Globalization Complete PDF

Globalization (Part 1) https://www.worldbank.org/en/programs/knowle dge-for-change/brief/Trade-and-Globalization Outline ▪ ▪ ▪ What is globalization? Measuring trade Two main drivers of globalization ▪ Liberalization ▪ Technological revolution - L (labor): remote work and cross-cultural abiliti...

Globalization (Part 1) https://www.worldbank.org/en/programs/knowle dge-for-change/brief/Trade-and-Globalization Outline ▪ ▪ ▪ What is globalization? Measuring trade Two main drivers of globalization ▪ Liberalization ▪ Technological revolution - L (labor): remote work and cross-cultural abilities - A (technology) ▪ ▪ False ideas about globalization Current trends in world trade Globalization What is globalization? 1. Dificult to define: globalization is a term with many definitions… 2. … because it is a MULTI-FACETED phenomena 3. GLOBALIZATION: A PROCESS OF GRWING INTEGRATION AND INTERDEPENDENCE OF NATIONS, CHARACTERIZED BY THE INTENSIFICATION OF INTERNATIONAL LINKS OF ALL TYPES –COMMERCIAL, FINANCIAL, CULTURAL, MIGRATIORY... Key factors 1. Two of the most important growth factors for globalization are: • The liberalization of international exchanges (geopolitical) • The innovation and improvement of major technologies (especially in communications and transportation services) 2. Both of these two factors reduce the TRANSACTION COSTS for international EXCHANGES. For example, the transaction How do we measure trade? Trade source https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F259B2CD424B85 https://unstats.un.org/unsd/trade/globalforum/default.asp Two useful concepts: - Gravity equation - Border effect Model: Gravity equation The gravity model of international predicts BILATERAL TRADE FLOWS between two units (countries, regions….) based on their ECONOMIC SIZE (often GDP) and DISTANCE between them In short: countries are expected to have larger trade flows: - If they are LARGE - If they are CLOSE Model: Gravity equation The model is still used today, in research and policy making The border effect Region A Region A Trade flow Region B Trade flow Region B border 1. The border effect refers to ASYMETRIES in trade patterns between cities and regions of different countries and those that are located in the same country. Usually, trade volume is much LESSER between cities and regions if they are located in DIFFERENT countries. The border effect 1. The “border effect” has become much SMALLER There is a lot of debate about the extent of this reduction, and a whole discussion around the question “Is the world flat?” Liberalization Liberalization 1. Process initated after WWII • Seek world peace through WELATH SHARING • Bretton Woods agreements • Stability Liberalization 1. Process initated after WWII • Seek world peace through wealth sharing • Bretton Woods agreements • Stability - The Bretton Woods agreement was negotiated in 1944 by delegates from 44 countries to help regulate and promote international trade by reducing FOREIGN EXCHANGE RISK. - It called for the U.S. dollar to be pegged to the value of gold at a FIXED EXCHANGE RATE and all other currencies in the system to be pegged to the U.S. dollar’s value. Central Banks would maintain FIXED EXCHANGE RATES between their currencies and the dollar and the United States would redeem U.S. dollars for gold on demand. - The objective was to provide CURRENCY STABILIZATION for trade and financing. Liberalization 1. Process initated after WWII • Seek world peace through wealth sharing • Bretton Woods agreements • Stability • Creation of international organizations: IMF, World Bank, GATT (General Agreement on Tariffs and Trade, later WTO) Liberalization 1. Process initated after WWII • Seek world peace through wealth sharing • Bretton Woods agreements • Stability • Creation of international organizations: IMF, World Bank, GATT (General Agreement on Tariffs and Trade, later WTO) - The IMF was established to MONITOR EXCHANGE RATES and identify nations that needed global MONETARY SUPPORT. Currently it provides loans to member countries experiencing actual or potential BALANCE OF PAYMENT problems to help them rebuild their international reserves and stabilize their currencies. - The World Bank was established to manage FUNDS available for providing assistance to countries that had been devastated by World War II. Liberalization 1. Process initated after WWII • Bretton Woods agreements (IMF, WB, GATT) • Seek world peace through wealth sharing 2. Most visible in international trade and the financial markets • • Lower transaction costs Lower tariffs: Average tariff in manufactures in the industrialized countries was 45% at the end of WWII. At the beginning of this century they were as low as 5% Trade: Lower transaction costs - Trade liberalization: more freedom and technological advances have facilitated economic integration and a lower cost of transaction among countries Trade: Lower transaction costs Transport