Fragmentation Project PDF

Fragmentation project Dr hadeer elbatanouny Team members: 1. Nurhan elshamy 2. Manar thabet 3. Nada Mahmoud 4. Reem osama 5. Rania hany Definition of Fragmentation in foreign trade: fragmentation refers to the separation of the production process into multiple stages, with each stage perf...

Fragmentation project Dr hadeer elbatanouny Team members: 1. Nurhan elshamy 2. Manar thabet 3. Nada Mahmoud 4. Reem osama 5. Rania hany Definition of Fragmentation in foreign trade: fragmentation refers to the separation of the production process into multiple stages, with each stage performed in different countries. This often involves the trade of intermediate goods (parts and components) between countries before a product reaches its final form. Fragmentation is a key feature of global value chains (GVCs) and reflects the growing complexity and interdependence of modern production systems Example: A smartphone may be designed in the United States, its components manufactured in South Korea and China, and assembled in Vietnam This approach enhances efficiency but creates dependencies, making economies vulnerable to disruptions in the chain Why is it an important topic in today’s globalized economy? As it underpins how goods and services are produced, traded, and consumed globally. Its significance lies in its profound impact on efficiency, economic interdependence, and resilience 1-Drives Global Efficiency By breaking production into stages, countries can specialize in tasks where they have a comparative advantage, reducing costs and improving efficiency 2- Economic integration Fragmentation fosters deeper economic interdependence among nations, as countries trade intermediate goods and services, This integration promotes closer international collaboration and access to larger markets 3- Boosts Economic Development Developing countries can integrate into global value chains (GVCs) by contributing to specific stages of production, even if they 4lack the capacity to produce entire goods 4-Innovation and Technology Transfer Fragmented production processes often involve advanced technologies and innovation sharing, which help spread knowledge across borders 5-risk and resilience Globalization of production makes supply chains vulnerable to disruptions, such as pandemics, geopolitical tensions, or natural disasters. So, Discussions around fragmentation highlight the need to balance efficiency with supply chain resilience and diversification 6-shifts in trade patterns Fragmentation changes traditional trade dynamics, with intermediate goods now accounting for a large share of global trade Origins of Trade Fragmentation: How did it evolve? The concept of trade fragmentation has evolved over time as global trade systems and economic theories have developed. The historical background can be traced through several stages, from classical trade theories to modern trade paradigms 1-Fragmentation in Classical Trade Theories (Comparative The roots of trade fragmentation can be traced back to the - Classical Theory of Comparative Advantage, This theory argued that Each country should focus on producing goods where it has a comparative advantage, where they have the lowest opportunity cost and trade for other goods While the classical theory emphasized complete specialization _ - in individual goods, it did not directly address fragmentation. However, it laid the groundwork for understanding how specialization—an essential component of trade fragmentation— could lead to mutual gains. Fragmentation, as we understand it today, was not yet conceived because full production cycles were still considered at the national level 2-Neo-Classical Views: Specialization and Fragmented Production specialize in producing goods that use their abundant factors of production (e.g., capital-rich countries focusing on capital- Trade and Production Fragmentation: Although -.intensive goods) early Neo-Classical theory still viewed trade as involving the exchange of final goods, the idea of partial specialization was introduced. This started to hint at production processes being divided into specialized tasks, even if not fully articulated as global value chains 3-Modern Trade Theories: Global Value Chains and Fragmentation In the latter half of the 20th century, the globalization of trade and production became more pronounced. This period saw the development of Modern Trade Theories, particularly those focusing on Global Value Chains (GVCs) and fragmented production. These theories evolved from earlier trade models and reflected real-world changes in how global trade functions Global Value Chains (GVCs): This modern framework describes how production is no longer a single, integrated process but is instead fragmented across multiple countries Vertical Specialization: Countries now specialize in particular stages of production rather than producing entire goods. This is a key feature of trade fragmentation Intermediate Goods Trade: A significant portion of global trade now involves the exchange of intermediate goods—components and parts used in the production of final products. This trade is essential to fragmented production systems Supply Chains and Logistics: The global movement of intermediate goods and the use of efficient logistics networks support trade fragmentation by reducing costs and time Scholars and Concepts Richard Baldwin’s "The Great Convergence" (2016): Baldwin - highlights how trade fragmentation has led to the creation of complex, multi-country production