This series of VoxEU columns seeks to remove some of the myths surrounding the notion of ‘deglobalisation’. The first column presented the prima facie case for the ‘peak globalisation’ narrative, pointing out that the crisp peaking of goods trade as a share of GDP in 2008 hid important aspects of the global reality. The second column looked at the sectoral composition of the global peak. It showed that about 60% of the decline in the ratio post-2008 was due to a drop in trade in mining goods and fuels (Figure 1), which was entirely due to a drop in the price of these commodities. Commodity prices have soared recently, but the analysis stops at 2021.
This third instalment in the series takes a closer look at the part of the drop that is foremost in most analysts’ minds, namely, the ratio of manufactures trade to GDP (Figure 1).
Figure 1 World goods trade to world GDP ratio, by sector
About 60% of the drop in the trade ratio was due to mining and fuels, the rest to manufactures
Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).
Note: the series all have the same denominator so they can be added vertically.
Are global supply chains unwinding? Is reshoring a reality?
In the public debate on deglobalisation, a standard explanation for the drop in the ratio of trade in manufactures to GDP is that global value chains (GVCs) have unwound (Antras 2021). Note that the terminology on this has not stabilised – this unwinding is also known as ‘reshoring’, ‘shortening of global supply chains’, ‘friend-shoring’, or ‘near-shoring’. Moreover, GVCs are also known by the more descriptive label ‘global supply chains’, although authors differ on the exact definition of these terms.
If such an unwinding did occur in a globally significant way, it would provide a natural explanation for the drop in the trade-to-GDP ratio. The point is that it would lead to a reduction in the multiple border crossings of parts and components that helped drive up the ratio during the offshoring expansion phase (Baldwin 2016: Chapter 3).
Before interrogating the trade data on the reshoring hypothesis, we look at a couple of non-trade indicators that suggest the massive reorganisation of world manufacturing production has shifted from one equilibrium (where almost all manufacturing was done in G7 nations) to another (where a handful of emerging markets, especially China, have become major manufacturing powers).
Production-based indicators of the end of the offshoring expansion phase
Reshoring manufacturing can be thought of as consisting of two parts. The first is the end of the offshoring expansion that dialled up trade in manufactured goods in the early part of globalisation’s ‘second unbundling’. The second part is the reduced complexity of supply chains globally, both within and among nations. We start with evidence that the offshoring expansion phase has come to a close.
Figure 2 shows how the G7’s share of global manufacturing evolved between 1990 and 2020. What we see is that the G7’s share started at a very stable, very high level. These seven economies – the four big European nations (France, Germany, Italy, and the UK), Japan, and the two North American nations (Canada and the US) – accounted for two-thirds of world manufacturing up to the end of the 1990s. The G7’s share declined fairly rapidly from the late 1990s right up to the mid-2010s (66% to 38% of the world total). Since then the share seems to have plateaued, or at least the drop has slowed substantially.
The figure also shows six rapidly industrialising emerging economies – what might be called the I6. These were chosen since they are the only economies that gained more than one-half of one percentage point in their global share of manufacturing between 1990 and 2020. They are, with the percentage points gained in parentheses, China (+16.2), India (+1.5), Korea (+1.5), Indonesia (+1.0), Thailand (+0.5), and Brazil (+0.5). The two most noteworthy points are, first, that the I6’s gain is essentially the mirror of the G7’s loss; and second, that the I6’s gain slowed significantly around the mid-2010s.
The behaviour of the G7’s and I6’s shares is consistent with the idea that the low-hanging fruit, so to speak, has been picked when it comes to offshoring manufacturing to emerging markets. The easy and obvious opportunities for combining ‘high technology’ with low-wage labour in emerging market factories have been exploited.
Observe how the shift in manufacturing shares is highly concentrated in the I6. All the other nations in the world saw almost no change in their collective share of world manufacturing.
Figure 2 High-income countries’ share of world manufacturing GDP, 1997-2020, and ratio of world value added to gross output (%), 1995-2018
The offshoring expansion phase has ended
Source: Author’s calculations based on UNIDO data.
Note: Manufacturing Value Added, current USD.
A very different type of evidence for the end of the offshore expansion phase is displayed in Figure 3. Understanding this evidence, however, requires a bit of background. The figure shows the ratio of value added to gross production for the entire world economy (all sectors). Gross production is the value added of all firms in the world (i.e. GDP) plus the value of all the inputs of goods and services that all firms buy from all other firms (this equals the value of global intermediate inputs). When production becomes more fragmented along national or international lines, the ratio of value added to gross output falls. In a sense, the ratio of value creation to sales falls as intermediate inputs are sold among firms rather than produced within firms. The ratio is thus an inverse measure of the degree of production fragmentation. Or put differently, the ratio falls when supply chains become longer or more complex.
Figure 3 The ratio of world value added to gross output (%), 1995-2018
The expansion of the supply chain has plateaued worldwide
Source: Author’s calculations based on OECD TiVA database, which is only available for 1995 to 2018.
As argued, globalisation’s ICT-fuelled second unbundling led to a spatial unbundling of the stages of production and thus a lengthening of supply chains, both domestically and internationally. This shows up very clearly in the figure. There is a gentle decline (increase in supply chain complexity) from 1995 to 2002, followed by a sharper fall from 2002 to 2008 and a plateauing after that.
