International Trade CSQ — Global Value Chains, the Belt and Road Initiative, and Whether Globalisation Is Reversible
Case
Extract 4 — The end of globalisation?
Until recently, the advance of globalisation with greater economic ties between countries was seen as inevitable. As the UN Secretary-General said in 1999, “Globalisation is an irreversible process, not an option.” Then, against expectations, the script changed. In January 2017, Donald Trump became President of the US, expressing his perspective: “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs.”
For some time the pace of globalisation has been slowing. Between 1970 and the global financial crisis of 2008, the ratio of global trade in goods to global GDP rose from around 20% to just under 52%. Since the crisis, however, trade has not been as dynamic and the ratio has fallen to 45% — a key indicator of the reversal of globalisation. International financial flows have suggested a slowing of globalisation; multinational companies’ cross-border investments fell by around 15% in 2016, and foreign direct investment is well below its pre-crisis peak and projected to decline further.
Manufacturing is becoming more local. A component supplier to a world-leading US manufacturer of smartphones and tablets is reported to be considering investing in the US rather than China. As automation reduces the labour needed for production and new technologies allow for smaller factories, localised production is more possible — a benefit for customers demanding personalisation and near-immediate delivery. Similarly, a major German manufacturer of sportswear has a factory in Germany that takes advantage of automation and 3D printing to make customised trainers on demand, rather than setting up the factory abroad.
Source: From Global To Local: The Making of Things and the End of Globalisation, Finbarr Livesey, 2017
Figure 1 — US manufacturing employment, 1987–2017 (millions): falls from 17.5m (1987) to 12.4m (2017).
Figure 2 — US real manufacturing output, 1987–2017 (real output index, 2009 = 100): rises from 69.79 (1987) to 129.26 (2017). Source: Bureau of Labor Statistics, 2017.
Table 1 — US employment by industrial sector, 2000–2020: manufacturing employment and its share of total employment fall over the period, while services employment and share rise.
Extract 5 — The rise of global value chains
Over the past 30 years, the growing technological complexity of products, trade liberalisation, and lower transportation and communication costs have re-shaped the landscape of global trade. International production, trade and investments are increasingly organised within so-called global value chains (GVCs), where the different stages of the production process are located across different countries.
Firms try to optimise their production processes by locating the various stages across different sites in different countries. Asia has especially exemplified this pattern of production.
Integration into GVCs brings benefits beyond those traditionally associated with international trade in final goods, reflecting the division of production and task specialisation, which enables each participating country to exploit comparative advantage and raise the benefits of producing on a larger scale. Among the clearest beneficiaries of globalisation are the emerging economies, which have become increasingly integrated into more and more complex global value chains. Their role in processing raw materials, and in manufacturing and services, has grown rapidly. Source: UNCTAD, 2017.
Table 2 — Participation in global value chains in selected economies (% of foreign inputs in an economy’s exports): Singapore 81, Malaysia 68, China 61, Japan 49, United States 42, Pakistan 40. Source: UNCTAD, 2017.
Extract 6 — China’s ‘Belt and Road Initiative’
The ‘Belt and Road Initiative’ is an immensely ambitious development campaign through which China wants to boost trade and stimulate economic growth across Asia and beyond, by building massive amounts of infrastructure connecting it to countries around the globe. By some estimates, China plans to spend US$150 billion each year on such projects. An extraordinary US$900 billion worth of projects are planned or under way.
There are plans for pipelines and a port in Pakistan, bridges in Bangladesh and railways to Russia — all with the aim of creating what China calls a ‘modern Silk Road’ trading route. Foremost among them is the US$62 billion China–Pakistan economic corridor, a network of motorways, power plants, factories and railways that supporters say will spark an ‘economic revolution’ and create up to one million jobs in Pakistan.
Observers say a number of overlapping goals lie behind China’s Belt and Road Initiative. In many ways it is an economic plan designed to open up and create new markets for Chinese goods at a time when China’s economy is slowing. It also intends to export excess cement and steel capacity by shifting factories overseas to less developed countries. Source: Tom Phillips, The Guardian, 12 May 2017.
