Patterns Of Globalization

Capitalism is a dynamic system and so is its globalization process.  In its contemporary form, capitalist globalization has been shaped by the efforts of transnational corporations to establish and extend cross border production networks or global value chains (GVCs) which, in the words of the Asian Development Bank, involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

Asia, in particular Northeast and Southeast Asia, is the region that has been most transformed by the establishment of these cross border production networks.  Japanese transnational corporations began the process with their investment in several Southeast Asian countries.  This move eventually forced Korean and Taiwanese corporations into adopting a similar strategy.   The process kicked into high gear in the mid to late 1990s, once China opened up to foreign investment and embraced an export-led growth strategy.  European corporations have established their own regional GVCs with investment in several of the European Union’s new member countries.  And US corporations took advantage of NAFTA to build their own regional networks.  Still, thanks to China’s extensive built infrastructure and sizeable low wage work force, European and North American transnational corporations have also invested heavily in that country, thereby securing Asia’s status as the premier location for the production and export of manufactures.

The Development of Cross Border Production Networks

The economist Prema-chandra Athukorala charts the development and significance of this new corporate strategy using trade data to isolate the trade in parts and components and final assembly within global production networks.  (See Prema-chandra Athukorala, Southeast Asian Countries in Global Production Networks in Bruno Jetin and Mia Mikic, editors, ASEAN Economic Community, A Model for Asia-wide Regional Integration?)  One consequence: the share of developed countries in total world manufacturing exports fell from 77.9 percent to 61.8 percent over the period 1992-3 to 2011-12.  The share of total world manufacturing exports produced by developing East Asian countries (DEA—East Asia without Japan) rose from 18.4 percent to 32.5 percent over the same period.  In 2011-12, DEA countries accounted for 85.1 percent of all third world exports of manufacturers.

The developed country share of network produced exports of manufactures also fell, from 78 percent in 1992-93 to 49.7 percent in 2011-12. The DEA share of network produced exports of manufactures greatly increased over the same period, from 18.8 percent to 43.8 percent, which means that DEA countries account for more than 87 percent of all third world network activity.

DEA countries, with few exceptions, are now largely producers of parts and components, which are traded multiple times within the region, before the final assembly of the product, more often than not in China, and its eventual export outside the region.  The DEA share of total world final assembly activity rose from 22.5 percent 50.9 percent over the period 1992-93 to 2011-12.  China alone accounted for 25.6 percent of all final assembly work done within networks in 2011-12, up from 1.9 percent in 1992-93.

As the table below shows, parts and components accounted for more than half of all DEA intra-regional manufacturing trade in 2006-2007.  In contrast, the share was only 28.8 percent for intra-Nafta trade and 22 percent for intra-EU15 trade.  One can see China’s special role as final assembly hub for the region:  China’s imports from DEA countries, especially members of ASEAN, are overwhelmingly parts and components.  For example, 74 percent of China’s imports from ASEAN countries are parts and components.  China’s exports to the region, and especially outside the region, include a relatively low share of parts and components.

Source: Prema-Chandra Athukorala and Archanun Kolpaiboon, Intra-Regional Trade in East Asia, in Masahiro Kawai, Mario B. Lamberte, and Yung Chul Park, editors, The Global Financial Crisis and Asia, Implications and Challenges.

 

The Asian Development Bank promotes an alternative methodology to measure the growth of cross-border production activity.  As explained in the Asian Development Outlook 2014 Update, the OECD–WTO Trade in Value-Added (TiVA) database, which combines national input-output tables with trade flows for 57 economies and 18 industries, is used to:

segregate gross exports into three parts: (i) foreign value added that is used to produce economy X’s exports (GVC-B), (ii) domestic value added that is used by a destination economy to produce its exports (GVC-F), and (iii) domestic value added that is consumed in the destination economy. The first two parts identify the two distinct ways that an economy’s trade can integrate into GVCs. GVC-B is economy X’s backward linkage into GVCs, using imported inputs to produce its exports. GVC-F is its forward linkage into GVCs, producing and exporting intermediate goods that are subsequently used in the production of other economies’ exports. Adding the two together provides a measure of total GVC participation.

