Globalization and International Value Chains: 2000-2021

The disruptions in international supply chains that occurred during the COVID-19 pandemic and the escalation of economic and political tensions between the U.S. and China have given rise to claims that globalization has died or is at least moribund. In this note we will address three questions concerning the evolution of globalization from 2000 through 2021:

1. Did globalization decline during that period?

2. To what extent did North America and China decouple their supply chains?

3. Did regionalization (“nearshoring”) increase?

In its broadest sense, the term “globalization” captures the interaction of national economies through the movement of people, ideas, capital, technology, goods, and services. Globalization so defined has already crossed a threshold from which it will likely never return, barring a global conflict or a failure to respond adequately to climate change. Indeed, individuals across the world today are more connected than ever before. Consider, for example, that almost two-thirds of the world’s population owns a smartphone, or that the estimated number of international tourists in 2023 exceeds 1 billion. Such human interconnectivity will only increase over time as communication and transportation-related technologies continue to advance. There has also been rapid growth in services trade, and especially in intermediate services.1 When observed through this broad lens, globalization remains deeply rooted and change is one of its enduring characteristics.

Among the many facets of globalization, our focus is on international trade, and on global value chains (GVCs) in particular. The volume of trade flows in goods and services has withstood significant challenges in the past, and stands to do the same in the future, even as patterns of trade flows change. Already, many of the negative impacts of the COVID-19 pandemic and increased geopolitical tensions have been met with creative workarounds, demonstrating the resilience of international trade and global supply networks. Changes in the patterns of cross-border trade in goods and services do not indicate a decline in globalization. Our quantitative analysis provides strong evidence that value-added trade supporting the production of goods and services did not recede during 2000-2021, nor was there evidence of a global trend toward reshoring. Instead, the evidence suggests that 2021 was a high mark for the global exchange of goods and services as measured by international value-added production linkages. Regarding the question of whether there has been a decoupling between North America and China, our analysis finds no evidence of decoupling of value-added production linkages. In fact, we find that China and North America increased their value-added production linkages between 2017 and 2021, implying significantly greater linkages than those that could be estimated using gross trade statistics.

Our analysis utilizes the GVC Indicators database created by the University of International Business and Economics (UIBE) in Beijing. The GVC Indicators database breaks down value added into that which flows through GVCs, and that which does not.2 See the appendix for a description of the data and methodology. In the charts that follow, the term “forward GVC participation” captures the degree to which a country’s domestic value added is exported through global value chains. “Backward GVC participation” captures the extent to which a country’s final production includes value added that is imported from global value chains. For each measurement, a higher percentage indicates greater relative importance of value added that is imported or exported through GVCs compared to value added sourced domestically. Thus, higher levels of backward and forward GVC participation indicate greater global integration of production networks.

We concentrate on the world’s three major trading entities: China, the European Union (EU), and North America, defined as the three nations in the USMCA (Canada, Mexico, and the United States). Our calculations for the EU in all years include GVC activity for the 27 member countries as of 2021, and therefore exclude the United Kingdom. Value added originating from China, the EU, and North America accounted for 54% of worldwide value added involved in GVCs in 2021, and final production by the three entities accounted for 57% of GVC-involved final production. Other significant GVC trading nations in 2021 which are not included in our main analysis include India, Japan, Russia, and the United Kingdom.3 In our analysis, we address reshoring within North America and the EU while considering how each bloc’s linkages with China have evolved over time.

Figure 1 shows trends in forward and backward GVC participation for each region at intervals during 2000-2021. For purposes of comparison with China and to avoid overstating the degree of international production linkages for North America and the EU, we only consider only the external trade of those two blocs when measuring GVC-related activity. As can be seen in Figure 1, Panels a and b, in 2021 both backward and forward GVC participation in goods production stood at or near all-time highs for each region.45 Panels c and d show that the same holds true within the service sector, except for Chinese forward GVC participation. It is likely that the decline in China’s forward GVC participation in services reflects the effects of structural change in the Chinese economy. The service sector’s share of Chinese GDP grew from 39.8% to 53.3% from 2000 to 2021, growth that our analysis indicates came largely from domestic value chains. In other words, Chinese demand for intermediate services produced domestically outpaced foreign demand for Chinese intermediate services from 2000 to 2021. This caveat aside, Panels a through d provide evidence that the involvement of these three major blocs in global value chains stood near or at a historic high, and that globalization had not declined through 2021. While the data that we employ in our analysis only extends through 2021, we note that with the volume of world trade hitting a record estimated at $32 trillion in 2022, it is likely that the trend seen in Figure 1 continued and globalization had still not declined as of the beginning of 2023.6

Guy Erb is a former U.S. trade policy official and investment banker.

Scott Sommers is a PhD student in Economics at the University of Minnesota.

To read the full paper, see below. 

Globalization and International Value Chains - Erb Sommers

 

The post Globalization and International Value Chains: 2000-2021 appeared first on WITA.