Extract 7 — Globalisation thrives in Asia as export revival boosts growth
For all the talk of globalisation’s retreat it is proving to be a very different story in Asia. Exports are rising again, governments are pursuing free-trade deals, and rather than bringing jobs back home US car producers are planning new facilities in China. That early-2017 worry over the potential of a trade war is now turning into recognition that there has been something of a trade boom, as the global economy’s strongest growth in seven years drives demand for Asian-made goods. The leading indicators of trade — manufacturing export orders and shipping rates — remain high, and global growth in the next few years is forecast to remain robust. And while the threat of a trade war remains, so far the US government has proven far more reluctant to challenge China than expected. Source: Enda Curran and Michael Heath, bloomberg.com, accessed 11 January 2018.
Questions
(a) With reference to Figures 1 and 2, what evidence is there to suggest an increase in productivity of workers in US manufacturing over the period 1987–2017? [2]
(b) Using an example, explain a benefit to a firm of producing on a larger scale through participation in the global value chain. [2]
(c) Explain one possible reason why Singapore has such a high participation rate in the global value chain. [2]
(d) Explain two possible reasons for the US government’s call for tariff protection of the US manufacturing industry. [6]
(e) Considering possible advantages and disadvantages to Pakistan’s economy of China’s ‘Belt and Road Initiative’, assess whether it is likely to be of overall benefit to Pakistan. [8]
(f) Using economic analysis and based on the evidence provided, discuss whether you agree with the view that globalisation is reversible. [10]
Answers
(a) [2] — command: describe. From Figures 1 and 2, US manufacturing employment declined over the period (17.5m in 1987 to 12.4m in 2017) while real manufacturing output rose (an index of 69.79 to 129.26). More output is therefore being produced with fewer workers. [1] This means output per worker — labour productivity, measured as total output per man-hour — has risen, so the productivity of US manufacturing workers has increased. [1]
(b) [2] — command: explain. A firm participating in the global value chain can reap internal economies of scale through specialisation. As Extract 5 notes, firms in GVCs can produce on a larger scale. [1] For example, a smartphone firm can have each worker specialise in one specific stage — assembly, or product design — raising productivity and lowering the average cost of production for the firm. [1]
(c) [2] — command: explain. One reason is that GVC participation lets Singapore reap economies of scale. With a small domestic market, Singapore’s access to a large global market through the GVC enables a far larger scale of production than its home market alone permits, lowering unit and average costs. [1] Producing at this larger scale yields cost savings Singapore could not achieve domestically, which raises its participation in the chain. [1]
(An equally valid alternative reason is gains from comparative advantage: Singapore focuses its limited resources on production aspects in which it holds a comparative advantage, such as electronic-component manufacturing, and trades for the rest — by being highly integrated into the GVC it reaps the gains from specialisation and trade.)
(d) [6] — command: explain (two reasons, 3 marks each).
Reason 1 — to protect domestic employment. From Figure 1 and Table 1, employment in US manufacturing has been declining. [1] A tariff raises the price of imported goods, so US consumers switch from imports to domestically produced goods; this raises the quantity demanded of domestic output, so domestic firms hire more factors of production, including labour, raising employment in the industry. [1] Furthermore, as US car producers plan to shift production to China (Extract 7), the tariff encourages them to remain in, or return production to, the US to avoid the tariff when selling to US consumers, preserving employment in the US car industry. [1]
Reason 2 — to guard against dumping. A second reason is protection against possible dumping by foreign producers such as those from China. [1] Dumping occurs when producers sell below their marginal production cost, often with the help of government subsidies, so as to drive out competitors. [1] A tariff raises the price of the Chinese imports to be more in line with US producers’ prices, so US domestic industries are protected from this unfair foreign competition. [1]
(e) [8] — command: assess (6 levels-of-analysis + 2 evaluation).
The Belt and Road Initiative (BRI) is a series of Chinese investments, predominantly in infrastructure — railways, ports, power plants — across Asia and beyond. For Pakistan it brings both benefits and costs.
Advantage — actual and potential growth, lower unemployment, and an improved external position. The BRI brings an inflow of foreign direct investment from China into Pakistan (Extract 6: “building massive amounts of infrastructure”), raising Pakistan’s investment expenditure (). The improved infrastructure also boosts trade between China and Pakistan, raising net exports (). Both raise aggregate demand, and the rise in improves Pakistan’s balance of trade, ceteris paribus. Assuming spare capacity, the rise in AD causes an unplanned fall in inventories; firms raise production by hiring more factors of production, lowering demand-deficient unemployment — Extract 6 cites the creation of up to one million jobs. Higher household income induces further consumption, so national income rises by more than the initial injection through the multiplier: actual growth. The rise in also raises Pakistan’s capital stock and hence productive capacity (potential growth), shifting aggregate supply rightward.