and communications costs have declined considerably during the 20th century, due to TECHNOLOGICAL IMPROVEMENTS, improved widespread TRANSPORTATION INFRASTRUCTURE and the application of ECONOMIES OF SCALE By 1960, maritime transport costs were A THIRD of their 1920 level and they fell even more with CONTEINARIZATION. Today, over 80% of international trade in goods is done by sea. Air transportation boomed after WWII with the application of TECHNOLOGICAL improvements (such as the jet engine) and better aircraft design in terms of fuel efficiency and comfort. The 1970s were particularly relevant with the introduction of long-distance fuel-efficient planes such as the Boeing 747. Costs have fallen significantly in telecommunications as well. With fiber optic cables, telecommunications are accessible worldwide, particularly through the Internet, and long-distance communication are close to FREE AND UBIQUITOUS. The mass diffusion of CELL PHONES has decreased costs further. l ¡ \ Universidad 1 ,·v de Navarra There goes gravity: How eBay reduces trade costs .,, '1v01ct- ¿; Andreas Lendle, Marcelo Olarreaga, Simon Schropp, Pierre-Louis Vézina Geograph1c d1stance continues to encumber mternational frade desp,te advances m transportauon and commumcauon technolog1es. Th1s column shows that eBaY, an onlme market, reduces the effect of distance on trade by 65%, mamly by reducmg mformauon fr,cuons. As consumers 'pul the,r money where the,r mouse 1s', welfare gams are largest where they are most needed, i.e. in remole countries with bad institutions. How much would countries gain from a flatter world? We conclude with an estímate of the gains from trade brought about by internet technologies. We use the approach proposed by Arkolakis et al. (2012) to calculate the welfare ains that would result • ·ons to the online lev We find that in the average country, real income would increase by 29%. uite straightforwardly, e gams wou e 1g es m coun nes remo e rom e res o e wor 1gure 2). lt is important to note that these welfare gams would result from a reduction in the distance effect only, and not from taking ali trade on e8ay1 where shipping costs may be higher. Stil , this is quite promising in terms of the potential of technology to render world trade more efficient. Figure 2. Welfare gains from world flattening •BRA • IND •JPN • NZL • Kc»\:AN • MEX •THA -1 O 1 Remoteness 2 3 Trade: reduction of tariffs - Although differences across regions exist, the reduction in tariffs has been a nearly universal fact Source: IMF Financial integration More trade of goods and services has correlated with more financial movements across borders Financial integration TAMY VARIABLE (BINOMIAL) The Chinn-Ito index (KAOPEN) is an index measuring a country's degree of capital account openness. It is based on the DUMMY VARIABLES variables that codify the tabulation of restrictions on crossborder financial transactions reported in the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). Source: Chinn and Ito (2014) Capital account = financial inflows in foreign direct investment (FDI), portfolio flows (investments where the owner holds less than 10% of a company's shares), and acquisition of assets in one country by residents of another. Liberalization 1. Process initated after WWII • Bretton Woods agreements (IMF, WB, GATT) • Seek world peace through wealth sharing 2. Most visible in international trade and the financial markets • Average tariff in manufactures in the industrialized countries was 40% at the end of WWII. • At the beginning of this century they were as low as 5% 3. In the recent past, we have also witnessed an increase in economic and political freedom, although some suggest the trend is reversing Technological revolution • We are experiencing a technological revolution: information technology • It is an ALL-PURPOSE revolution, not unlike others in the past (automobile, railway, electricity…) • With large Implications for businesses and MARKET STRUCTURE: “Leapfrogging” : DISTRIBUITION OF POWER IN ONE MARKET, TECHNOLOGY FACILITATES CHANGES IN THAT POWER, CREATING OPPORTUNITIES FOR NON-DOMINANT FIRMS TO BECOME DOMINANT • Unique feature: a rapid and ample difusion of the IT process. Would you like to work remotely, at least sorne of the time, for the rest of your career? Yes l ¡ \ Universidad 1 ,·v de Navarra .,, '1v01ct- ¿; 98% 2% No Is your company planning on permanently allowing sorne amount of remote work? Yes ----------- 71% tlll---------- No ----------- 8% Unsure 8% Does not ----------- 13% apply to me 71% of companies are permanently allowing some amount of remote work The rise of remote work Crosscultural work Culture is an INTEGRTED SYTSTEM of LEARNED BEHAVIOUR patterns that are characteristic of the members of any given society. It is not necessarily defined by NATIONAL BORDERS, it can span more than one country or exist within regions or organizations. Culture is MULTIDIMENSIONAL, consisting