1. food and drink
2. food
3. baked goods

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86232
MARCH 2014 • Number 137
Global Value Chains in the Current Trade Slowdown
Michael J. Ferrantino and Daria Taglioni
Real growth in global trade has decelerated significantly since its sharp recovery in 2010. Year-on-year growth in global
real trade1 decelerated from 13.3 percent at the end of the first quarter of 2010, to 9.9, 3.1, and 0.5 percent at the end of
the first quarters of 2011, 2012, and 2013, respectively, while picking back up to 3.9 percent in the year leading up to
the fourth quarter of 2013.2 This aggregate deceleration in global trade includes absolute declines in real trade for many
product categories and regions. In the wake of the Great Trade Collapse of 2008–9, understanding of the behavior of
trade in slowdowns has improved. Among the many explanations offered for the Great Trade Collapse, including
explanations related to uncertainty, trade financing, and new protectionist measures by governments, there has been a
significant focus on whether the emergence of global value chains (GVCs) in international trade, and their behavior, are
a contributing factor in trade slowdowns.3
Relationship between GVCs and Trade
Decelerations
GVCs involve trade in goods that have multiple production
stages that take place in many different countries (that is,
“production fragmentation” or “slicing up the value chain”)
and in which multiple imports and exports of intermediate
goods are necessary to produce a final good, which may also be
exported. Since the emergence of the North American GVC
in automobiles in the 1960s and the East Asian electronics
GVC in the 1970s, the role of GVCs in international trade
has become more important and has attracted increasing attention. There are several potential reasons why GVC trade
may behave differently.
First, there is a crude statistical argument for a relationship between GVC trade and slowdowns, arising from the
fact that there are more trade flows in GVC trade than in nonGVC trade. If an exported good is produced entirely within
the exporting country, and there is a reduction in demand,
then one trade flow disappears. But if the exported good is
produced with an imported input, there are two trade flows
(the import of the input and the export of the final good), and
thus the same drop in demand for the final good causes two
trade flows to disappear. This simple argument turns out to
be fallacious (O’Rourke 2009): since there is twice as much
trade in a GVC world, then a 1 percent drop in demand leads
to a 1 percent drop in both intermediates and final trade,
which is not unusual.
However, global trade, in fact, consists of both GVC
trade, say, complex goods such as automobiles, whose parts
and components are produced in different countries and then
assembled in one location, and non-GVC trade, such as exports of bananas that require no further processing. If there is
a drop in global demand, and demand for complex goods such
as automobiles drops more rapidly than demand for simple
goods like bananas, then a compositional effect of decelerating
demand for goods produced in GVCs (for example, complex
consumer goods and capital goods) could cause trade to slow
down more rapidly than it would otherwise. Since the world
has gradually transitioned over the last several decades to a
world in which GVC trade has become more important, there
appears to have been a long-run increase in the elasticity of
global trade with respect to global income (Escaith, Linden-
1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
berg, and Miroudot 2010). This increase in elasticity reversed
itself in the late 2000s. Whether this reversal is due to cyclical
factors associated with the recent financial crisis, or to the
possibility that the structural transformation associated with
the increasing geographical fragmentation of production is
now nearly finished, is not yet known. In any case, the fact
that demand for the final good is ultimately spread out over
demand for intermediates in many countries means that the
transmission of demand shocks during a slowdown in any one
region may be more rapid and greater in a world where GVCs
are important.
In addition, different parts of a GVC may behave differently in a downturn. In particular, reductions in final demand may lead to even larger reductions in intermediate
demand, so that trade in intermediates declines more rapidly than trade in final goods, the so-called bullwhip effect (Altomonte et al. 2012; Zavacka 2012). When demand for final
goods slows, exporters of such goods can continue for a
while on inventory rather than ordering new intermediate
goods for production, so intermediate goods trade declines
more rapidly than final goods trade. On top of this, the effect
of uncertainty is different in the upstream parts of the supply
chain, especially for firms that are more peripheral in terms
of decision making. Having less information about the drop
in demand for final goods, the suppliers of inputs may start
avoiding risk, cutting production and trade in intermediate
goods even more rapidly than if they had the same information as final-goods producers.
Figure 1. Trade in GVCs Has Decelerated More Rapidly Than Total Trade
40
Within these patterns, there is substantial regional and
sectoral variation. While the above generalizations are useful,
not every GVC produces a good whose final demand is unusually sensitive to declining income, and not every GVC exhibits bullwhip behavior at all times. For example, GVCs in
more sophisticated value chains, especially those associated
with large multinational lead firms making extensive use of
high-tech supply chain management tools, may be more adept
at managing fluctuations in demand.
