVCs' reorganization) and potential development prospects for Asian low-income developing countries.

Globalization is a rich concept associated with an abundance of scholarly and other literature on the topic. It isn't easy to give a single definition of globalization that would please all. Still, the aspect of globalization that points to a global economy becoming more inter-dependent (or integrated) would likely be acceptable to all. This integration is then "measured" by how much trade and investments among countries there is and how it changes over time, and, more importantly, how much of their production relies upon these international flows. With the subsequent advances in the technology of transport, communication, and information, and production accompanied by reduction of trade barriers in the last century, the world has moved from an early globalization phase (1st unbundling) to the one reflected in the expansion of the specific business model known as global value chains (2nd unbundling). That phase of globalization allowed through the global value chains (GVCs) and the involved firms to organize (locate) their production by fully utilizing comparative advantages (mostly based on relative factor abundance) and maximizing the efficiency by exploiting economies of scale in production and transport, and low coordination and transaction costs. Notably, the mindset among policymakers and the public everywhere worked favouring such an economic governance model. Developing countries in East and Southeast Asia, especially China that joined the WTO with a selective opening to FDI, quickly started to record benefits of participating in the GVCs. These are increased economic and trade growth, a new source of improved productivity, higher wages, and more formal employment. Of course, institutional and regulatory improvements are often necessary for a country to be accepted as the GVC location. But the adverse impacts also started to be noticed more clearly – increased inequality within economies, including increased unskilled unemployment in developed economies, degradation of the environment, and increased exposure to external shocks.

The Global Financial Crisis (GFC) of 2008-9 and the "Great Trade Collapse" was that shock which re-set the path of globalization: from the steadily increasing share of GVC-trade in the global trade and production, after the short-lived recovery in 2010, the trend has been relatively flat. The shock of increased protectionism after the GFC and the complex impacts of the COVID-19 pandemic, which started in 2020 and is still evolving, have only reinforced these underlying trends. As shown in the webinar, more data and improved measurement methods point out that we are now facing a lack of growth of the GVC-linked trade and perhaps a retreat. More specifically, we are learning that: 1) import content of global production has been falling or at best stalling; 2) foreign value added in gross exports has been falling, especially in China; 3) GVCs are becoming less fragmented or less complex, entailing fewer different cross-border production stages, and they are becoming more regionalized with domestic or regional value-added increased compared to the share of an extra-regional component. So, the GVs are getting shorter, less complex, and more domesticated.

What are the potential implications for those low-income developing countries which were still hoping to benefit from the participation in the GVCs?

This mostly depends on the main drivers of the above-described changes. According to industry insiders, some of these changes are expected due to some GVCs reaching their maturity stage where further fragmentations are not cost-efficient, and the re-set of the supply sourcing is required. The several years of rising unilateral protectionism, weakening of multilateral trade system and gradual efforts to replace it with larger regional deals, and finally, the changes in public mindset in the face of COVID-19 pandemic have caused significant changes in the ecosystems where GVC operate. Notably, the policymakers have openly started to show interest in interfering with the organization of the GVC, especially those linked to some public services /goods such as the health sector or national security. Both public sector and GVC-lead firms agree that there will be changes, including even more pronounced shortening, tweaking of the reliance on the just-in-time and lean inventory drivers of efficiency, and adoption of more cost-expanding redundancy and just-in-case diversified supply sourcing. Luckily for (some) developing countries, the GVC-lead firms are more inclined to embrace diversification (overseas) than domestication (apart from few narrow lines, e.g., in the health sector).

However, they will be looking for new factors relevant for the resilient GVCs of 21st century, which are different from the 2nd unbundling. These will include the following changes:

  1. A shift from manufacturing to services,

  2. A shift from analog to digital technology in production, distribution, and trade processing, including reliance on e-platforms,

  3. Adoption of unskilled and some skilled labour-saving technology such as automation and robotics, as well as AI, and

  4. Reconsideration of efficiency and economies of scale as the primary decision-making factors to include resilience, trust, safety and solidarity, and sustainability across the supply chain.

It is correct to be sceptical about the future when considering these new drivers of globalization from the perspective of low-income developing countries. Suppose they were not able to "fit-in" based on simple wage arbitrage. How could they be expected to do so based on digital technology and having appropriate accompanying regulation? Of course, developing countries with large domestic markets may well choose this (hypothetical?) problem and do what China and developed countries were attempting to do – boost domestic demand as the primary source of growth. Unfortunately, this is hardly an option for the small, low-income developing countries which depend on participant in the global economy both for demand and supply. The obvious choice is to try to "attach" itself to a large economy of a bloc (e.g., such as RCEP) to get the benefits of a regional market, allowing for more conventional specialization.

Furthermore, much more should be done in services because these economies have not fully exploited the direct and indirect role of services in the GVCs. Exploring how to become a substitute source of some production stage in the chain, which considers the abandoning of the current location for one or more reasons, could open the door for higher participation. Policy changes concerning regulation about digital economy and regulation and promotion of FDI will be the key to closing the gaps currently existing when looking at the 21st-century re-bundling.

The views and opinions expressed in this blog are solely those of the original authors and contributors. These views and opinions do not necessarily represent those of TPRForum, and/or any or all contributors to this site.

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