of a number of common elements that are INTERDEPENDENT. It includes shared values, beliefs, customs, and behaviors. Culture shapes how people perceive the world, interact with each other, and make decisions. Culture is LEARNED, SHARED, AND TRANSMITTED across generations. It can be passed down from parents to children, by governments, social organizations, or other groups such as schools, churches etc. We can learn or become sensitive to other cultures. ACCULTURATION is the process of adjusting and adapting to a different culture. It is key for success in international operations. Crosscultural work Culture is an essential part of international business. It influences many aspects of the process, including: • COMMUNICATION: Language, non-verbal cues, and communication styles. • Business Etiquette: MEETING protocols, NEGOTIATIONS, and GIFT-GIVING. • Decision-Making: RISK tolerance, decision-making processes, and problem-solving approaches. • Leadership: Leadership styles and the role of HIERARCHY. • CONSUMER Behavior: Preferences, buying habits, and brand loyalty. Crosscultural work Cross-cultural knowledge is crucial for several reasons: • Avoiding MISUNDERSTANDINGS : Miscommunication or cultural insensitivity can harm relationships, teamwork and business deals. • Building TRUST: Understanding and respecting a coworker or partner's culture fosters trust and cooperation. • Enhancing Negotiations: Cultural insights aid in negotiation strategies and reaching mutually beneficial agreements. • Expanding Global Markets: CULTURAL COMPETENCE opens doors to new markets and opportunities. • Managing Multinational Teams: Effective LEADERSHIP requires navigating cultural differences within teams. Hofstede's Theory of Cultural Dimensions Cultural dimensions are a framework for understanding how cultures differ in terms of values, beliefs, and behaviors. We will use Hofstede's Theory of Cultural Dimensions to analyze and compare cultures on various dimensions. • Developed by Geert Hofstede, a Dutch SOCIAL PSYCHOLOGIST, in the 1970s. • He conducted one of the most comprehensive studies on how VALUES in the WORKPLACE are influenced by culture. • His research involved surveying IBM employees from different countries. Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 1. Power Distance 2. Individualism vs. Collectivism 3. Masculinity vs. Femininity 4. Uncertainty Avoidance Two additional dimensions were added later on, based on the research of Michael Minkov: 5. Long-Term Orientation vs. Short-Term Orientation 6. Indulgence vs. Restraint Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 1. Power Distance: measures the extent to which a culture accepts HIERARCHICAL AUTHORITY, in particular the extent to which the less powerful members of organizations and institutions (like the family or business) accept and expect that power is distributed UNEQUALLY. • High power distance cultures respect AUTHORITY and HIERARCHY. • Low power distance cultures prefer EQUALITY and question authority. Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 2. Individualism vs. Collectivism: the extent to which people feel INDEPENDENT, as opposed to being INTERDEPENDENT as members of larger WHOLES/GROUPS. • Individualism emphasizes individual RIGHTS and personal FREEDOM , individual choices and decisions are EXPECTED. • Collectivism focuses on GROUP COHESION and LOYALTY. An individual´s place in the group is determined SOCIALLY. Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 3. Masculinity vs. Femininity: the extent to which the use of force in ENDORSED SOCIALLY. It doesn't necessarily relate to gender roles (although there is often correlation) but to cultural values. • Masculine cultures are more COMPETITIVE, they value ASSERTIVENESS, ACHIEVEMENT and material rewards for success. Masculine societies tend to have stronger gender roles • Feminine cultures are more CONSENSUS-ORIENTED, they prioritize COOPERATION, nurturing, and QUALITY OF LIFE. Competition is not so openly endorsed, there tends to be more SYMPATHY. Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 4. Uncertainty Avoidance: a society's tolerance for AMBIGUITY, UNCERTAINTY and RISK. • High uncertainty avoidance cultures prefer RULES, structure, PREDICTABILITY and FIXED habits and rituals. They may exhibit more ANXIETY and distrust when faced with the unknown. For example, students are concerned about “THE RIGHT ANSWER” and workers tend to change jobs LESS often • Low uncertainty avoidance cultures are more ADAPTABLE and open to CHANGE. For example, students are concerned about “HAVING A GREAT DISCUSSION” and workers tend to change jobs MORE often Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 5. Long-Term Orientation vs. Short-Term Orientation: how society deals with CHANGE and how it values the PAST. Long-Term Orientation (or flexhumility) emphasizes SAVINGS, PERSISTANCE, and ENDURANCE. Societies tend to foster virtues