WIOD Conference on Industry-Level Analyses of Globalization and its Consequences 26-28 May, Vienna Trade in Value Added and Global Production Networks: Contribution to a Structural Interpretation of the Great Trade Collapse Hubert Escaith Outline of the presentation 1. Before the Crisis 1. Supply Chains crawling on the Flat World 2. Supply Chains inflating the Bubble 2. During the Crisis a. Supply Chains as Transmission Channels b. Supply Chains and Trade Elasticity 3. After the Crisis: Exit scenarios a. The role of Supply Chain in Global Rebalancing b. From Global to Regional Supply Chains? 4. Concluding remarks: Back to Business As Usual? H. Escaith 2 1. Before the Crisis: Supply Chains: Determining Contemporaneous Globalization • Flattening of the World: – 1989: Berlin Wall and Brady Bonds – IT Revolution, transport and communication – New Business Management Models – Governance: Uruguay Round and Trade Liberalization, structural reforms in FDI recipient countries • Trading in a Flat World: – Convergence of Tastes and Standards vs. Preference for Diversity: Mass Marketing vs. Mass Production. – The end of the Fordist model, the rise of Wall-Martism – Foreign Direct Investment and International Supply Chains: Towards Global Manufacturing – Global Manufacturing: Trade in Intermediate Goods H. Escaith 3 1. Before the Crisis: Supply Chains Contributing to the Financial Bubble? Hypothesis: (A) Thanks to Global Outsourcing, large firms in developed countries 1. Gained productivity; and 2. Were able to lower the price of their final products. (B) Central Banks under inflation targeting maintained a lax stance because (i) potential output was up, and (ii) underlying inflation was low. (C) Accumulated liquidity led to asset-price inflation and credit boom. But this hypothesis remains to be fully tested Evidences at firm level but no strong empirical basis relating offshore outsourcing and aggregate productivity (work in progress...) H. Escaith 4 2. During the Crisis a. Supply Chains as Transmission Channels – The old story: the macroeconomics of shocks • • Real Side: Final Demand Effects Financial Side: Sudden Stops and Interest Rate – The new story: industrial linkages and the microeconomics of shocks • • H. Escaith Demand shocks and the “Bullwhip Effect”: from slowdown to complete stand-still (backward effects) Supply shocks and network disruption (forward effects) – Isolated credit shortage (e.g., trade finance) can affect several firms across several countries. 5 2. During the Crisis: b. Supply Chains and Trade Elasticity The Great Recession and the Trade Collapse of 2008-2009 19 90 19 92 19 94 19 19 96 98 20 20 00 02 20 04 20 20 06 08 15 10 5 0 -5 -10 Exports total -15 Quarter/Sectors (world trade, QoQ, nominal) Q1/08 Q2/08 GDP Q3/08 Q4/08 Q1/09 Q2/09 Q3/09 Q4/09 Manufactures -1 9 -2 -15 -21 7 9 9 Office and telecom equipment -12 5 5 -10 -27 13 14 16 Automotive products 1 6 -14 -18 -33 14 13 21 Iron and steel 11 23 7 -34 -31 -8 10 10 Ores and other minerals 10 20 4 -33 -35 13 24 7 H. Escaith 6 Why this jump in elasticity in 2008-2009? • Goods dominate Trade; Services dominate GDP (especially for OECD countries) • Double counting of trade in intermediate goods – Parts and components cross several borders: Accounting bias Value-Added vs. Gross CIF valuation • Inventory effect intensifying backwards along the supply chain • Composition effect: – Lags between Short and Long Term effect; risk of “W” profile: • Credit squeeze and initial shock on manufactures and trade finance: Strong trade effect • Then spreading to all sectors as recession hurts employment and investment: Secondary shock See an example of lag between industrial production and GDP: H. Escaith 7 Two questions to conclude: 1. Global Supply Chains and Trade Elasticity: Are we facing a Structural Shift in World Trade? 2. Crisis and Exit scenarios: Does this crisis lead to deglobalization and the breaking down of Global Supply Chains? H. Escaith 9 1. Are we facing a Structural Shift due to Global Supply Chains? a. STRUCTURAL SHIFTS AND WORLD TRADE-GDP ELASTICITY: Transition period 3.5 3.0 2.5 2.0 1.5 Ten year average Trade-GDP elasticity 1.0 1990 1995 2000 2005 2009 b. GLOBAL SUPPLY CHAINS ALONE CANNOT EXPLAIN THE STRUCTURAL SHIFT: Vertical Specialization unable to explain by itself the country/sectoral heterogeneity (i) Many of the participants in Global Supply Chains follow this transition pattern of Trade Elasticity … But others don’t : Germany, China or Mexico. (ii) Error Correction Model: Shows “overshooting of trade”… 1% decrease in GDP translates