Three Representative GVCs: Apparel/
Footwear, Electronics, and Motor Vehicles
and Related Parts
A focus on trade in three important product groups characterized by GVC-type trade—apparel and footwear, electronics,
and motor vehicles and parts—provides a simple picture of the
role of GVCs in the current trade slowdown. The goods making up these GVCs, defined in Sturgeon and Memedovic
(2011), can be divided into intermediate goods and final
goods using BECs (Broad Economic Categories). Together,
these goods make up about 20 percent of global trade. However, the GVCs for these goods include more trade than is included in the definitions. A significant amount of primary
trade—in metals, chemicals, fossil fuels, electric power, and
natural fibers produced in agriculture—is involved in providing inputs for the goods in this analysis. Moreover, GVCs exist
for other complex goods, such as capital equipment, precision
instruments, and chemical-based consumer goods such as
cosmetics and personal care products. It is possible that the
three GVCs analyzed here have had behavior similar to other GVCs, but the
extent is uncertain.
Overall GVC Trade in
Current Slowdown
20
10
08
20 Q1
08
Q
20 2
08
Q
20 3
08
Q
20 4
09
20 Q1
09
Q
20 2
09
20 Q3
09
20 Q4
10
Q
20 1
10
20 Q2
10
Q
20 3
10
20 Q4
11
20 Q1
11
Q
20 2
11
20 Q3
11
Q
20 4
12
20 Q1
12
Q
20 2
12
20 Q3
12
20 Q4
13
Q1
0
20
year-on-year real growth
growth for period ending at date shown (%)
30
-10
-20
All goods, average
GVC, all
-30
-40
Figure 1 shows that in the current slowdown, trade in the three GVCs combined has declined more rapidly than
global trade.4 In the Great Trade Collapse, the deceleration was also more
rapid. However, during 2008–9, GVC
trade collapsed more rapidly than global trade, and then boomed back. The
current slowdown in GVC trade, relative to total trade, is more subtle. Arguably, GVC and non-GVC trade have
grown at about the same rate since late
2011. However, in four of the last five
rolling 12-month windows calculated
on quarterly data, GVC trade has grown
less rapidly than total trade. In the most
Source: Datastream, International Trade Commission (ITC), World Bank.
2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
Figure 2. Trade in Motor Vehicles and Parts Has Led Decline in Current and
Previous Slowdowns
30
20
10
08
20 Q1
08
Q
20 2
08
20 Q3
08
Q
20 4
09
20 Q1
09
20 Q2
09
20 Q3
09
20 Q4
10
20 Q1
10
20 Q2
10
20 Q3
10
20 Q4
11
20 Q1
11
20 Q2
11
20 Q3
11
Q
20 4
12
20 Q1
12
Q
20 2
12
20 Q3
12
20 Q4
13
Q1
0
20
year-on-year real growth
growth for period ending at date shown (%)
40
-10
-20
-30
apparel/footwear
electronics
autos and parts
-40
-50
Source: ITC, World Bank.
Figure 3. The Europe-Centered GVC Contracted First, Then NAFTA and East Asia
60
40
EU27+ as importer
East Asia as importer
NAFTA as importer
30
ROW as importer
20
10
08
20 Q1
08
20 Q2
08
20 Q3
08
20 Q4
09
20 Q1
09
20 Q2
09
20 Q3
09
20 Q4
10
20 Q1
10
20 Q2
10
20 Q3
10
20 Q4
11
20 Q1
11
20 Q2
11
20 Q3
11
20 Q4
12
20 Q1
12
20 Q2
12
20 Q3
12
20 Q4
13
Q1
0
-10
20
year-on-year real growth
growth for period ending at date shown (%)
50
-20
-30
-40
Sectoral patterns
At the sectoral level, a decline in demand
for motor vehicles and parts is leading the
current slowdown, as it did during
2008–9. The bust-and-boom behavior of
trade in motor vehicles and parts has been
associated with the domestic stimulus
programs in this sector pursued by many
countries in the aftermath of the 2008–9
recession. In turn, the phasing out of
these programs may be contributing to
the disproportionate slowdown in motor
vehicle trade.