oriented towards FUTURE REWARDS, take a pragmatic approach and the common view is that the world is constantly CHANGING and preparing for the future is a constant need. • • Short-Term Orientation (or monumentalism) values TRADITION, and STABILITY. The common view in these normative societies is that the world largely REMAINS THE SAME, so the past is a very useful tool, keeping things the same is VALUED and fixed rules and social obligations ALWAYS apply. Societies are proud of themselves, suspicious of change and tend to be more ideological and fundamentalist. This dimensions is particularly useful in understanding business practices globally. Hofstede's Theory of Cultural Dimensions Hofstede identified six cultural dimensions that help explain cultural differences: 6. Indulgence vs. Restraint (or gratification dimension): reflects a society's approach to the gratification of NATURAL HUMAN DESIRES and NEEDS without GUILT or SOCIAL CONSTRAINTS . It helps us understand how societies regulate and express their emotions, desires, and impulses. Indulgence cultures put greater emphasis on the pursuit of HAPPINESS, SELF-EXPRESSION, and PERSONAL FREEDOM. People are more open about their emotions. Societies are more permissive of different LIFESTYLES. • • Restraint cultures suppress these desires and regulate BEHAVIOUR. There is a greater emphasis on SELF-DISCIPLINE, and adherence to societal norms and rules. Society emphasizes ____________________and a sense of ________________over personal pleasure. Hofstede's Theory of Cultural Dimensions Technological divide Refers to the idea in differences in acces based on geogrpahical differemces and socioeconomical factors https://www.weforum.org/agenda/2021/01/ covid-digital-divide-learning-education/ Outline ▪ ▪ ▪ What is globalization? Measuring trade Two main drivers of globalization ▪ Liberalization ▪ Technological revolution - L (labor): remote work and cross-cultural abilities - A (technology) ▪ ▪ False ideas about globalization Current trends in world trade Three false ideas 1. Globalization is something new, exclusive to our times 2.Globalization is irreversible 3. Globalizacion is complete or, at least, very profound and extensive Three false ideas 1. Globalization is something new, exclusive to our times Globalization is new “The archaeological record demonstrates that our Ice Age ancestors were already trading tens of thousands of years ago. Cromagnon sites in the interior of the Pleistocene Europe contain Baltic marine amber and Mediterranean seashells transported a thousand miles inland, plus obsidian, flint, jasper and other hard stones especially suitable for stone-tool-making transported hundreds of miles from the sites where they had been quarried” The World Until Yesterday: What Can We Learn From Traditional Societies (Jared Diamond, 2012) Globalization is new Silk Road: network of Eurasian trade routes active from the second century BCE until the mid-15th century. It spanned over 6,400 kilometers, playing a central role in facilitating economic, cultural, political, and religious interactions between the East and West. The Silk Road derives its name from the highly lucrative trade of silk textiles that were produced almost exclusively in China. Besides silk, the route was also used to transport other goods such as spices, gold, and precious stones. Other goods traded along the route included tea, dyes, perfumes, and porcelain from the East. From the West came horses, camels, honey, wine, and gold Globalization is new The Mongol Empire: although it came at a great cost in war and lives, the Mongol empire facilitated a stable environment for trade and the exchange of knowledge. There was an exchange of spices, tea, porcelain, silk, gold and innovations. Source Globalization is new The Roman Empire: regional and international trade were common features of the Roman world. A mix of state control and free markets facilitated trade across the Empire. There was significant trade in products such as cereals, wine, olive oil, precious metals, marble, and spices. Source Globalization is new The Inca Empire, or Tawantinsuyu, traded foods, ceramics, cloth metal, wool, skins and feathers using a road network of over 35,000 km. “I believe that, since the memory of people, it has not been read of such a greatness as this road, made through deep valleys and high peaks, snow covered mountains, marshes of water, live rock and beside furious rivers; in some parts it was flat and paved, on the slopes well made, by the mountains cleared, by the rocks excavated, by the rivers with walls, in the snows with steps and resting places; everywhere it was clean, swept, clear of debris, full of dwellings, First Globalization (1870-1913) Several factors contributed to a deep economic integration (“first golden age of globalization”) • Pax Britannica (“British Peace”) • Monetary stability (gold standard) • Improvements in transport and