This can be expressed relative to total trade, which includes an economy’s regular value-added trade that is not part of GVCs and its value added for domestic consumption. A participation value of 50%, for example, means that half of a nation’s trade is comprised of either forward or backward GVC linkages.

Researchers found that the share of GVC trade (GVC-B + GVC-F) in total manufacturing exports from the countries included in the TiVA data base rose from 36.9 percent to 48 percent over the period 1995 to 2008.  Thus, by the late 2000s, approximately half of all manufacturing exports were produced within cross border production networks.

Network operations in Asia tend to be far more complex than those in Europe or North America.  In the words of one economist quoted approvingly by the Asian Development Bank:

what makes Asia’s production networks stand out is their intricate open-loop web of transactions within and between firms that span a number of economies and continents. Figure 2.2.1 shows in the left-hand panel production sharing between the US and Mexico, which tends to display a comparably simple structure of closed-loop, back-and-forth transactions. To illustrate, a US firm’s headquarters may send components to its Mexican factory and have final products shipped back to it to sell in the US market. European GVCs have a similar structure. By contrast, the right-hand panel shows a somewhat simplified rendering of the more complex Asian model, with reference to the production and distribution networks of a Japanese manufacturer in the electronics industry, which extends all over East Asia and the US.

As we see in the table below, transnational corporate organized activity in Asia, especially in East Asia, has been the driving force behind the expansion of GVC trade.  The GVC trade share of world manufacturing exports produced in Asia almost doubled, from 8.55 percent in 1995 to 16.20 percent in 2008; the East Asian share more than doubled.  The European share, although higher, remained largely unchanged.

Transnational capital’s strategic embrace of Asia has had serious consequences for the region’s economies.  Their growth has become more dependent on the production of exports.  And their exports have increasingly narrowed to parts and components.  And their trade patterns have been forced in line with network needs, which means that a growing share of regional economic activity is directed at satisfying extra-regional demand.  For example, as the table below shows, Taiwan’s participation rate, or the share of its exports produced within network structures, rose from less than 50 percent in 1995 to over 70 percent in 2008.   Korea has also had a significant increase in its participation.

 

The Asian Development Bank also expanded their study of GVCs to include services and commodities as well as manufacturing.  The figures below:

depict the geographic orientation of GVCs and how they are increasing connected. Three main hubs—the US, Germany, and the PRC—occupy the center of a tightly knit web of value-added transfers, mainly among regional economies engaged in split production processes. The US is at the center of the GVCs both as the largest exporter of goods and services measured in gross terms and as the main exporter of value added to the exports of other economies. Germany and the PRC follow in rank in terms of gross and value-added exports. Compared with the US, these economies are positioned further downstream in the GVCs and are involved in a substantial share of value-added inflows and outflows.

In the European regional network, horizontal integration prevails, with value added to goods flowing in both directions between pairs of countries. Asian production networks are more hierarchical. At the top, Japan and the US inject value by providing key components and services directly to the PRC, which is the downstream hub. Malaysia, Thailand, and some other Southeast Asian economies, as well as India, also supply components to the PRC that often embody valued added by the US and other industrial economies. Other key players right at the center of the regional networks are the Republic of Korea, Singapore, and Taipei, China—each economy exporting high shares of foreign value added that reflect their strong GVC involvement.

The time progression panels in [the figures below] show that GVCs have expanded rapidly and grown more complex since 1995. By 2005, the PRC had overtaken Japan as the center of the Asian regional production network. GVC expansion reached a peak in 2008. This was because the global economic crisis slowed consumption in 2009, causing the temporary collapse of international trade that year and curtailing the trade flows associated with GVCs.

Winners and Losers

The work cited above demonstrates the growing web of transnational corporate shaped production and trade.  Most economists see the expansion of GVCs is a boon to development, in that it allows a finer and more efficient comparative advantage to shape global economic activity.  It certainly has been a boon to transnational capital.