network Theories of New Trade: These theories suggest that firms within countries, not just nations, engage in fragmented production across borders. This reflects a microeconomic shift where firms, rather than countries, drive the division of labor Implication for Fragmentation: The rise of multinational corporations (MNCs) and outsourcing in the 1980s and 1990s made GVCs a reality. Companies began splitting production processes across multiple countries to take advantage of lower costs, technological expertise, and efficiency gains The Evolution of Trade 4- Fragmentation in a Globalized Economy The development of fragmentation has been deeply intertwined with the processes of globalization and technological advancements in transportation and communication. The ability to coordinate production across borders has been made easier with innovations like the internet, shipping containers, and faster communication systems The types of fragmentation in foreign trade can be classified into several categories: 1-Horizental fragmentation Definition: When similar stages of production are carried out in Example: A company produces identical goods (e.g., cars) in multiple countries to cater to local market 2-Vertical Fragmentation Definition: When different stages of the production process are located in different countries, often based on cost efficiency or specialization Example: Raw materials sourced from one country, components manufactured in another, and final assembly in a third 3-Geogrphical fragmentation Definition: The dispersion of production tasks across various geographical regions, often influenced by trade policies, labor costs, or proximity to markets Example: Outsourcing IT services to India while maintaining manufacturing facilities in Southeast Asia 4- Functional Fragmentation Definition: Splitting up distinct functions of the production process, such as design, manufacturing, and marketing, among different countries Example: A U.S. company designs products domestically, manufactures them in China, and markets them in Europe 5-Market Fragmentation Definition: Division of markets by trade barriers, consumer preferences, or differing standards, leading companies to adapt their production and trade strategies accordingly Example: Adapting product specifications to meet the regulatory requirements of specific countries 6-Technology-Driven Fragmentation Definition: Separation of production processes driven by advances in technology that enable specialized tasks to be performed remotely or with high precision Example: Using robotics for manufacturing in one country while handling quality control through remote AI systems in another These types of fragmentation enable firms to optimize costs, enhance efficiency, and leverage global expertise Here are some key concepts of fragmentation: under the umbrella of foreign trade, presented in subtitle format 1-Global Value Chains (GVCs): -Disintegration of production processes into distinct tasks -Tasks distributed across different countries -Increased interdependence between 2-trade in intermediate goods -Exchange of unfinished products between countries facilitates specialization and efficiency -Key driver of GVCs 3-Offshoring and Outsourcing -Shifting production processes to lower-cost locations -Can involve both domestic and foreign suppliers -Reduces production costs and increases competitiveness* 4-Import Content of Exports (ICE) -proportion of foreign inputs in a country's export -Measures the extent of global integration -Higher ICE indicates greater reliance on foreign components 5-Fragmentation and Economic growth -Can lead to increased economic growth through specialization and efficiency gains -Can also create job losses in certain sectors and regions -Requires careful policy management to maximize benefits and minimize costs 6-Challenges and risks -Vulnerability to global economic shocks -Potential for geopolitical tensions -Need for strong international cooperation and coordination* 7- Policy implication -Investment in education and training to adapt to changing labor market demands -Strong infrastructure and logistics networks to facilitate efficient trade - Effective trade policies to balance protectionist and liberalizing tendencies Fragmentation drivers 1-Technological Advancements: Innovations in information and communication technologies have made it easier for companies to manage operations around the globe. This includes improvements in logistics, real-time data sharing, and automation 2-Cost Reduction: Businesses often fragment production to take advantage of lower labor costs in different regions. Outsourcing certain stages of production to countries with cheaper labor can decrease overall production costs 3-Access to Resources: Different countries have various resources and raw materials. Fragmentation allows companies to source materials from the most suitable locations, thereby optimizing production 4-Market Expansion: Companies may fragment their operations to enter new markets more efficiently. By establishing production facilities closer to key markets, businesses can reduce shipping costs and improve responsiveness to customer demands 5-Regulatory Environment: Favorable trade agreements and lower tariffs can encourage companies to move parts of their operations to different countries. Additionally, countries with business- friendly regulations may attract firms to set up operations there 6-Specialization: Fragmentation allows for specialization, where different regions can become