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Factory Europe
How does Europe tie in with global value chains?

 

For the last decades, the production of goods has experienced profound and fundamental changes, amongst which a sharp internationalization. This in turn has led to goods crossing borders multiple times during production, as for example cars do between Mexico and the U.S. To describe this globalised production chain used by companies, the term “Global Value Chains” is used. From design to marketing, through the assembly of different intermediate goods or the distribution, global value chains are a structural and vital part of the global trade market.

 

Global value chains: meets and bounds of a worldwide trade revolution

 

Global value chain’s development have been bolstered by the rise of economic liberalization in the end of the 20s century. However, it was, first and foremost, enabled by technological progress among which the new communication networks, the transport revolution and lately what could be called the data revolution. These drastically diminished the cost of trade and facilitated the creation of strong communication network worldwide within and between companies. Alongside, the multilateral liberalization of trade, witnessed by the increasing trade agreements, has contributed to the stronger specialisation of country and the unbundling of the production chain (See Fig. below).

 

factory europe 1

 

From offshoring, the relocation of production activities, to outsourcing, the subcontracting to foreign companies, the rising use of the global value chain has maximised the countries’ comparative advantages, increased the efficiency of production factors and, thus, generated economic benefits.

 

The measure of the size and impact of global chain values is however a delicate thing to do. Indeed, the numerous processing steps within the creation of a product and the multiple and overlapping import and re-exports of intermediate goods makes the finding of a suitable indicator difficult.

 

Despite this difficulty, it appears legitimate to report that by creating a competitive environment for companies, by offering a greater and cheaper choice of products for consumers or by enabling a larger transfer of technologies between countries, the global value chain development has largely contributed to growth and prosperity worldwide.

 

The development of global value chains has however logically raised voices of concerns among which three main issues where brought to the fore. The first critic, or the bazaar thesis, fears that the developing countries, Germany for example, would undergo a decrease of their own added value exports and would become the host and, a fortiori, a pass-through of foreign intermediate goods, with no added value for the own country. Secondly, the impact of offshoring on labour markets raises fears for employment as the slow adaptation of the individuals to the changing structures of the labour market might deepen the gap between the beneficiaries and losers in this globalized process. The rise of a strong welfare state to absorb such structural fluctuation appears in this regard as essential. Last but not least, the higher interdependence of international companies increases the transmission of economic shocks between economies and, hence, increases their sensitivity to economic variations, for better or for worst.

 

Finally and mostly topical, the current rise of protectionism casts a shadow on the now highly globalised world economies. The rise of protectionist policies such as the increase of tariffs would have indeed a dramatic effect as the interdependence between countries are already strong. Moreover, the very structure of the multi-layered production chain would make the impact of tariffs on production costs dramatic as intermediate goods cross borders a large number of times.

 

Europe inclusion within the global value network

 

If we have highlighted the major role of the global value chains in today’s globalised trade, the actual involvement in these global value chains of the European countries within Europe and with the rest of the World remains a main issue to address for economic policy makers.

 

If the importance of global value chains is today incontestable, the trade of such goods remains mostly regional: in Europe, 89.6% of the purchased goods come from Europe itself. The number is 92.1% and 92.6% for North American and Asia respectively. This highlights the inherently regional nature of the global value chains.  A major difference between these regions remains to be noted: if purchase of intermediate goods stay mostly domestic in other regions, Europe has a strong interconnection between countries within the region. 14.6% of the purchase of intermediate goods are traded between countries within Europe against 4.5% and 2.6% in North America and Asia in 2014. This tendency, which intensified after the integration of the central and eastern European countries in the CCE, underlines the windfall of the European free trade area but also emphasize on the utmost importance of a good and inclusive trade policy in this deeply interconnected Union (see Fig. below).

 

factory europe 2

 

Within this dense European intermediate goods network, Germany has a very special place. It accounted for €128 billion or 36.8% of the increase in the volume of trade in intermediary goods between 2000 and 2014. It also appears in the seven strongest bilateral ties within the union (see Fig. below).

 

factory europe 3

 

Finally, the employment in Europe has largely benefitted from this strong intraregional trade of intermediate goods. The number of jobs related to the trade of intermediate goods rose from 14.9 million in 2000 to almost 20 million in 2014. This expanding labour market has been, relatively to their size, much more advantageous for the small and industry-heavy countries such as Hungary, Czech Republic or Slovakia (see Fig. below).

 

factory europe 4

 

Thus, such results reaffirm the importance of the European construction since its benefits were significant as much for the trade as for employment in all parts of Europe. In this respect, the coming Brexit and any other protectionist trade policies could have a very damaging effect on global value chains and, hence, on growth and employment.

 

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