Changing economies

The world’s economies, whether large or small, have been changing, and with it, the nature of trade has changed dramatically as well. In its latest Economic Policy Monitor, the Philippine Institute for Development Studies (PIDS) focuses on the ongoing “new globalization,” aka Globalization 4.0, and notes changing economic structures to be one of its key features.

Traditional opponents of globalization have mainly been wary of competition from foreign products seen as a threat to the livelihoods of domestic producers. But in international trade, competition is increasingly giving way to complementation. Rather than compete to sell the same products to the same overseas markets, economies are now effectively collaborating to produce final products that are no longer distinctly made in one country alone, but better described as “Made in the World.” Such collaboration where different countries produce different components and services embodied in a product, also permits larger scales of production, and achieves cost-reducing economies of scale. This ultimately benefits consumers via lower prices, and achieves greater economic efficiency as more can be produced with less of the earth’s limited resources.

The phenomenon is known as global value chains or GVCs (or regional value chains, when confined to neighboring economies). These cross-border value chains came about as a result of steeply falling costs of moving products and components across countries in recent decades, for two reasons. First, technological developments in transport and logistics have drastically reduced the cost of moving products and materials across the globe. PIDS notes how airfreight prices fell from USD 3.87 per ton-kilometer in 1954, to less than USD 0.30 in 2004 (in

constant 2000 prices), or less than one-tenth, all made possible by the jet engine. In the case of water transport, the cost reduction was the result of increasing ship speeds and improved efficiency in handling that came with containerization, which greatly reduced the time needed to load and unload ships.

The second reason it has become much less costly to move products and materials across countries is the deliberate lowering by governments of barriers to trade in the form of import tariffs and quantitative trade restrictions, as fostered by the World Trade Organization. With trade restrictions eliminated and transport costs much reduced, producers found it advantageous to fragment and unbundle the production process, and source components and services that form their product from wherever they cost the least.

The proliferation of GVCs can be seen in the dramatic rise in the share of intermediate goods (goods not yet in the final stage of production) in world trade from the 1990s to the early 21st century. In Asean, the share of intermediate goods in total exports of the region grew from one-half in 1995 to nearly two-thirds in 2011. Over that same period, both developed and developing economies have also experienced a significant rise in the import content of their exports, reflecting how production inputs have increasingly been sourced from elsewhere where they are cheaper.

In this new world of cross-border value chains, trade protection has become not only irrelevant, but even possibly counterproductive and self-penalizing. In the regional value chain for motor vehicles, for example, among the Philippines’ top exports to Thailand are transmissions, wiring harnesses and other vehicle components that the latter assembles into finished cars with other components sourced from elsewhere. If our government tries to block the importation of cars from Thailand with high tariffs or import quotas (say, to protect our domestic car assemblers), we would actually hurt our auto components manufacturers who have become part of the regional value chain for vehicles. It is this feature of international trade under the new globalization that casts great doubt on the sensibility of the trade war US President Donald Trump has waged with China, or of the general resurgence of protectionism also seen elsewhere.

Perhaps someone forgot that globalization itself has changed.

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