Trade
How global value chains will evolve in the post-COVID-19 economy
Author: Satoshi Inomata, IDE-JETRO
According to traditional trade theory, the direction and magnitude of product flows are principally determined by the comparative advantages of trading countries. These comparative advantages depend on endowments of production factors: labour, capital (including human capital) and land (or natural resources). Forces integrating the different factor endowments of various countries — especially capital and technologies from advanced economies and cheap labour from developing countries — drive the development of global value chains (GVCs).
COVID-19 will likely accelerate the move toward ‘peer value chains’ among countries with similar institutional arrangements. In addition to traditional production factors, the quality of domestic institutions may become an important determinant of a country’s comparative advantage. Nathan Nunn conceptualises ‘contract-intensive’ products, which have complex supply chains that involve multiple transactions at various stages of the production process.
Just like a country with an abundant labour force has a comparative advantage in the production of labour-intensive products, the quality of a legal system may determine a country’s international competitiveness in ‘contract-intensive’ products. Indeed, Nunn empirically demonstrates that countries with superior legal institutions have an advantage in the production of products that require complex transactions, and are more likely to export such products.
A country with an appropriate legal framework to protect intellectual property rights has an advantage in knowledge-intensive industries. Likewise, domestic institutions that support fair and transparent economic activities can be complementary sources of competitiveness. These include competition rules, licensing and clear government procurement principles. Equally important is the institutional aspect of domestic technology development and use. Intellectual property rights for digital technologies, data localisation and cross-border data flows and commerce are emerging issues for global value chains.
Still, some less novel factors remain relevant. For example, what matters to a country for entering technology intensive GVCs is the extent that the country’s technological standards are compatible and harmonious with the global technology ecosystem. Even such basic institutional aspects account significantly for a country’s competitiveness, in addition to the level of physical infrastructure — or capital factors — and the availability of corresponding operational skills — human capital factors.
Multinational firms are also increasingly committed to corporate social responsibility like environmental protection and fair trade. Some pay strict attention to the relevant institutional schemes of sourcing countries in organising cross-border supply chains. The presence of appropriate environmental and labour standards enhances a country’s international competitiveness as a global supplier.
Why, then, will institutions matter more for GVCs?
First, the importance of labour in determining a country’s comparative advantage is declining. Wage differentials among countries were once major drivers of GVCs. But with the surge of new technologies, unskilled labour in developing countries — which is increasingly being substituted with machines — is rapidly losing its economic value. This has occurred as a consequence of the extensive installation of digitally automated production processes in advanced economies, empowered by autonomous robotics, smart sensors and artificial intelligence.
Second, there is a dramatic change in economic environments amid rising geopolitical tensions, particularly driven by the US–China trade war and security conflict. Firms are becoming highly susceptible to various forms of state intervention such as asset freezes and forced technology transfers. Robust institutions can provide predictability for firms’ international operations and serve as impartial guards against discretionary interventions by local governments into business activities. In expanding supply chains, risk-sensitive firms will look for countries with high quality institutions, or at least similar institutional attributes to their home countries.
Universal rule-making about the best forms of domestic institutions has been a key agenda of international organisations like the World Trade Organization (WTO) and the International Labour Organization. But not every country is a member of these bodies, and the influence of…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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