Regional patterns in GVCs
GVCs often operate on a regional basis to
optimize time and transport costs. To examine the different patterns, GVC trade
can be divided into three regional supply
chains: EU27+, which includes the 27
members of the European Union (EU27)5
as well as their GVC partners in Morocco,
Tunisia, and Turkey; North American
Free Trade Agreement (NAFTA) countries (Canada, Mexico, and the United
States); and East Asia (including Japan,
China, the Republic of Korea, and other
large Asian traders). Each of the regions
includes both developed and developing
countries. Remaining trade is classified as
“rest of the world.” For the three sectors
analyzed here, over 96 percent of their
trade involves one of the three big regional
GVCs, either as an exporter or importer.
On a regional basis, the slowdown in
EU27 demand is most notable. EU27 imports of GVC goods (including intraregional imports) did not recover as dramatically as imports of other regions, and
have been in absolute decline in real
terms since 2011. In the most recent
12-month window ending in the first
quarter of 2013, real growth in NAFTA
and East Asian GVCs is also negative,
while GVC imports by the rest of the
world have been more resilient (figure 3).
Differences between intermedate and
final goods trade
Figure 4 shows one difference between
the current trade slowdown and the Great Trade Collapse.
Looking at the three sectors together, the strong bullwhip behavior (intermediate trade declining more than final goods
Source: ITC, World Bank.
Note: EU27+ = EU 27 and Morocco, Tunisia, and Turkey; NAFTA = North American Free Trade Agreement;
ROW = rest of world.
recent window for which data are available, that ending in the
first quarter of 2013, total global merchandise trade increased
by 2.0 percent, while GVC trade declined by 0.6 percent.
3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
Figure 4. Within GVCs, Trade in Intermediate Goods Has Slowed More
Rapidly Than Trade in Final Goods
2013M1
2012M9
2012M5
2012M1
2011M9
2011M5
2011M1
2010M9
2010M5
2010M1
2009M9
2009M5
2009M1
2008M9
2008M5
2008M1
year-on-year real growth
growth for period ending at date shown (%)
recent years, the most notable slowdown in
demand has been in Europe. While world
economic activity grew by 4 percent in 2011
50
and 3.2 percent in 2012, with projections
for 2013 at 3.3 percent, in the EU-27, it
40
only grew by 1.6 percent in 2011, and conworld world GVC, intermediate
world world GVC, final
tracted by 0.2 percent in 2012. The euro
30
area seems to have been driving the EU performance, with 1.4 percent growth in 2011
20
and 0.6 percent contraction in 2012, and a
further contraction for 2013 estimated at
10
0.3 percent.6
The slowdown in Europe is having sig0
nificant spillover impacts on its trading partners in Africa and the Middle East. This
-10
point is highlighted by the network representation of world trade (using a Minimal
-20
Spanning Tree [MST]) shown in figure 5,
which details overall bilateral trade for
-30
2010. MSTs enable at-a-glance visualization
of large and dense networks, such as world
-40
trade. The lines in the network represent
link weights and are proportional to trade
-50
flows, while the size of the nodes reflects a
Source: ITC, World Bank.
country’s degree of centrality in global
trade. Following the links of the network, it
is possible to assess which countries’ exports are most likely to
trade) that characterized 2008–9 does not appear in aggrebe affected by a contraction of activity and demand in the Eugate GVC trade in the latest slowdown. Trade in intermediate
ropean Union.
and final GVC goods are currently decelerating at a proporWorld trade appears polarized around three main blocks.
tional rate.
China, of course, is the most relevant trade partner for many
Given the hypothesized origin of bullwhip behavior in
the management of uncertainty and inventories, there are
countries (higher degree of centrality), but so are the United
some potential explanations for this difference. It could be
States and Germany. More specifically concerning the Eurothat firms in GVCs have learned from 2008–9 and are able to
pean Union, it appears that there are three distinct sub-blocks.
adjust production in the supply chain more efficiently and
One is centered around Germany and comprises mostly
better anticipate the slowdown. Also, because the current
countries from the wider European region. The second is censlowdown is more modest, there is less uncertainty in the systered around France and comprises a mix of Middle Eastern,
tem overall for firms to react to, thus less bullwhip behavior.
