The future of services trade in global value chains

In recent times it has become fashionable to argue that globalization, largely reflected in value chain relationships among firms, is on the wane. Its putative demise is often linked to geopolitical tensions and technological rivalries among major powers and is reflected in product- and country-specific restrictions on trade and foreign direct investments. It is also perceived as a shift in global value chain input sourcing practices referred to variously as on-shoring, near-shoring, and friend-shoring. To the extent that this is occurring, such tendencies reflect trade-offs between cost minimization and geopolitical and geoeconomic rivalries.

A recent series of papers by Richard Baldwin[2] argued that globalization and changes in the relationships that underlie it are complex and require careful consideration if we are not to be misled by superficial analysis of their trends. Baldwin demonstrated that reliance on a simple aggregated measure of the relationship between GDP and trade doesn’t explain much and results in misleading conclusions. Contrary to prevailing wisdom, Baldwin says, globalization has not peaked, notably in the EU. For other major trading countries (China, Japan, and the United States), peaking occurred at different times rather than in the synchronization suggested by a simple measure of merchandise trade-to-GDP ratio that marked 2008 as the turning point.

The major fallacy Baldwin identified is the blanket assumption that globalization is in decline. Trade in goods has shrunk when compared in proportion to GDP growth. Changes in price levels help to explain this. Another factor is that manufacturing activity has shifted to a degree away from developed economies. One indicator is the dramatically falling share of imports within exports from China in the last few years.