Are Trade Wars Missing the Point? (Part I)

By Sungjoon Cho [originally posted on the International Economic Law and Policy Blog on February 5, 2019]

The answer might be in the affirmative according to the recent report by McKinsey Global Institute, titled “Globalization in Transition: The Future of Trade and Value Chains.”  Here is a summary of its main findings.

1. “Goods-producing value chains have grown less trade-intensive.”
2. “Services play a growing and undervalued role in global value chains.”
3. “Trade based on labor-cost arbitrage is declining in some value chains.”
4. “Global value chains are growing more knowledge-intensive.”
5. “Value chains are becoming more regional and less global.”

On its face, this report might seem to play the same gloomy tune as “slowbalization.”  However, the McKinsey report does not equate this new phenomenon with the decline of globalization.  On the contrary, it attributes the phenomenon as the economic maturation of emerging economies, such as China, India, Thailand, Malaysia and Indonesia, which are “now consuming more of what they produce.”  By 2030, developing countries’ consumption will exceed a half of global consumption.

The same trend also explains increasing “regionalization” of value chains: developing countries are increasingly producing their own intermediate goods (parts and components), rather than importing them.

Of course, one cannot overemphasize the ever-important role of “non-goods” (services, IP, design, software, branding etc.) in running global value chains.  The current trade statistics might not effectively capture all of such contributions, especially for tax considerations.

Given this new trade reality, are trade wars missing the point?  After all, they mostly concern trade in “goods,” such as steel (ball bearings etc.), aluminum, and soybeans.  Yes, IP issues do matter, but the remedies (retaliation) are still in the form of “tariffs” imposed on “goods.”  One might argue that trade wars are not really about “trade,” but more about “security” or other more grave (geopolitical) concerns.  Then, would trade wars be a misnomer?  Should we label them differently?  Relatedly, some people observe that trade wars are actually a security risk.

Let me discuss possible implications to the WTO that the McKinsey report may bring in the next blog post.