World trade growth has been weak recently and the expansion of global supply chains (GSCs) has lost momentum. Comprising an estimated 80% of global trade, GSCs will continue to expand in coming years, but at a slower pace than before and they will be increasingly driven by services and by horizontal trade, according to a wide-ranging new report on shifting international trade trends from the British multinational banking group Standard Chartered.
Measured in value-added terms, services likely already constitute more than half of the value of trade even though direct services trade is only about 20%. New technologies as well as new trade agreements are likely to boost the role of services in goods supply chains as well as direct services trade, the report concludes. It also maintains that horizontal trade based on firm-level excellence rather than differing wage costs, a type of production network prevalent in developed countries, should get an additional boost from multilateral trade deals such as the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP).
Firms in developed countries routinely source parts from suppliers in other countries, based on quality rather than low-cost production. While emerging markets have increasingly been integrated in vertical supply chains, developed countries are active in horizontal supply chains of more complex products such as electrical machinery, automobiles, and aircraft. The Boeing 787 “Dreamliner” is a classic example of a horizontal supply chain, with various components manufactured in the UK, France, Sweden, Japan, Canada, and elsewhere before being assembled in the United States.
First described by Michael Porter in the 1980s in a seminal book on the subject as a new paradigm of global competitive advantage, the growth of horizontal trade and global supply chains (also known as global value chains or GVCs, as outlined in a 2013 WTO paper) has been one of the central developments contributing to accelerated change in the landscape of international investment and trade over the past three decades.
Working on the theory “that as countries become larger, they tend to trade more with each other,” researchers at Standard Chartered feel that “deep” multilateral agreements such as TPP and TTIP covering more than 60% of world output and over 15% of the population are likely to strengthen trade ties between the developed countries such as the U.S., EU and Japan not only in goods but also in services. “Though horizontal supply chains do not exploit wage differences, they allow for economies of scale for producers,” the report states. “At the same time, they provide greater consumer choice for a growing middle class looking for more variety.”
The report’s authors see an increase in horizontal trade taking place between the emerging markets of Mexico, Peru and Chile over the coming years as result of the TPP (presuming the deal is eventually ratified). Similarly, they speculate that the S.E. Asia Regional Comprehensive Economic Partnership would also be likely to support the establishment of more bilateral and supply chain trade between countries such as India and the Philippines or China and Malaysia, which have roughly similar wage levels.
Another key supply chain trend highlighted in the report is a shift from China to lower-cost countries, whereby “the centre of gravity will likely trend westward, towards ASEAN and India in particular.” This transition will likely be gradual, however, as China still has lower-wage areas inland which, together with fast-growing productivity, including the rapid adoption of automation and robotics, can keep China competitive, the report says. Meanwhile, it expects China to cement its role as a “megatrader” by leading the expansion of supply chains through international programs such as its new Silk Road initiative.