For example, the Asian Development Bank cites a study that attempts to break down the winners and losers from the expansion of global value chains.   It concludes that:

From 1995 to 2008, capital’s share of value added in GVCs rose from 40.9% to 47.4% while the share of low- and medium-skilled labor fell from 45.3% to 37.2%. Second, emerging economies increasingly focus on capital-intensive activities. The Republic of Korea saw its low- and medium-skilled labor share fall by 17.1% (as its capital income share rose by 9.3%), the PRC by 11.4% (capital income share up by 9.3%), India by 7.6% (4.5%), and Indonesia by 6.8% (5.3%).

These results are not surprising given that this new corporate strategy was designed to increase corporate mobility and by extension corporate power over labor.  As a consequence national governments find themselves engaged in competition to secure ever narrower segments of corporate production networks, which by their nature can never be made secure.  And they compete by offering up their workers.  Thus, we see ongoing state efforts throughout Asia and elsewhere to weaken labor rights and organization.

Moreover, as I and others have argued, contemporary capitalist globalization dynamics contained a serious contradiction, one that led to mounting global imbalances and instabilities and eventually our current problems of economic stagnation. In the pursuit of profit, transnational corporations promoted an East Asian–centered production system designed to export to core countries, especially the United States, that simultaneously undermind the overall purchasing power of core country consumers, including those in the United States. This contradiction was masked for approximately a decade because of the rise of speculative bubbles in the United States. Those bubbles finally burst and the economies of the US, Japan, and Europe now suffer from stagnation.  This, in turn, has left an export-driven Asia, Latin America, Africa, and Middle East in an increasingly precarious position.

Unfortunately, given the deep structural roots of capitalist globalization in the workings of national economies, there is no way working people will be able to meaningfully improve their living and working conditions without challenging and transforming existing patterns of international production and consumption.  The growing movement against newly proposed trade agreements is a small step in the right direction.

The World Economy: Trouble Ahead

Economic conditions are not good and the signs are for more trouble.  The post-Great Recession recovery has been incredibly weak and it appears that it will soon come to an end.  And here I am writing about all the advanced capitalist economies, not just the United States.  Perhaps the key indicator: investment and productivity trends.

Here is the International Monetary Fund [IMF] writing in 2015: “Private fixed investment in advanced economies contracted sharply during the global financial crisis, and there has been little recovery since.”

More specifically, the IMF finds that:

The sharp contraction in private investment during the crisis, and the subsequent weak recovery, have primarily been a phenomenon of the advanced economies. For these economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.

The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. There is little sign of recovery toward precrisis investment trends in either sector.

The figure above illustrates how far advanced economy investment has fallen relative to the precrisis period and past forecasts and that there has been no recovery in investment spending (the log scale shows percentage change in investment).

The following figure, which covers only advanced economies, demonstrates that the investment slump has affected both residential and nonresidential investment.  And, as far as the latter is concerned, investment spending on both structures and real equipment are significantly down relative to past trends.

These trends have real consequences.  As the economist Michael Roberts points out,  “Global industrial output growth continues to slow and in the case of the G7 economies (red line below), industrial production is now contracting.”

He also highlights the fact that “world trade . . . is in significant negative territory (red line below).  This is partly due to the collapse in energy and other industrial raw material prices.  But even when you strip out the impact of the deflation in prices, world trade volume is basically static (blue line) and well below even the low world GDP growth rate of around 2.5%.  Countries with low domestic demand can expect no compensation through exports.”

The investment slump has also taken its toll on productivity.  According to the Financial Times:

Output per person . . . grew just 1.2 per cent across the world in 2015, down from 1.9 per cent in 2014. A slowdown in Chinese productivity was a big driver, as was poorer output growth in commodity producing countries in Latin America and Africa because of weaker oil prices and production.

Productivity growth in the eurozone, measured by gross domestic product per hour, is set to be a feeble 0.3 per cent and barely better in Japan at 0.4 per cent.

