Simon Evenett
The fact that cross-border value chains are commercially significant is beyond contest. The claim that geopolitical rivalry between some nations is intensifying is oft-repeated and appears plausible. But are we certain that geopolitical rivalry has profoundly rewired global value chains? Has convincing evidence linking the driver to the effect been provided for such a far-reaching phenomenon? Deeper consideration of a number of factors suggests a corrective is in order.
First, the driver. Interviews conducted with 13 firms with international operations in the preparation of a 2024 White Paper by the World Economic Forum uncovered a remarkable finding. Among business people, there was no common understanding of what ‘geopolitics’ is. In fact, there were 12 different understandings, and corresponding examples, of what constitutes a geopolitical act — almost as many understandings as firms interviewed. While some of definitions of geopolitics overlapped, the driver is quite diffuse. The upshot: analysing the impact of geopolitically-motivated policy change is not like analysing an import tariff hike which can be neatly and accurately captured as a continuous independent variable.
Geopolitical-driven trade and investment policies expose gaps in the skillsets of most international trade research economists, many of whom have shown little serious appetite for getting inside of the ‘black box’ of traditional and opaque commercial policy decision-making. Fewtrade researchers make investments in institutional knowledge, which is at a premium now that multiple bureaucratic interests seek to shape trade policy around geopolitics. That journal referees haven’t demanded much institutional understanding reinforces the cycle of underinvestment in what is really going on.
This underinvestment is particularly problematic when studying the impact of geopolitics on global value chains. Central to an understanding of geopolitical acts are certain motives — making public policy based on relative national position, for example — that may clash with other motives in countries’ public decision-making processes. Moreover, motive is hard to pin down empirically, introducing doubts as to whether a particular policy decision studied is, in fact, a geopolitical act.
Another problem compromising the analysis of the impact geopolitical factors on global value chains relates to data. There has been much analysis of global value chains in the 21st century, including heroic mapping exercises by the Bank of International Settlements. But as we learned during the COVID-19 pandemic, there are simply no comprehensive datasets accessible on the many tiers of suppliers that international companies engage with.
That many companies know, at most, only the first two tiers of their own suppliers — direct suppliers and their respective suppliers — hampers the econometric study of knock-effects with supply chains. Comprehensive transaction data on what firms’ source, from where, and on buyer behaviour is rarely available — for good commercial reasons, a firm’s supply chain can be a source of competitive advantage and is its customer base. Perhaps the most we can expect here are excellent case studies.
Disruption further confounds econometric identification strategies. National economies and regions of the global economy have been hit by a series of disruptive events, the beginning of which can be dated to the Global Financial Crisis. Not all of these events were caused by ‘geopolitics’ — though they have in some cases induced geopolitical responses.
After all, the term ‘polycrisis’ has arisen for a reason. Empirical study seeking to identify impacts of this nature will have to control for other disruptive events and, critically, the growing uncertainty caused by a sequence of such events. The latter is hard to measure as it is almost certainly sector- and firm-specific.
The direction of causation poses another challenge to analysts. Have the corporate decisions underpinning the commercial footprint of GVCs influenced the assessment of geopolitically-influenced policy options by officials or visa versa? The following example crystalises the problem.
Canada was the first G7 nation to revoke Russia’s and Belarus’s Most-Favoured-Nation status in order to impose 35 per cent import tariffs on Russia following its 2022 invasion of Ukraine. That was relatively cost free for Ottawa given how little the country trades with Moscow. But it became evident that certain EU member states which traded a lot more with Russia dragged their feet in imposing sanctions — to say nothing of turning a blind eye to sanctions circumvention. Reverse causality cannot be ruled out. The strength of prior commercial ties might in fact shape geopolitics.
Differential impact is another difficulty. It is often claims that US firms are shifting some sourcing out of China. But research conducted by the Global Risk Institute has found that this is not the case for supply chains serving Canadian markets. Firms on the same continent appear to be reacting differentially to geopolitical factors. This calls into question the generality of the looming ‘great reallocation’, as one prominent paper puts it.
When combined with data availability gaps, such differential impact can lead to misleading narratives. The least-worst data on GVCs pertains to firms operating in the United States, and more research papers will almost certainly be written on this nation’s cross-border supply chains. But that does not mean that US corporate decisions are being replicated elsewhere. This is worth bearing in mind when reading future surveys of the academic literature. The risk lies in overgeneralising trends in geopolitics based on US corporate responses.
Those who disagree the tenor of this corrective might argue: ‘Don’t make the good the enemy of the perfect’. This may well be true so long as it is understood that international trade economists are operating at the margins of their available knowledge and evidence base when making claims about the impacts of geopolitics on cross-border supply chains.
It would be a different issue altogether if the studies purporting to show these impacts were arcane. But cherry-picked research findings are likely to be used by those with an interest in painting a certain picture of geopolitical impacts on global value chains.
Simon J Evenett is Professor of Economics at the University of St Gallen, Co-Chair of the World Economic Forum’s Global Council on Trade and Investment and Founder of the Global Trade Alert at the St Gallen Endowment.
Source: East Asia Forum