African, and European countries. The third sub-block centers
However, breaking down the behavior of final versus inon Italy and comprises Mediterranean and North African
termediate trade by sector and region, it appears that bullpartners.
whip behavior is not entirely extinct. Over the last two years,
The same representations can be carried out for indideclines in intermediates trade in excess of final goods trade
vidual industries. Figures 6–8 provide MSTs of the three
characterized the electronics GVC for most of 2011 and
GVCs industries discussed here: electronics, motor vehicles
2012, but have recently moderated. Intra-EU trade in GVCs
(including motorbikes), and apparel (including footwear).
as a whole has exhibited bullwhip behavior. For the year endFor the electronics industry, the clustering broadly follows
ing in the first quarter of 2013, real intra-EU GVC trade in
the main regional blocks. The network centered around EU
final goods increased by 1.3 percent, while intra-EU GVC
countries comprises mostly European, Middle Eastern, and
trade in intermediates decreased by 5.4 percent.
North African countries. The European trade network links
back to the rest of the world through the United States. MoGVCs’ Impact on EU Slowdown
tor vehicle trade is also very regional in scope, but the number of countries clustered around Europe is higher than in
Trade is likely to slow down most rapidly in countries exportthe case of electronics, for which Asian countries are most
ing to regions where demand has slowed down the most. In
4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
Figure 5. World Trade Network, 2010
Figure 7. World Trade Network, 2010: Passenger Vehicles
NFK
MWI
AFG
UZB
LTU
BLR
UKR
BRA
PRT
BFA PRK
UGA
GIB
SEN
VGB
MAR
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TCA
BGD
BRB
LBY
COK
JAM
CRI
USA
CAN
DOM SLV
RUS
ECU
PER
HMD
Source: Comtrade.
BVT
TMP
CIV
BRB
ATG
Figure 8. World Trade Network, 2010: Apparel and Footwear
Source: Comtrade.
MRT
AND
ASM
TON
PAK
NZL
PER
BGD
PAN
ERI
GHA
BRB
CIV
PYF
LAO
IRQ
IOT
CHL
NFK CCK
SPM
CAN
ARG
IND
TKM
BTN
ISR
BRA
MEX
AIA BEN
YEM
GRL
LBY
LBR
USA
TCA
FLK
HMD
BIH
POL
TUR
GMB
SVN
HRV
HUN
AND
CAF
YUG
BDI
LTU
GNB DEU
FRA
PRT
SVK
CHE
ESP
ITA
TUN
BGR
LVA DNK
EGY
AUT
CYM
SGS
ROM
SYR
COG
NLD RUS
ZAF
COM
BLX
CZE
NER
MLI KGZ
TKL
MKD
ATF
UMI
UKR
GBR
SWE
BLR
ALB
NOR
GUM
SHN
MLT
EST
AZE
IRL
SLE
MOZ
TJK
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AUS
BGR
MKD
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MNP
VEN
IRN
CHN
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DZA
PRK
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DOM
ARE
WSM
CUB
MMR
SAU
SDN MHL
SUR
MUS
BHR
TKM
SGP
CHN
UGA
MNG
TCD
BFA
VGB
TUV
MWI
URY
DJI
GIN QAT
AGO
IDN
NIC
USA
GRD
TCA CCK
HND
SHN
CYM
BHR
SLV
ZAF
TKL
GTM
CAN
ZWE
MEX
ISR
NGA
SPM
CRI
KHM
ASM
VUT
PLW
GUYDMA
NCL AFG
GRD
KIR
TGO
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BMU
ALB
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BIH
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Figure 6. World Trade Network, 2010: Electronics
COK
SLB
TMP
PER
TJK
ATF
SPM
NZL
IDN
KWT
SLE
CYP
NIU
MWI
UGA
OMN
MLI
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VEN
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BLX
MDG
FRA
GRC
LTU
NLD
CHE
DEU
AZE
GRL
POL
HUN
SVK
CZE
SVN
NRU
MHL
KHM
ESH
KNA
AUT
SWE
DNK
NOR
BGD
MSR
BRA
ESP
GIB
AGO
CUB
IOT
BLR
RUS
LKA
SAU
FIN
COK
SYR
EST
LVA
PRT
MAR
CPV
STP
COG
SEN
MDV
GNB
SYC
WLF
PNG
GHA
ETH
GUM
CMR
BRN
JOR
Source: Comtrade.
GRC
Source: Comtrade.
central to the network. The most central EU country for motor vehicles is Germany. Finally for apparel, Italy, France, and
Spain represent more central nodes in the global network.
Dampened demand, which has concentrated in these countries, may explain the subdued growth of apparel GVCs
shown in figure 2.