But the US, which appeared to be outperforming other advanced economies, is now increasingly concerned at the deterioration in its own performance. Growth in output per hour slowed last year to just 0.3 per cent from 0.5 per cent in 2014, well below the pace of 2.4 per cent in 1999 to 2006.

Moreover, things are fast deterioriating in the US.  The Financial Times reports that productivity will likely fall this year for the first time in three decades. “Research by the Conference Board, a US think-tank, also shows the rate of productivity growth sliding behind the feeble rates in other advanced economies, with gross domestic product per hour projected to drop by 0.2 per cent this year.”

Sadly, as Roberts argues, most governments still seek to rejuvenate their respective economies by some combination of monetary easing, cuts in public investment, privatization, weakening labor rights, and new free trade agreements. These policies have not worked and there is no reason to think that they ever will.

The Greek Tragedy Continues

The Greek tragedy continues.  Greece remains in depression.  The economic downturn began in 2008 and the economy has shrunk every year since, with the exception of 2014.  Although millions are suffering from poverty, the Greek government has continued to make its debt payments, first to foreign banks and now to the Troika.  This pairing is the result of two huge loans by Troika institutions in exchange for the imposition of fierce austerity policies.

The Greek people have refused to quietly accept the unraveling of their society.  According to the Greek police, there were 27,103 protests and rallies in Athens alone between 2011 and 2015.  The number of rallies attended by more than 1,000 people were 61 in 2012, 72 in 2013, 58 in 2014 and 72 in 2015.  Knowing the reliability of police record keeping, these are likely undercounts.

Despite popular resistance, a commitment to more austerity in exchange for yet more debt was recently approved by the Greek parliament.  It includes new cuts to pensions, increases in required social security contributions, and higher personal and business taxes.  Tragically, the current agreement was negotiated by Syriza, the political party elected in January 2015 on the basis of its commitment to end the austerity and renegotiate the country’s foreign debt.

I recently published an article in the journal Class, Race, and Corporate Power which attempts to explain the forces driving Greece’s economic crisis and the failure of Syriza to fulfill its promises.   The abstract is below.  The article can be accessed for free here, on the journal’s webpage.

 

The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece

Abstract:

With its 2015 electoral victory in Greece, Syriza became the first left political party to lead a European government since the founding of the European Union. As such, its eventual capitulation to the demands of the Troika was a bitter development, and not only for the people of Greece. Because the need for change remains as great as ever, and efforts at electoral-based transformations continue, especially in Europe, this paper seeks to assess the Greek experience, and in particular Syriza’s political options and choices, in order to help activists more effectively respond to the challenges faced when confronting capitalist power.

Section 1 examines how Greece’s membership in the euro area promoted an increasingly fragile and unsustainable economic expansion over the period 2001 to 2007. Section 2 discusses the role of the Troika in Greece’s 2008 to 2014 downward spiral into depression. Section 3 discusses the ways in which popular Greek resistance to their country’s crisis helped to shape and nourish Syriza as a new type of left political organization, “a mass connective party.” Section 4 critically analyzes the Syriza-led government’s political choices, highlighting alternative policies not chosen that might have helped the government break the Troika’s strangle hold over the Greek economy and further radicalize the Greek population. Section 5 concludes with a presentation of five lessons from the Greek experience of relevance for future struggles.

TTIP Dangers Revealed

The US government and and the European Commission are negotiating a major so-called free trade agreement, the Transatlantic Trade and Investment Partnership (T-TIP).

According to the US government:

T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services. This will help to promote U.S. international competitiveness, jobs and growth.

However, it is hard to see great benefits from expected tariff reductions since both sides already have low average tariff rates.  For example, the average tariff rate for manufactured products in the European Union was 1.43 in 2013.  Its highest value over the past 25 years was 5.86 in 1990; its lowest value was 1.41 in 2012.

But of course much more is at stake than simply lowering already low tariffs.  The secret negotiations are really about removing regulatory barriers that get in the way of large corporations maximizing their profits, barriers like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations.