communications, as well as reduction in tariffs • New territories and economic growth and productivity First Globalization (1870-1913) • Pax Britannica (“British Peace”): the period of relative peace between the great powers during 1815 (defeat of Napoleon) and 1914 (beginning of WWI), which led to an increase in TRADE • It was characterized by the principles outlined in The Wealth of Nations (Adam Smith, 1776), supported on the idea of free trade based on COMPARATIVE ADVANTAGE • The British dominated the seas and controlled trade routes First Globalization (1870-1913) • Classical gold standard (1870-1914): o Gold standard: monetary system where the value of currency is based on gold. Paper money is freely convertible into a fixed amount of gold backed by the Central Bank. - Pros: It limits the power of governments to issue too MUCH currency (causing INFLATION) and it can create stability, providing a fixed EXCHANGE RATE between countries with gold standards. - Con: reduced FLEXIBILITY in money supply, which is linked to the availability of gold o FIAT system: the value of a currency is not based or backed on any physical commodity. It has value only because the individuals who use it as a unit a medium of exchange AGREE ON ITS VALUE First Globalization (1870-1913) • Improvements in transport and communications, as well as reduction in tariffs First Globalization (1870-1913) • New territories and economic growth and productivity : the domination of Africa by European powers grew from 10% in 1870 to nearly 90% in 1914, which resulted in access to CHEAP AND ABUNDANT RAW MATERIALS Comparing the first and second modern globalization: trade flows Globalization is not new, but today´s trade is different - Higher volumen - Change in composition: more K and consumer goods US imports and exports Irreversible? • Several forces operate against globalization • The descontent with the shape of globalization and its results (Stolper–Samuelson theorem: relationship between relative prices of goods and relative returns to f.o.p) • Political tensions (US- China trade war, the two World Wars) and different ideologies (North vs South Korea) can cause protectionism • Economic crises (Great Depresion) • The rise of populism and protectionism • Fear (Xenophobia, terrorism, covid) Irreversible? • Several forces operate against globalization 1. The descontent with the shape of globalization and its results: Globalization has created more wealth, but this increase has not been EQUALLY DISTRIBUTED There are many reasons to explain inequality, now we will focus on how trade can generate inequality using the StolperSamuelson theorem Irreversible? The Stolper–Samuelson theorem shows how changes in the prices of goods cause changes in the prices of factors of production: An increase (decrease) in the price of a good will cause an increase (decrease) in the price of the factor of production that is used intensively in the production of that good and a decrease (increase) in the price of the other factor. Irreversible? Stolper–Samuelson theorem Assumptions: • PERFECT COMPETITION • FIXED FACTOR RATIOS • TWO GOODS: C (LABOR INTENSIVE) AND S (CAPITAL INTENSIVE • TWO FACTORS OF PRODUCTION: K & L C: CLOTH S:STEEL Irreversible? Stolper–Samuelson theorem Because of perfect competition: P(Cloth)= 𝑎𝑘𝑐 𝑟 + 𝑎𝐿𝐶 𝑤 P(C) and P(S) prices of godos ai: amount of f.o.p. used (fixed) P(Steel)= 𝑎𝐾𝑆 𝑟 + 𝑎𝐿𝑆 𝑤 C is L intensive S is K intensive r: rental rate of capital w : wages for labor Irreversible? Stolper–Samuelson theorem P(Cloth) = akc r + aLC w P(Steel) = aKS r + aLSw If P(S) ↑ (aks r + aLS w) ↑ (increases) since ai are fixed r ↑ , w↓ INTEREST RATE GOES UP Intuition: Because S is K intensive, we need relatively MORE K than L to produce it. As K becomes more DEMANDED its rental rate INCREASES Irreversible? • Several forces operate against globalization 2 . Political tensions (US- China trade war, the two World Wars) and different ideologies (North vs South Korea) can cause protectionism Irreversible? • Several forces operate against globalization 2 . Political tensions and ideologies can cause protectionism The process of trade integration started after the Second World War. It gained new impetus in the 1980s and had a golden age in the period 1990-2008, when total trade in goods and services increased from 39% to 61% of world GDP. But trade integration has slowed over the last decade. Since then, trade has slowed, while protectionism has been on the rise. Source: WTO press release. 