14 October 2022

Maria Savona is Professor of Economics of Innovation at the Science Policy Research Unit (SPRU) at the University of Sussex Business School and Full Professor at the Department of Finance and Economics at LUISS Business School in Rome. Filippo Bontadini is Assistant Professor in Applied Economics at LUISS and Associate Fellow at SPRU, University of Sussex. Valentina Meliciani is Professor of Applied Economics and Dean of the School of European Political Economy at LUISS. Ariel L. Wirkierman is Lecturer in Economics at Goldsmiths, University of London. 

After the great recession of 2008-2009, the world economy seemed to enter a phase of de-globalisation or deceleration in globalisation. But, is this really the case? Are we actually just experiencing a reorganisation and regionalization of production and value chains? Are these trends similarly affecting Europe, Asia-Pacific and the Americas, or are there regionally distinctive trends?

Our latest research, Nearshoring and Farsharing in Europe within the Global Economy[1], set out to investigate these questions by examining how much of what is produced by a country in any given industry uses ‘value added’ from other countries.

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Suppose the textile industry in Italy buys intermediate inputs (such as yarn, dyes or cotton) from Vietnam. Note, however, that the yarn from Vietnam in turn may have been produced using inputs from other countries, such as Turkey. Our methodology allows us to calculate the value added by Vietnam, Turkey and all other countries supplying inputs to the Italian textile Global Value Chain (GVC). At the same time, we also keep track of the intermediate inputs supplied by the Italian textile industry to GVCs in other countries. Hence, we are identifying the geographical source (and destination) of the value added contributed by each country-industry to each country-GVC.

Therefore, first, we adopt an input sourcing perspective: we look at where value chains in each region draw value-added contributions from and whether this comes from within (i.e. the Regional Foreign Value added Share, RFVAS) or outside (i.e. the Global Foreign Value Added Share, GFVAS) a country’s region.[2]

Second, we adopt an output destination perspective: we look at the final destination of domestic value added and whether it contributes to value chains articulated within (i.e. Regional Foreign Subsystem Share, RFSUBS) or outside (i.e. Global Foreign Subsystem Share, GFSUBS) a country’s region.

We then define regional-to-global ratios as the ratios between regional and global value added input sourcing (NFVA) and output destination (NFSUB).

Using these metrics, we find very clear-cut results on Europe, suggesting two opposite trends on the source and destination sides of GVCs: Europe is increasingly sourcing value added from within the EU region (which we refer to as “nearshoring”) but exporting value added globally, outside of the EU (which we term “farsharing”).

Figure 1 depicts nearshoring as increases in the regional-to-global ratio of foreign value added, in the upper panels, while also reporting the two components separately in the lower panels.

Figure 2 does the same, looking however at the output destination: farsharing is a decrease in the regional-to-global ratio in the upper panels, i.e. a larger share of value added of a region is absorbed by extra-regional value chains, while lower panels depict the trajectories of the ratio’s components. We carry out our analysis for three regions: European Union (EU28), Asia-Pacific (AP) and North and Latin America (NLA)[4].

FIGURE 1 Upper panel: Regional-to-Global foreign value added (NFVA); Lower panel: Regional (RFVAS) and global (GFVAS) foreign value added (FVA) share of final output.

Note: All value added corresponding to primary industries has been excluded from the computations.

Source: Authors’ calculations based on OECD-ICIO 2021 database.

FIGURE 2 Upper panel: Regional (RFVAS) and global (GFVAS) foreign value added (FVA) share of final output; Lower panel: Share of domestic value added contributed to regional (RFSUBS) and global (GFSUBS) value chains.

Source: Authors’ calculations based on OECD-ICIO 2021 database.

In the context of a higher level of intra-regional integration in Europe than in both Asia-Pacific and the Americas, a distinctive European trend emerges. Europe shows high regionalisation of its foreign value-added sourcing that decreases during the 2000s but picks up again from 2012 (nearshoring) and a globalisation of EU domestic valued-added contributions since the financial crisis in 2008 (farsharing) (top left panels of Figures 1 and 2, respectively).

The Asia-Pacific region is also increasingly nearshoring (centre top panel Figure 1). However, while in Europe this is driven by higher growth in regional than global sourcing after 2012, in Asia-Pacific it is the result of a decline in global sourcing vis-à-vis a stagnant regional share after 2008 (bottom centre panel Figure 1).

Finally, the Americas have, by far, the lowest level of GVC regionalisation, both in terms of input sourcing and of domestic value-added destinations, in stark contrast with the other regions.

Also, in terms of destination of value added, different patterns emerge. Europe has engaged in farsharing, increasing its dependence on foreign demand (bottom left panel Figure 2), while Asia has coupled its nearshoring with increasing domestic absorption of value added (nearsharing) (centre panels Figure 2).

While the perception of the fragility of GVCs to external shocks after the pandemic and the war in Ukraine has shifted the debate on the trade-off between efficiency and security in the direction of reshoring or nearshoring,[5]^,[6],[7] little attention has been paid to the destination of European value added.

Overall, our results suggest the consolidation of a European export-led growth model involving an increase in intra-regional backward linkages and a diversification towards extra-regional markets. Differently from Asia, Europe has become increasingly dependent on foreign demand. Is this model sustainable for Europe?

While Europe should be aware of the economic and political risks of a deceleration of globalisation, defend multilateralism and resist a new wave of protectionism, its capacity to retain an important geo-economic role requires a bolder step forward in concerted industrial and macroeconomic policies.

This is all the more important for the UK, which experiences similar trends of nearshoring and farsharing to the rest of Europe, though at levels of integration within the wider European area that are much lower than, for instance, those in Germany, France, and Italy. This would risk leaving the UK more exposed to geo-political shocks coming from outside the European continent.

Footnotes

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[1] Bontadini, F., Meliciani^, V., Savona, Wirkierman, A. L. (2022). Nearshoring and Farsharing in Europe within the Global Economy, EconPol Forum, 23(5), pp. 37-42.

[2] The ICIO data are in nominal values and, as a result, are affected by price dynamics. In order to mitigate this, we have removed from our calculations agriculture and mining industries, that are most affected by commodity price super cycles. While this has an impact on the levels of our measure it does not change the main trends and key conclusions, we refer the interested reader to Bontadini et al (2022) for a more detailed discussion.

[3] NFVA = RFVAS / GFVAS and NFSUB = RFSUBS / GFSUBS  

[4] EU28 considers 28 European countries, including Croatia and the UK; AP considers 18 countries: ASEAN Plus Six (i.e. including China, Japan, South Korea, India, Australia and New Zealand), together with Hong Kong and Chinese Taipei; NLA considers 9 countries: USMCA, together with Argentina, Brazil, Chile, Colombia, Costa Rica and Peru.

[5] Javorcik, B., 2022: “Global supply chains will not be the same in the post-Covid-19 world”, in Baldwin, R.E., Evenett, S.J., (Eds.), 2020.

[6] Posen, A., 2022: “The End of Globalization? What Russia’s War in Ukraine Means for the World Economy”. Foreign Affairs, March 17, 2022.

[7] World Bank, 2022: “The Impact of the War in Ukraine on Global Trade and Investment”. Washington, D.C.

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