This may sound extreme, but judge for yourself thanks to Greenpeace Netherlands.  On May 1st,  it published 248 pages of leaked T-TIP negotiating texts.  According to Greenpeace, these “classified documents represent more than two-thirds of the overall TTIP text as of April, at the 13th round of TTIP negotiations in New York. They cover 13 chapters addressing issues ranging from telecommunications to regulatory cooperation, from pesticides, food and agriculture to trade barriers.”

Among other things they highlight the aggressive US attempt to dramatically weaken already low European Union safety and health regulations.

The following excerpts from a Guardian article provide some of the specifics:

Talks for a free trade deal between Europe and the US face a serious impasse with “irreconcilable” differences in some areas, according to leaked negotiating texts.

The two sides are also at odds over US demands that would require the EU to break promises it has made on environmental protection. . . .

“Discussions on cosmetics remain very difficult and the scope of common objectives fairly limited,” says one internal note by EU trade negotiators. Because of a European ban on animal testing, “the EU and US approaches remain irreconcilable and EU market access problems will therefore remain,” the note says.

Talks on engineering were also “characterised by continuous reluctance on the part of the US to engage in this sector,” the confidential briefing says.

These problems are not mentioned in a separate report on the state of the talks, also leaked, which the European commission has prepared for scrutiny by the European parliament.

These outline the positions exchanged between EU and US negotiators between the 12th and the 13th round of TTIP talks, which took place in New York last week.

The public document offers a robust defence of the EU’s right to regulate and create a court-like system for disputes, unlike the internal note, which does not mention them.

Jorgo Riss, the director of Greenpeace EU, said: “These leaked documents give us an unparalleled look at the scope of US demands to lower or circumvent EU protections for environment and public health as part of TTIP. The EU position is very bad, and the US position is terrible. The prospect of a TTIP compromising within that range is an awful one. The way is being cleared for a race to the bottom in environmental, consumer protection and public health standards.”

US proposals include an obligation on the EU to inform its industries of any planned regulations in advance, and to allow them the same input into EU regulatory processes as European firms.

American firms could influence the content of EU laws at several points along the regulatory line, including through a plethora of proposed technical working groups and committees.

“Before the EU could even pass a regulation, it would have to go through a gruelling impact assessment process in which the bloc would have to show interested US parties that no voluntary measures, or less exacting regulatory ones, were possible,” Riss said.

The US is also proposing new articles on “science and risk” to give firms greater regulatory say. Disputes over pesticides residues and food safety would be dealt with by the UN Food and Agriculture Organisation’s Codex Alimentarius system.

Environmentalists say the body has loose rules on corporate influence, allowing employees of companies such as BASF, Nestle and Coca Cola to sit on – and sometimes lead – national delegations. Some 44% of its decisions on pesticides residues have been less stringent than EU ones, with 40% of rough equivalence and 16% being more demanding, according to Greenpeace.

GM foods could also find a widening window into Europe, with the US pushing for a working group to adopt a “low level presence initiative”. This would allow the import of cargo containing traces of unauthorised GM strains. The EU currently blocks these because of food safety and cross-pollination concerns.

The EU has not yet accepted the US demands, but they are uncontested in the negotiators’ note, and no counter-proposals have been made in these areas.

In January, the EU trade commissioner Cecilia Malmström said the precautionary principle, obliging regulatory caution where there is scientific doubt, was a core and non-negotiable EU principle. She said: “We will defend the precautionary approach to regulation in Europe, in TTIP and in all our other agreements.” But the principle is not mentioned in the 248 pages of TTIP negotiating texts. . . .

The EU negotiators internal note says “the US expressed that it would have to consult with its chemical industry on how to position itself” on issues of market access for non-agricultural goods.

Where industry lobbying in regulatory processes is concerned, the US also “insisted” that the EU be “required” to involve US experts in its development of electrotechnical standards.

Of course, this might be a one-sided look.  No doubt European corporations are pushing hard to undermine US regulations that they find objectionable.   One can imagine a terrible compromise where the two sides split the difference, leaving majorities on both sides of the Atlantic less healthy and safe.