12 April 2018, p. 4 Irreversible? • Several forces operate against globalization 3. Economic crises (ex: Great Depression) Irreversible? Charles Kindleberger, 1989, “Commercial Policy Between the Wars,” in P. Mathias and S. Pollard, eds., The Cambridge Economic History of Europe, vol. 8 (Cambridge, UK: Cambridge University Press), p. 170. Irreversible? Trade war: an economic conflict arising because of perceived unfair protectionist policies (tariffs, quotas, restrictions or bans on imports…) They typically lead to high costs for all involved Led to international agreements to prevent such events in the future (GATT, WTO) Irreversible? • Several forces operate against globalization 4. The rise of populism and protectionism Irreversible? • Several forces operate against globalization 4. The rise of populism and protectionism Irreversible? • Several forces operate against globalization 5. Fear (Xenophobia, terrorism, covid) Three false ideas 1. Globalization is something new, exclusive to our times 2.Globalization is irreversible 3. Globalization is complete or, at least, very profound and extensive An incomplete process • Border effect (“Home bias” in trade and equity) • Feldstein-Horioka paradox (in theory: it is not necessary for levels of domestic I and S to be correlated, as investors would seek the best opportunity, wherever it is. This is not the case in real life and domestic S and domestic I are in fact correlated) • Reduction in purchasing power • The problem of exchange rates • Severe limitations on migration • Non-tradeable nature of many goods and especially services Outline ▪ ▪ ▪ ▪ ▪ What is globalization? Measuring trade Two main drivers of globalization Liberalization Technological revolution - L (labor): remote work and cross-cultural abilities - A (technology) ▪ ▪ False ideas about globalization Current trends in world trade . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and new global players Uncertainty about trade partnership. Maybe an increase in bilateral agreements? The threat of protectionism Tradables vs non-tradables • Some goods and services lose their "non-tradable" status because of technological advances • Reduction of transportations costs • The information and communications technology breaks the geographical link between the production and consumption of services: expansion of trade in services . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and eew global players Uncertainty about trade partnership. Maybe an increase in bilateral agreements? The threat of protectionism Global value chains International production, trade and investments are increasingly organized within so-called global value chains (GVCs) Cargando… In GVCs the different ______________ of the production process are located across different countries. Global value chains Much of the trade we see today is in intermediate goods, rather than final goods 52% of world trade in goods (excluding fuels) is in intermediate goods and services Source: WTO Global value chains Trade in intermediate goods took a significant hit during the pandemic, but is __________________ Global value chains This rise is largely due to a decrease in costs . A good can now cross borders multiple times during its production because the transportation and communication costs have fallen so much that it can be economical to combine the labor and capital resources of several countries to produce a final good or service. Two concepts are often used: • Offshoring • Outsorcing Global value chains The same production process can incorporate trade through the chain Forward integration is a form of vertical integration in which companies expand their activities to control the direct distribution of their products. Ex: handling the shipping of products directly to customers Backward integration is a form of vertical integration involving the purchase (or merger) of suppliers in the supply chain “forward” “backward ” Indices of participation in global supply chains (% of Exports) (Source: WTO/OCDE) Global value chains This emergence of GVCs challenges conventional wisdom on how we look at economic globalization and in particular, the policies that we develop around it. https://www.wto.org/english/res_e/booksp_e/gvc_dev_report_2019_e_ch1.pdf Global value chains Firms try to optimize their production processes by locating the various stages across different sites. The past decades have witnessed a strong trend towards the international dispersion of value chain activities such as design, production, marketing, distribution, etc. Drivers Globalization Information technology Regulation Objectives Quality Cost Services Time Flexibility Decisions Localization Product / process design Supply Logistics COMPETITIVE ADVANTAGE Global value chains: effects GVCs impact different sectors differently The largest growth can be seen in warehousing and storage https://www.wto.org/english/res_e/booksp_e/gvc_dev_report_2019_e_ch5.pdf Global value chains GVCs intensify the relationship between international trade and ______________________________ higly · bestscaterplot for fot " Serror Cominimizing -> min see -> highly de positive square Centrality the m of best connection summarices the ↳ - a in a lot network of relationsheep connection between the variables coorrelation the errors connected with the countries https://thedocs.worldbank.org/en/doc/c9a f0143184de77cb58ddd5adf0245080350012021/original/Chapter-1-AnInvestment-Perspective-on-Global-ValueChains.pdf Against popular belief, more and more this involves south-south trade Global value chains Problems: 1)The _________________________accumulate as intermediate products move between countries 2) Costs incurred by the procedures and customs requirements, which often create ________________ (changes in the necessary documentation in the procedure, in processing permits, ...) These are particularly troublesome for companies that need to plan carefully the time and resources required for production (ie, the "just in time") . