Global trade outlook and the resilience of Global Value Chains

The global trade policy environment has been deteriorating for a number of years. Globalisation, understood as increasing interconnectedness of economies through the flow of goods, services, capital and technology, has been exposed to increasing headwinds in the last fifteen years. These include the fallout from the Global Financial Crisis (GFC), the tailing-off of gains from China’s rapid integration into the global manufacturing system in the 1990s and 2000s ⁽¹⁾ and, more recently, the widespread rise of protectionist trade policies (see Graph 1) as geopolitical tensions have mounted ^([1]).

Graph 1: New trade policy interventions

Source: https://www.globaltradealert.org/

The era of hyper-globalisation of the 1980s and 1990s has given way to a phase of ‘slowbalisation’. Global trade has gone through a prolonged period of ‘hyper-globalisation’. The ratio of global exports to GDP, one of the key gauges of globalisation, rose steadily from 17% in 1986 to 31% in 2008, or more than 0.5 pps. per year. After the GFC this ratio has stalled at around 30% (see Graph 2), as the global economy entered a period of weaker trade growth, dubbed ‘slowbalisation’. However, despite the double shock of the pandemic and the energy crisis hitting the global economy in succession, and the gradual deterioration of the trade environment, global exports of goods and services have shown remarkable resilience, broadly keeping their share in GDP at around the pre-GFC peak. This forecast expects the ratio of global exports to GDP to remain broadly unchanged over 2023-26 (see Graph 2). 

Graph 2: Share of exports of goods and services in GDP

Against this background, the export-to-GDP ratio in the EU ^([2]) has fared surprisingly well and is forecast to edge up over the forecast horizon. Propelled by a trade-supportive policy stance, the introduction of the euro and major successive enlargements of the EU single market, as well as opportunities created by the expansion of manufacturing bases in China ^([3]) and South-East Asia, EU exports continued to expand, even after global trade entered the post-GFC stagnation ^([4]). This expansion has been driven by exports, both inside and outside the EU, with the share of intra-EU in total EU exports remaining around 60%, broadly unchanged since the 1990s. The share of exports to GDP in the EU is projected to edge up over the course of 2024-26. By comparison, the respective export shares remained stable in the US and China, increased modestly in Japan, and saw a decline in India (see Graph 2). 

The expansion of global value chains has warranted a new measurement of trade openness. Traditional trade indicators, such as export-to-GDP ratios (Graph 2) are based on gross trade flows that record the value of goods and services, including intermediate ones, each time they cross borders. However, with the expansion of global value chains (GVCs), intermediate goods and services cross multiple borders, including possibly the same border multiple times, before reaching the final consumer. To address this, international organisations such as the OECD (De Backer and Miroudot, 2013), WTO (WTO et al., 2023) and the World Bank (World Bank et al., 2017) have proposed indicators measuring the integration in GVCs based on trade in value added ^([5]). This approach helps identify countries’ contributions to global production processes through the lens of value added rather than gross trade flows. 

Despite mounting headwinds to trade, global value chains have continued expanding in recent years. Standard GVC participation indicators calculated based on Eurostat’s FIGARO ^([6]) database available for the period 2010-2022 confirm continued modest expansion in GVCs in recent years. While total GVC integration ^([7]) at the global level declined from 2010 to 2015, it has been gradually rebounding as from 2016, reaching 41.9% in 2022, roughly 1 pp. above its 2010 level (see Graph 3). The EU (viewed as a single entity), Japan and the US have seen their GVC participation increase over this period. In China, the rebalancing towards domestic production weighed on its position in GVC. In 2022 GVC participation in the EU stood at 37.9%, significantly above the US (35.3%) and China (33.8%).

Graph 3: Total GVC participation (sum of backward and forward participation indices)

Source:  JRC calculation based on Eurostat's FIGARO database.

Inherent resilience of Global Value Chains to trade disruptions has helped keep global trade openness high. This resilience can be explained by several factors. Firstly, much of GVC trade involves intra-firm transactions, where multinational corporations trade intermediate goods between their subsidiaries in different countries. This type of trade is generally less price-sensitive and more resistant to tariffs, as companies often find it more efficient to absorb short-term cost increases rather than to disrupt well-established supply chains. Secondly, the deep integration and specialisation in GVCs make firms more inclined to weather short-term trade disruptions. Highly specific supplier-customer relationships, make it more challenging to switch partner. In sum, the structured dependencies, specialised nature and lower price sensitivity of value chains contribute to their resilience. Studies by the World Bank, ⁽[8]⁾ IMF ⁽[9]⁾ and the OECD ⁽[10]⁾ that observed composition of trade flows following recent trade disruptions confirm that GVC trade flows are indeed less responsive to short-term barriers than traditional trade. Given that the expansion of GVCs has been behind a large share of gross trade in recent years, their resilience may help explain why trade has retained a high share of the global economy despite mounting headwinds. However, this does not mean that the global organisation of production is immune to protectionist policies. If disruptions persist or intensify, or when alternative policies increase the incentives for domestic production, more companies may start reshoring certain production processes ⁽[11]⁾.