• October 11, 2017
  • |
  • Trade

Globalization Is Alive and Kicking

We are still moving toward – and not away from – a truly global economy.

Peter Holmes | University of Sussex

Michael Gasiorek | University of Sussex

It’s commonplace to emphasize that we are now in a new era of globalization, marked by the rise in the importance of emerging economies. But what does this really mean?

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Global value chains are still mainly regional.

Richard Baldwin, author of The Great Convergence, argues that what is new is the combination of northern technology and southern labor.

But he adds that for the present, global value chains are still mainly regional. Intermediate goods like car parts are primarily moved around within a regional “factory” (North America, Europe, East Asia), and then final goods are shipped to the user.

China is the exception to this rule with its use as a factory economy by the EU and US.

It is worth testing this idea by looking at the patterns in the data since 2002. We have organized world trade into country groups: North America, Europe, East Asia, Southeast Asia, South America, less developed countries and the rest of the world.

So then, who trades the most?

The greatest shares of both imports and exports are accounted for by Europe, followed by East Asia, the rest of the world and then North America. Trade flows are calculated using UN COMTRADE import data.

East Asia has increased its share by five points. The other big gainer is the rest of the world, whose constituent countries have seen their share of world imports increase by three points and their share of exports increase by seven.

Growth here, and for Southeast Asia and South America, reflects the growing importance of emerging markets. And this is backed up by declines in the share of imports and exports for both Europe and North America.

Who trades with whom?

It is commonly argued that distance matters in international trade – that countries tend to trade most with countries that are closer. The fact that the cost of moving people hasn’t fallen along with the cost of moving goods and information may accentuate this.

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Just-in-time production methods are very vulnerable to border holdups.

Europe operates on a different level in terms of the intra-regional share of trade. In 2016, 54 percent of imports into European countries came from other countries on the continent.

It’s at 56 percent for exports. The corresponding figures for North America, the next biggest, were 33 percent and 48 percent. East Asia comes in at 31 percent and 29 percent.

It helps explain the hand-wringing over Brexit from businesses worried about even small barriers to this market. Just-in-time production methods are very vulnerable to border holdups.

That said, while intra-regional trade is important, and there remains much truth in the idea that global value chains are primarily regional, it appears this may be in decline.

The only grouping which sees a rise in trade with itself is the rest of world, and it’s fair to note that this is not a regional grouping geographically.

More generally, there is a rise in the importance of the rest-of-the-world countries as destinations for the exports of other groupings. Their share in the exports of East Asia has gone up from 8 percent to 18 percent between 2002 and 2016. For Europe, it rose from 19 percent to 22 percent; for North America, from 8 percent to 13 percent.

The role of intermediates

To truly understand the story, we need to get a handle on trade in services and on intermediates. This market for things like the switches on a food mixer or the consultancy work on a company merger have become more and more important in world trade.

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More parts are being sourced away from where final products are manufactured.

There is an increase in the share of intermediates from 48 percent to 52 percent – and in total trade from 35 percent to 39 percent. In other words, more parts are being sourced away from where final products are manufactured.

There is a slight fall in the share of services in total trade. Services figures are notoriously unreliable, but these estimates are consistent with IMF and WTO estimates. In fact, much of recorded trade in goods reflects services embodied in goods, for example where software is used in design or manufacture.

Even for the growing trade in intermediates, the data show the same trend away from intra-regional activity. You might wonder if that’s just down to how we built the groups, but it’s not.

Even within categories of intermediates, there remains a trend towards a slightly declining importance of intra-regional trade. It seems to be happening within almost all categories.

What does all this tell us?

Well, trade is still heavily regional. But China’s growing global role in the last 15 years has not prompted East Asia as a region to switch its focus to internal markets. And even Europe may be weaning itself off the dominance of trade between its constituent countries.

Genuine protectionism from Washington in the future may have a deep and lasting effect on this data, but right now we are still moving toward – and not away from – true globalization.

This article first appeared on The Conversation and was republished with permission.

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The Future of Trade, Inequality and Globalization

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Peter Holmes is the Director of the Centre for the Analysis of Regional Integration at Sussex (CARIS) and is a specialist in international economic integration.

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Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex.

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