centers of excellence for particular production processes, enhancing efficiency and productivity 7-Risk Management: By diversifying production across various locations, companies can mitigate risks associated with political instability, natural disasters, or supply chain disruptions in a single region 8-Changing Consumer Preferences: As global demand shifts, companies may alter their production strategies to better align with consumer preferences, which may lead to reconfiguration of global supply chains 9-Environmental Concerns: Increasing emphasis on sustainability can drive companies to distribute their production processes to regions that allow for more environmentally friendly methods or that utilize renewable resources 10-Globalization: it paved the way for fragmentation as it becomes increasingly cheaper and easier to source, ship, and track goods as they travel from place to place 11-Un skilled labor: a shortage of unskilled laborers in some developed nations can push companies to look elsewhere to fill the gap Negative impacts 1-Job Displacement Fragmentation Job can lead to job losses in domestic industries when production shifts to countries with lower labor costs 2-Environmental concerns The global distribution of production processes can lead to increased transportation emissions and environmental degradation in countries with less stringent environmental regulations 3- Unequal Economic Benefits The benefits of fragmentation often accrue unevenly, sometimes exacerbating economic inequality both within and between countries 4-Exploitation of local workforce cheaper labor may mean low wages, long work hours, and unsuitable working conditions for workers. in addition, employees may not be able to advance to get more skills 5-Drop in quality of goods and services because of the use of cheaper labor and material Challenges and risks Here’s some current challenges and risks affecting global trade systems, along with potential weaknesses and threats: 1-Rising Protectionism and Trade barriers Countries are increasingly imposing trade restrictions, such as tariffs and export bans, leading to regional trade blocs. This reduces global cooperation, disrupts supply chains, and raises costs for businesses. As trade barriers grow, global trade becomes less efficient, which ultimately impacts consumers and industries worldwide 2-Economic Fragmentation When countries focus on trading only with a few select partners, they lose the economic benefits of global cooperation, such as shared knowledge and lower production costs. This could reduce the global GDP by up to 7%—a significant loss in economic output 3-Technological Disconnecting refer to how easily global supply chains can be disrupted by events like pandemics, wars, or climate change. These disruptions cause delays, increase costs, and make it harder for businesses to get goods when needed For example, the COVID-19 pandemic caused delays and shortages worldwide, while extreme weather (like droughts or floods) can block important trade routes, such as the Panama Canal, which is vital for global shipping 4-Weakening Global Trade institutions refers to the decline in influence and effectiveness of organizations like the World Trade Organization (WTO), which help resolve international trade issues and ensure fair trade practices. As countries focus more on bilateral agreements (trade deals between two countries) or regional partnerships (like the EU), global institutions like the WTO lose their ability to manage global trade challenges. This makes it harder for countries to collaborate on complex issues, such as setting trade rules or addressing conflicts between nations 5-Climate and environmental Risks refer to how extreme weather events, like floods, droughts, and storms, can damage critical infrastructure that supports global trade, such as ports or shipping routes. For example, the Panama Canal, which is a vital trade route, can be affected by droughts, slowing down shipping As a result, countries may focus more on regional trade (trade within a specific area or between neighboring countries) rather than global trade, because it’s harder to rely on disrupted global trade routes Solutions and future trends Let's break down these solutions along with future trends in foreign trade in a simplified way: 1-Trade Agreements and regional cooperation Solution: Strengthening global and regional trade deals helps reduce barriers like tariffs and quotas, making it easier for countries to trade with each other Future Trend: More countries are likely to form regional trade blocks (like the EU or ASEAN) to create smoother and faster trade routes. As trade becomes more global, countries will focus on agreements that allow for more open borders, especially in emerging markets 2-Improved Logistics and infrastructure Solution: Better roads, ports, and digital systems make the movement of goods faster and cheaper, cutting down delays and costs Future Trend: Smart technologies like drones, self-driving trucks, and AI in warehouses will make logistics more efficient. These innovations will lead to faster deliveries and lower costs, reducing the fragmentation of trade 3-Standardization of regulations Solution: Countries agreeing on the same rules for things like product safety and quality makes it easier to trade because businesses don’t have to follow different rules in each country global rules, especially for things like environmental impact and digital products. This will make trade smoother and less complicated 