Reports from the Economic Front

a blog by Marty Hart-Landsberg

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.

trade

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.

organization

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.

new asia

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.

new 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.

expanding 1

expanding 2

expanding 3

expanding 4

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.

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One response to “Patterns Of Globalization

  1. Pingback: Trump’s Economic Policies Are No Answer to Our Problems | Counter Information

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