Ongoing financial market friction in the European
Union, particularly in the euro area, have also greatly increased uncertainty, leading to delays on investment and expenditure decisions, especially regarding durable goods. Increases in uncertainty can have a dampening effect on trade,
as producers scale back investment decisions and inventory
accumulation (as discussed above under the bullwhip effect)
and consumers postpone purchases. Evidence shows that,
even taking traditional determinants of trade into account,
exports to markets experiencing stock market volatility decline by more than expected (Taglioni and Zavacka 2012).
The deterioration of financing conditions in the European Union also pose a problem. Inadequate financing constrains working capital, which affects firms’ investment decisions and limits funds, particularly for small and medium
enterprises, which are the backbone of the EU economy. The
prolonged financial crisis in the European Union likely has
had a significantly negative impact on firms, which in turn has
affected the exports of their foreign suppliers.
Conclusion
The recent slowdown in global merchandise (2010-early
2013) confirms some of the lessons learned during the Great
Recession. Trade in complex products organized in GVCs has
once again been more sensitive to global downturns than has
trade in simple products, particularly for motor vehicles. For
motor vehicles, the start-and-stop nature of incentives in
5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
many countries may have added to the volatility. Conversely,
trade in simpler products appears once again to be more resilient to global downturns. Although evidence is still accumulating, this suggests that the preference often expressed for
countries to go “up the value chain” by specializing in more
and more complex products may need to be qualified. While
diversification is one way to manage risk associated with export portfolios, focusing on simpler products less associated
with GVCs may be another way, and there is likely to be a
tradeoff between these two strategies. Continued monitoring
and research in this area is warranted.
Acknowledgments
The authors would like to thank Gianluca Santoni for the
analysis of networks and accompanying charts, and Guillermo Arenas and Amir Fouad for additional research assistance.
About the Authors
Michael J. Ferrantino and Daria Taglioni are Lead Economist
and Senior Economist, respectively, in the World Bank's International Trade Unit.
Notes
1. Unless otherwise specified, the trade data used in this note
represent the average of import and export data to smooth
out the effect of short-run discrepancies in the two series.
2. World Bank’s Datastream, maintained by DEC.
3. Baldwin (2009) reviews the explanations for the Great
Trade Collapse offered by economists in mid-2009, including
the role of GVCs.
4. Due to lagged reporting of monthly figures at the product
level, data for this analysis are only available through the first
quarter of 2013. Nominal GVC trade has been deflated using
sector-specific import price deflators for the United States,
taken as a rough proxy for the global market.
5. In June 2013, Croatia joined the European Union, becoming the 28th member. However, since this analysis covers the
period up to mid-2013, the analysis includes only the EU-27.
6. See the International Monetary Fund’s World Economic
Outlook (April 2013, http://www.imf.org/external/pubs/ft/
weo/2013/01/).
References
Altomonte, Carlo, Filippo Di Mauro, Gianmarco Ottaviano,
Armando Rungi, and Vincent Vicard. 2012. “Global Value
Chains During the Great Trade Collapse: A Bullwhip Effect?”
European Central Bank Working Paper Series No. 1412.
Baldwin, Richard, ed. 2009. The Great Trade Collapse: Causes, Consequences and Prospects. London: Center for Economic Policy
Research and VoxEU.org.
Escaith, Hubert, Nannette Lindenberg, and Sébastien Miroudot.
2010. “International Supply Chains and Trade Elasticity in
Times of Global Crisis.” Economic Research and Statistics
Division Staff Working Paper ERSD No. 2010-08, World Trade
Organization, Geneva.
O’Rourke, Kevin. 2009. “Collapsing Trade in a Barbie World.”
http://www.irisheconomy.ie/index.php/2009/06/18/collapsingtrade-in-a-barbie-world/.
Sturgeon, Timothy J., and Olga Memedovic. 2011. “Mapping
Global Value Chains: Intermediate Goods Trade and Structural
Change in the World Economy.” United Nations Industrial
Development Organization, Development Policy and Strategic
Research Branch Working Paper 05/2010, Vienna.
Taglioni, Daria, and Veronika Zavacka. 2012. “Innocent Bystanders:
How Foreign Uncertainty Shocks Harm Exporters.” World Bank
Policy Research Working Paper No. WPS 6226, Washington, DC.
Zavacka, Veronika. 2012. “The Bullwhip Effect and the Great Trade
Collapse.” European Bank for Reconstruction and Development Working Paper No. 148.
The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty
Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect
those of the World Bank. The notes are available at: www.worldbank.org/economicpremise.
6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise