Cost, benefit of global value chain

Geopolitics are a major driver of the deglobalisation now being spearheaded by the United States. But there are also economic arguments to be made for bringing supply chains closer to home. So, what are the economic costs of globalisation, and do they outweigh the benefits?

- KEUN LEE ISABEL ÁLVAREZ

To answer this question, one must start by distinguishing between "backward" and "forward" participation in global value chains (GVCs). Backward participation covers the imported intermediate goods on which a country's production relies; it is essentially the share of foreign value-added that is incorporated into gross exports. For example, when Vietnam produces and exports Samsung Galaxy phones, it uses a lot of imported high-tech inputs from South Korea and elsewhere. So, its backward-GVC-participation index is very high, and its domestic value-added is rather low.

Forward participation in GVCs refers to the use of a country's exports as inputs in production by its trade partners — that is, the value-added they contribute to others' exports. When the US exports automobile parts and components to Mexico for assembly, its forward-GVC-participation index is high.

Recent research suggests that backward GVC participation is more likely to boost a country's economic growth, whereas forward participation is more likely to undermine it. But beneath this headline lies a lot of nuance.