4-Digitalization of trade Solution: Using technology (like online platforms and systems that track goods) to make trading faster, more secure, and easier Future Trend: More businesses will use digital tools, like websites and digital payments, to do business internationally. This will make cross-border trade faster and cheaper, and help reduce confusion or mistakes 5-Supply Chain integration Solution: Encouraging companies to set up more connected supply chains across different countries helps reduce the impact of trade disruptions and fragmentation. Future Trend: Companies will increasingly move towards “just-in- time” and localized supply chains, where parts and materials come from nearby regions, rather than being shipped globally. This helps avoid risks like global disruptions (e.g., pandemics) while reducing costs and improving efficiency. 6-Support for Small and Medium Enterprises (SMEs) Solution: Helping smaller businesses access international markets through subsidies, financing, and digital tools enables them to compete in global market Future Trend: With e-commerce and digital platforms growing, SMEs will have more opportunities to trade globally. Policies that reduce barriers for SMEs will help them expand into new markets without facing the same challenges that larger companies do. In summary, the future of foreign trade will see more digitalization, stronger international partnerships, and smarter logistics. These trends will make global trade more efficient, reducing fragmentation and making it easier for businesses—big and small—to participate in the global economy Case study Fragmentation in the Textile and Apparel Industry: Context: The textile and apparel industry is one of the most fragmented industries in global trade. The supply chain involves multiple stages, including:.1 Raw Material Production: Cotton, wool, or synthetic fibers..2 Spinning: Converting raw materials into yarns..3 Weaving/Knitting: Transforming yarns into fabric..4 Dyeing and Finishing: Adding colors and textures..5 Garment Manufacturing: Cutting, stitching, and assembling..6 Distribution: Exporting to retail markets. Each stage is often handled by different countries, driven by cost, resources, and expertise. Example of Egyptian Cotton Supply Chain 1. Raw Material (Egypt): Egypt produces some of the world’s highest-quality cotton, known for its long staple fibers. This makes it a preferred choice for luxury textiles. 2. Spinning (India/China): Raw Egyptian cotton is often exported to India or China for spinning, where the process is cheaper due to advanced spinning mills and lower labor costs. 3. Fabric Manufacturing (Bangladesh/Pakistan): Yarn is sent to Bangladesh or Pakistan to be woven into fabric. These countries have highly competitive weaving and knitting industries. 4. Garment Assembly (Vietnam/Indonesia): Fabric is exported to Southeast Asian countries for sewing and assembly into garments. Their labor costs are some of the lowest in the world. 5. Retail (US/EU): Finished garments are shipped to consumer markets like the United States or the European Union. In conclusion, we will summarize everything we talked about *Fragmentation is the separation of production into stages across different countries, driving global efficiency and interdependence. While it boosts economic growth and innovation, it also exposes economies to risks and requires careful management for sustainable and resilient global supply chains. *The evaluation of trade fragmentation is a journey from classical trade theories, emphasizing complete specialization to modern concepts of global value chains. It has been driven by technological advancements, economic theories and the rise of globalization leading to the current complex and interconnected global production systems. *All These Types of Fragmentation which was mentioned earlier allows businesses to optimize costs, increase efficiency, and tap into global expertise by dividing production processes across different countries based on specialization, cost-effectiveness, and.market considerations *Fragmentation, driven by GVCs and trade in intermediate goods, has reshaped global trade. While it offers opportunities for economic growth through specialization and efficiency, it also exists challenges like job displacement and vulnerability to global shocks. Striking the right balance between openness and protectionism is crucial for reaping the benefits of fragmentation.while mitigating its risks *Some of reasons that led to fragmentation are: technological advancements, cost reductions, resource access, market expansion, specialization, risk mitigation, evolving consumer preferences, environmental concerns, globalization, and labor shortages. *Fragmentation can lead to job losses, environmental harm, and unequal wealth distribution. It can also exploit workers and lower product quality. *Global trade faces significant challenges, including rising protectionism, economic fragmentation, technological divergence, supply chain vulnerabilities, weakening global institutions, and climate change risks. These factors can hinder economic growth, disrupt supply chains, and increase costs for businesses and.consumers worldwide Finally, the future of foreign trade is set to be more digital, collaborative, and efficient. With advancements in technology and stronger international partnerships, global trade will become smoother, faster, and more accessible for businesses of all sizes. This will lead to a more integrated and less fragmented global economy.