The magnitude of the fall is not very impressive, from 54% to 50%, but these figures include the entire world economy. Since about two-thirds of world value added is generated by the service sector, and the global supply chain revolution was mostly concentrated in manufacturing, this modest impact is to be expected.
Focus on manufacturing
When we focus only on the world’s manufacturing activity (Figure 4), the drop is a bit bigger, with the ratio falling from 35 in 2002 to 29 in 2013. Notice that the level of the ratio is much lower for manufacturing than it is for the whole economy because manufacturing firms generally use far more purchased inputs than firms in the service sector. Also noteworthy is the behaviour of the ratio after 2013.
Figure 4 World manufacturing ratio of value added to gross production, 1995-2018
(An inverse measure of supply chain complexity)
Source: Author’s calculations based on the TiVA database.
The fact that the ratio rises suggests that supply chains are becoming less complex. Or, to put it differently, that supply chains are ‘unwinding’. The ratio rose from 29% to 31% between 2013 and 2018, so we know that the average manufacturing firm is doing more of its value creation inside the firm. That is one definition of unwinding the complexity of supply chains. The shift is not huge, and we only have five years of data, but this can be taken as evidence that the famous unwinding has indeed been taking place.
The timing of the unwinding is important for rejecting deglobalisation assertions in the public discourse. According to the data in Figure 3, it started in 2013, five years before President Trump started his war on trade and three years before Brexit, but five years after the Global Financial Crisis.
The measures examined hitherto focused on production, not trade. The next measures focus on trade in intermediate goods (a very direct measure of international supply chains).
Trade-based measures of reshoring
One direct measure of the intensity of global supply chains is the share of imports that is made up of intermediate goods. If a country is intensively sourcing parts and components from foreign sources, then the share of intermediates in its imports should be high.
Figure 5 shows the facts for the four big trading economies. In the left panel, which presents the facts on the import side, we see that there has been a clear peaking of the intermediates ratio. All four traders saw significant increases in their share of intermediates from 1995 to the mid-2000s (during the offshoring-expansion phase). For China, the change since the mid-2000s has been more of a plateauing than a decline, but for the others the decline is clear. The upshot is that the biggest traders and the biggest manufacturers are doing less international sourcing of intermediates. That is one way of defining the unwinding of global supply chains.
Figure 5 Share of imported goods made up of intermediate goods, all sectors, 1995-2018
Source: Author’s calculations based on indicators in the TiVA database.
Note: Specifically, the denominators are EXGR and IMGR while the numerators are EXGR_INT and IMGR_INT.
On the export side (right panel), the outcome is more mixed. Japan experienced an increase in its export share made up of intermediates in the offshore expansion phase and stagnation or slight decline since. The EU pattern looks rather stable throughout, although it should be noted that the TiVA data do not include trade within the EU. Since most of the offshoring happened within ‘Factory Europe’, the figures in the chart need to be interpreted with care. China’s pattern involves a rise and then decline, but a rise in recent years. Overall, the change from the mid-2000s peak and 2018 is very small. The US, by contrast, has seen a steady rise in the intermediates share of its exports throughout the period.
The lesson from the charts is that the biggest manufacturing economies are not disengaging from global supply chains on the selling side (Figure 5, right panel), even if they are on the sourcing side (left panel).
The usual GVC discussion focuses on a few manufacturing sectors, like autos, electrical and mechanical equipment, pharmaceuticals, and chemicals (World Bank 2020). To acknowledge this, Figure 6 shows the same shares as in the figure above but focuses only on manufactures.
The patterns here – especially for imports – present a clear picture of reshoring. On the export side, the patterns for the EU and China are quite like the patterns in the left panel of Figure 6, since the exports of the two economies are dominated by manufactured goods.
Figure 6 Share of imported manufactured goods made up of intermediate goods, 1995-2018
Source: Author’s calculations based on indicators in the TiVA database.
Note: Specifically, the denominators are EXGR and IMGR while the numerators are EXGR_INT and IMGR_INT for manufacturing sectors.
This column was a deeper dive into the decline in the ratio of trade in manufactures as a share of world GDP. The decline resulted from two things. First, the offshoring-expansion phase has come to a close. The rising part of the trade-to-GDP ratio peaks was greatly enhanced by the unbundling and offshoring of some manufacturing stages from high-income nations to a handful of emerging economies. This process has attained a new equilibrium, where the share of manufacturing in high-income nations has stabilised. Second, the overall complexity of supply chains, both domestically and internationally, has fallen.
In the last column in the series, I complete the presentation of the facts. This will show that trade in services has not peaked.
Author’s note: Parts of this column are drawn from Baldwin (2022).
Antras, P (2021), “De-globalisation: Global value chains in the post-COVID-19 age", paper written for the 2020 ECB Forum on Central Banking.
Baldwin, R (2016), The Great Convergence: Information technology and the new globalisation, Harvard University Press.
Baldwin, R (2022), “Globotics and macroeconomics: Globalisation and automation of the service sector”, paper presented at 2022 ECB Forum on Central Banking, Sintra.
World Bank (2020), World Development Report 2020: Trading for development in the age of global value chains.