into a 3% decrease in imports in year 1. Trade recovers in the 2nd and 3rd years; 4 years after the shock the decrease in trade is about 2%. H. Escaith … But fails to relate it to Vertical Specialization 10 index After the Crisis: Exit scenarios a. The role of Supply Chain in Global Rebalancing V.A. BOP Because the Value Added content of trade is less than BOP data, some bilateral imbalances will be easier to correct Billion USD 1. US exports to China 2. Chinese exports to USA Balance (1-2) 3. US-VA exports to China 4. Chinese VA exports to USA Balance (3-4) 5. Ratio (3-4)/(1-2) 2000 19 80 (61) 18 40 (22) 0.4 2008 77 305 (228) 70 152 (83) 0.4 But total trade deficit remains unchanged: The macro issue still need to be addressed Preliminary estimate based on input-output matrices, adjusted for Export Processing Zones and HK effect H. Escaith 11 After the Crisis: Exit scenarios a. The role of Supply Chain in Global Rebalancing (cont.) Rebalancing is more difficult: Traditional exchange rate policy is partially affected by GSC 1. Because the domestic content of exports is less than the gross commercial value, traditional exchange rate policy does not work as expected to correct bilateral trade deficits - No asymmetry between revaluation of the surplus country or devaluation of the deficit country. - The pass-through effect of exporters is limited to their domestic content: need for higher revaluation, but ... - Alternative suppliers can substitute the exporter if appreciation is too high. 2. Exchange rate policy still effective to reduce global imbalances: ceteris paribus, a devaluation tends to reduce the demand for all imports, while revaluation increases the demand for imports. But not all, and total BOP deficits will still need to be addressed H. Escaith 12 Exit scenarios: b. The Future of Global Supply Chains After the Crisis Towards smaller and more regional supply chains? • – – • – – – – Increase in transaction costs Murky Protectionism (tariffs, NTBs, “Buy Domestic”) Oil and other transportation costs Systemic risks related to offshoring Consumer preferences may move towards “economic nationalism” Environment concerns (e.g.: buy local to limit CO2 emissions) Flexibility of supply chains vs. rapid changes in economic environment ? Offshoring complex industrial processes has its limits If true, serious challenge for peripheral developing and LDCs: Policy options for the resource constrained least advanced developing countries away from main regional supply networks? (Trade facilitation, A4T, ...) H. Escaith 13 Concluding Remarks: The Risks of Deglobalization after the Great Recession Probably not The recent drop in trade flows is due to “magnification-effects”; not to be related to deglobalization per se. New markets are appearing in emerging countries Offshoring has often been used to get closer to final demand rather than simply reducing costs Technical trends are positive: Offshore plants often more efficient ones: no incentive to close/sell them Continuous reduction of transaction costs by new technologies The improvements in IT and business practices enlarge the pool of “out-sourceable” tasks Demographic trends in most developed countries favour offshoring Emerging countries engaged in global manufacturing are acting as poles for FDI in partner countries. H. Escaith 14 Concluding Remarks: The Risks of Deglobalization after the Great Recession Probably not ... But it will not be “Back to Business As Usual” New centres Traditional markets for consumer durables entering into debt-deflation Final demand in emerging countries not a substitute in near future New players New global governance (?) The future of Global Manufacturing: Moving from a Global Network to a Network of Networks? H. Escaith 15 Trade in Value Added and Global Production Networks: Contribution to a Structural Interpretation of the Great Trade Collapse WIOD Conference on Industry-Level Analyses of Globalization and its Consequences 26-28 May, Vienna Thank you! Sources: “Global Supply Chains And The Great Trade Collapse: Guilty Or Casualty?” H. Escaith (2010, forthcoming in the first issue of TPREF Journal). “International Supply Chains and Trade Elasticity in Times of Global Crisis” H. Escaith, N. Lindenberg and S. Miroudot (2010, WTO) Acknowledgments and disclaimer: This presentation builds on a series of related works which benefited from the contribution of Ch. Degain, F. Gonguet, S. Inomata, N. Lindenberg, A. Maurer and S. Miroudot. The views expressed are mine and do not represent a position, official or unofficial, of the WTO .