Brexit and supply chain trade

Last week I was invited to talk about supply chain trade and Brexit at Sidley Austin in London. They asked me to focus my intervention on the how the rest of the world, in particular the bigger countries, thinks about Brexit in connection to supply chains. My answer was short: on the whole, not so much.

The simple reason for providing this short answer is straightforward if reasoned from an economic point of view. The figure below shows that most global supply chain trade takes place around three blocs of countries, namely one centered around NAFTA and neighboring countries with the US in the middle, one in Asia with China as the lead country, and one in Europe with Germany as the focal point. The thickness of the lines between countries indicates their  level of supply chain trade. 

As one can see, countries clustered around each of these three core countries are mostly trading within their bloc, not between them. The UK, circled in orange, clearly features inside the EU bloc and doesn’t have as strong trade linkages across the other two non-EU groups of countries. Therefore, from an economic perspective, when the UK leaves the EU, on the whole, other countries outside the European bloc are likely to remain unaffected.

Further research using formal economic models underscores this line of thought. In GDP numbers, countries such as China, Japan, Brazil or Korea may not be so much affected after all. That does not mean, however, that changes in trade may take place in several supply chain industries. A reshuffling of trade is likely to happen for some but would simply not be as big enough of an issue to create a serious dent in their economies.

Source: Santoni and Taglioni (2015) with author's addition. 

However, economics is not everything. Especially regarding Brexit. If reasoned from a political economy point of view outsiders in the rest of the world may be a little bit more concerned, as for example regarding food tariff quotas. But the extent to which they are disturbed as part of these re-negotiations is likely to be related to one thing: market size.

For instance, it’s no surprise that precisely a bigger country like the US vocally oppose the tariff quota plan which is a harbinger for what’s coming. If bigger countries come in the position of negotiating a new trade agreement with the UK, the US and other countries such as China, Korea, Japan conveniently have a lot of market weight on their side. Again, this fact hardly gives bigger counties in the rest of the world a reason to be very much concerned.

By the way, fun-fact of the week: when looking at the figure, can you see in which of the three blocs Ireland is placed? Click on the figure to enlarge. 

Who Underperforms in Digital Services Trade?

For the past 40 years or so, developments of information and communication technology (ICT) have transformed much of the way producers and consumers connect with each other. ICT reduces costs of distance between producers – and between producers and consumers. This has resulted in the fact that international trade has grown faster than before.

Only a short while ago, it was simply unimaginable to export services. Thanks to new technologies and ICT, services have become tradable and, moreover, have hugely expanded the scope of exports and imports. Nowadays, services represent around 23 percent of total cross-border trade. Moreover, the figure below illustrates that trade in total services has grown faster than trade in goods, particularly in the last 5 years.

Rapid growth rates of trade in services and digital services (1995-2016)

Source: World Development Indicators

However, the figure also shows that ICT finds its strongest effect on digital services trade. Indeed, a more impressive growth rate is observed for digital services. Since 1995, this type of digital flow grew with a factor of more than 5! With the current trend of digitalization, it is very likely that these trade patterns will not just continue but even accelerate.

Ultimately, this will rapidly change the way we perceive globalization. The digital economy is moving fast, and a large part of future trade and growth lies in this digital area. This development will favor the EU as traditionally, it has been a strong exporter in services. 

However, not all countries in the EU capitalize on the digital developments such as Germany and France. This is worrying as these two countries are the two largest economies after Brexit. In large part, Europe’s future growth based on digital services needs to come from these two countries, which includes digital services trade as well.

Moreover, one should bear in mind that digital technologies do more than enabling services to become tradable; services themselves are also becoming more and more digital-intense. The essence of this profound change is that any type of services is increasingly developed with the help of digital assets and means such as big data, internet-of-things and other ICTs.

A new Bertelsmann report performed by ECIPE finds that developing an attractive infrastructure for digital technologies to facilitate digital services trade is not a given. On the contrary, some countries are still lagging behind in some or many of these infrastructural “endowments” which enables digital services trade to happen in the first place.

The endowments specific to digital services trade will both relate to invested capital such as telecom infrastructure, network-access capacities and the skills among the workforce to use digital technologies. These are the factors that will determine a country’s future success in digital services trade and the next frontier of globalization.

The report compares the performance of European and OECD countries, against their own predicted capacity. It therefore enables us to understand if countries over or underperform in cross-border digital services trade over the internet. One takeaway point from this analysis is that precisely Germany and France underperform in digital services trade.

The report also sheds light on the potential for countries to trade digital services indirectly as an embodied item in other industries and sectors using digital services, which extends the scope of trade in digital services even further. Here too, France and Germany could be doing much better.

That begs the question: why?

The conclusion of this study is that while Germany for instance has great potential to increase digital trade in services, and along with that output and jobs connected to digital services, that potential can only be realized in the economy if German firms get better at utilizing existing digital endowments and capabilities, including digital services themselves. 

APEC meetings on digital trade

In this presentation that I held in Hanoi for the APEC meetings, I argue that the digital trade can be viewed not only from a trade angle, but also from a competitiveness angle which should therefore not be overlooked. 

The reason is that digital policies will in my view first and foremost increase domestic productivity. Sure, less stringent data policies will also effect trade, inducing countries to reinforce their comparative advantage in digital goods and services, but the way in which we will see this development in our statistics will be through improved productivity. 

Read more here! 

Data Flows & Servicification

Here are my slides of a talk I gave at the WTO last week. The presentations sets out how data flows are economically important for the servicification of the economy / industries, and how the regulatory environment of data flows looks like today. Have a good read! 

Europe's Productivity Problem

There is a long-standing concern about Europe’s productivity performance, a long-term indicator for sustained economic growth. It is a measure that summarizes how effective we use our economic resources such as labour, capital and skills to create an efficient European economy.

Across the developed world, productivity is one of the most important economic catalysers because at some point economic growth through accumulating skills, capital or labour continue to naturally increase at a slower pace than before. From that moment onward, and hence in the long-run, economic growth comes down the ability to use all these factor in an efficient manner.

The concern with productivity is that aggregate productivity numbers describe a picture that is rather bleak. For over a long period of time now, the level of productivity has remained constant in the European Union (EU) as well as other OECD countries, and does not seem to be capable of showing any significant increase.

Using micro-level data of millions of firms in the EU, a recent report by the World Bank confirms this dim picture in the sense that there is very little movement of productivity over time. The figure below shows in blue the productivity developments in Europe’s manufacturing sector. After the global financial crisis (GFC), productivity went somewhat down and continued hovering around a constant level.