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and new global players Uncertainty about trade partnership. Maybe an increase in bilateral agreements? The threat of protectionism Covid-19 . . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and new global players Uncertainty about trade partnership. Probably an increase in bilateral agreements? The threat of protectionism Covid-19 Intra-regional trade Much of trade trade flows are intra-regional World merchandise exports (US billions) intraregial trade tlargest dominats our trade AFR Africa ASI Asia CIS Commonwealth of independent states EUR Europe MEA Middle East Source: WTO NAX North America Regionalism • The number of RTAs (regional trade agreements) keeps growing • As of September 2021, 350 RTAs were in force. • The trend is likely to continue given the numerous such agreements currently being negotiated. Regionalism • Various types of regional agreements are possible: • Free Trade Agreement (FTA): eliminate mutual barriers • Customs Union: FTA + establishment against common external tariffs (FTA + common external tariff, with common external trade policy) • Single Market: trade barriers eliminated and freedom of movement of factors of production and enterprise Regionalism vs multilateralism • In principle, regional agreements seem at odds with the principles of the multilateral system • But they can be complementary, hence these agreements are seen as permissible exceptions in the multilateral system • They must meet certain conditions: • The agreement facilitates trade between countries that subscribe to it • The agreement does not involve the establishment of protectionist conditions to other countries . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and new global players Uncertainty about trade partnership. Maybe an increase in bilateral agreements? The threat of protectionism Covid-19 . . . Current trends in world trade Some goods and services become tradable (technological advances) Trade patterns change because of FDI. The role of global value chains Increase in south-south trade and new global players Uncertainty about trade partnership. Maybe an increase in bilateral agreements? The threat of protectionism Co-Vid 19 CoVid • Sharp decline in trade: • International trade fell by 5.6 percent in 2020 • The number, albeit large, is smaller than expected as we saw a rebound in late 2020, partly due to government programs that supported consumption • Estimates suggest strong recovery: 8-10% growth for 2021 and about 4% in 2022 • Risks: • Regional disparities • Insufficient production & distribution of vaccines • Public deficits and debt (because trade is highly linked to GDP) Going forward • Sharp decline but rapid rebound in international trade, with regional disparities Going forward • Sharp decline but rapid rebound in international trade, with regional disparities https://www.wto.org/english/res_e/statis_e/wts2021_e/wts2021_e.pdf Going forward • Recovery is stronger in manufacturing than services https://www.wto.org/english/res_e/statis_e/wts2021_e/wts2021_e.pdf Going forward: • War in Ukraine: putting upward pressure on the international prices of energy and - primary commodities. In the short term, because of the inelastic global demand for food and energy products, rising food and energy prices would likely result in higher trade values, and marginally lower trade volumes - • Global trade disputes and trade negotiations • US-China relations • Likely more protectionism in trade and investment • Regionalism vs multilateralism • Inflation costs & economic concerns: • Uncertainty about debt sustainability • Downward revisión of growth prospects revision Going forward: • Population dynamics: • Smaller global population growth, and mostly concentrated in emerging economies, could lead to more moderate increases in trade • ↑ less tradeablee Aging populations may shift demand to service-intensive sectors and increased dependency ratios may reduce available income • Pressure towards more sustainability • Regulations (for ex: regulations on carbon intensive products) • Demand for changes in products and processes • New technologies that could affect GVC & GVCs challenges • Advanced robotics and AI • Digitalization • COVID-19 mitigation measures may continue • to create supply disruptions