Disadvantage — structural unemployment and inflationary pressure. One of the BRI’s stated goals is to open new markets for China’s exports (Extract 6). Pakistani industries such as steel and cement may then face competition from cheaper Chinese exports; their producer surplus is eroded, and workers unable to compete may face structural unemployment through occupational immobility. Further, if Pakistan’s economy is near full employment, the rise in AD raises the general price level with little gain in real output — demand-pull inflation — as firms hire less-suitable factors at rising unit cost and pass the higher costs on as higher prices, worsening the cost of living.
Judgement. Pakistan can benefit from the BRI, but the benefit is conditional on the Pakistani government’s ability to make the gains widespread. [Ev] Given Pakistan’s relatively low current GVC participation (40%, Table 2), there is considerable room to integrate further, so the BRI is an opportunity for both short- and long-term growth — especially valuable to a developing country seeking to raise its standard of living and develop infrastructure. [Ev] The key to lasting benefit is that the government supports the development of local firms and the retraining of workers into growing sectors, overcoming structural unemployment, so that the gains accrue to a broad base of local firms and workers rather than being concentrated among a few — and so that income generated is not largely repatriated to China by Chinese-owned firms, which would deepen Pakistan’s debt to China. On balance the BRI is likely to be of overall benefit provided this policy support is in place.
(f) [10] — command: discuss.
Globalisation is the increased integration of economies through cross-border movement of goods, services, capital, labour and knowledge; its reversal would mean a reduction in these flows. I argue that globalisation is not fully reversible over the long term, though it is being reshaped.
Thesis — globalisation is reversible. From Extract 4, the ratio of global trade in goods to global GDP fell from just under 52% to 45% after 2008, and FDI fell below its pre-crisis peak, suggesting a reversal driven by rising protectionism and nationalism between the US and China. The imposition of tariffs raises the price of imports (from the world price to the world price plus tariff), reducing imported quantity, so trade flows contract. Tariffs also make it costlier to outsource: a firm producing overseas and shipping goods back home faces the tariff, eroding the cost advantage of offshore production, so firms keep production at home, reducing cross-border capital flows. Beyond trade policy, automation and new production technology (Extract 4) make domestic production cheaper, so developed countries lose less by producing at home; less developed countries lose their comparative advantage in labour-intensive goods, reducing outward FDI. Changing consumer preferences towards personalisation and fast delivery (Extract 4) further shift manufacturing to be more local. These reduce the flows of FDI and goods, reversing globalisation.
Anti-thesis — globalisation is shifting, not reversing. However, the trend may have shifted from worldwide to regional rather than reversing outright. Investment and trade flows remain strong in Asia: Asian economies continue to embrace free-trade deals (Extract 7), GVC participation remains high (Extract 5; Table 2 shows high foreign-input shares for Singapore, Malaysia and China), and the BRI represents a large outflow of FDI from China into the region (Extract 6), promoting further intra-regional flows of goods and services. So while flows have weakened across continents, they are intensifying within regions, especially Asia, mitigating the reversal. The protectionism itself appears limited — the US has been “far more reluctant to challenge China than expected” (Extract 7) — and US firms are still shifting production to China to tap cheaper inputs and reach growing Asian markets.
Judgement. Globalisation will not be fully reversible and will instead continue over the long term, albeit in a more regional form. The apparent reversal — protectionism driven by domestic political concerns and the localisation of some manufacturing — is unlikely to produce a substantial, lasting reduction in globalisation, because the underlying gains from trade based on comparative advantage remain compelling, especially for emerging economies, and continuing technological progress that lowers transport and communication costs keeps enabling integration. The recent retreat is likely short-lived, arising as a response to growth challenges that may subside as recovery takes hold; protectionist measures also tend to be voter-driven and may be unwound with changes of government. After three decades of deep specialisation and GVC integration, it would be near impossible for economies to disconnect from the global value chains and the wider global economy. Globalisation is therefore being reshaped — regionalised and partly localised — but not genuinely reversed.