Monday, 11 December 2017

Brexit and supply chain trade

Last week I was invited to talk about supply chain trade and Brexit at Sidley Austin in London. They asked me to focus my intervention on the how the rest of the world, in particular the bigger countries, thinks about Brexit in connection to supply chains. My answer was short: on the whole, not so much.

The simple reason for providing this short answer is straightforward if reasoned from an economic point of view. The figure below shows that most global supply chain trade takes place around three blocs of countries, namely one centered around NAFTA and neighboring countries with the US in the middle, one in Asia with China as the lead country, and one in Europe with Germany as the focal point. The thickness of the lines between countries indicates their  level of supply chain trade. 

As one can see, countries clustered around each of these three core countries are mostly trading within their bloc, not between them. The UK, circled in orange, clearly features inside the EU bloc and doesn’t have as strong trade linkages across the other two non-EU groups of countries. Therefore, from an economic perspective, when the UK leaves the UK, on the whole, other countries outside the European bloc are likely to remain unaffected.

Further research using formal economic models underscores this line of thought. In GDP numbers, countries such as China, Japan, Brazil or Korea may not be so much affected after all. That does not mean, however, that changes in trade may take place in several supply chain industries. A reshuffling of trade is likely to happen for some but would simply not be as big enough of an issue to create a serious dent in their economies.

Source: Santoni and Taglioni (2015) with author's addition. 

However, economics is not everything. Especially regarding Brexit. If reasoned from a political economy point of view outsiders in the rest of the world may be a little bit more concerned, as for example regarding food tariff quotas. But the extent to which they are disturbed as part of these re-negotiations is likely to be related to one thing: market size.

For instance, it’s no surprise that precisely a bigger country like the US vocally oppose the tariff quota plan which is a harbinger for what’s coming. If bigger countries come in the position of negotiating a new trade agreement with the UK, the US and other countries such as China, Korea, Japan conveniently have a lot of market weight on their side. Again, this fact hardly gives bigger counties in the rest of the world a reason to be very much concerned.

By the way, fun-fact of the week: when looking at the figure, can you see in which of the three blocs Ireland is placed? Click on the figure to enlarge. 

Thursday, 5 October 2017

Who Underperforms in Digital Services Trade?

For the past 40 years or so, developments of information and communication technology (ICT) have transformed much of the way producers and consumers connect with each other. ICT reduces costs of distance between producers – and between producers and consumers. This has resulted in the fact that international trade has grown faster than before.

Only a short while ago, it was simply unimaginable to export services. Thanks to new technologies and ICT, services have become tradable and, moreover, have hugely expanded the scope of exports and imports. Nowadays, services represent around 23 percent of total cross-border trade. Moreover, the figure below illustrates that trade in total services has grown faster than trade in goods, particularly in the last 5 years.

Rapid growth rates of trade in services and digital services (1995-2016)
Source: World Development Indicators

However, the figure also shows that ICT finds its strongest effect on digital services trade. Indeed, a more impressive growth rate is observed for digital services. Since 1995, this type of digital flow grew with a factor of more than 5! With the current trend of digitalization, it is very likely that these trade patterns will not just continue but even accelerate.

Ultimately, this will rapidly change the way we perceive globalization. The digital economy is moving fast, and a large part of future trade and growth lies in this digital area. This development will favor the EU as traditionally, it has been a strong exporter in services. 

However, not all countries in the EU capitalize on the digital developments such as Germany and France. This is worrying as these two countries are the two largest economies after Brexit. In large part, Europe’s future growth based on digital services needs to come from these two countries, which includes digital services trade as well.

Moreover, one should bear in mind that digital technologies do more than enabling services to become tradable; services themselves are also becoming more and more digital-intense. The essence of this profound change is that any type of services is increasingly developed with the help of digital assets and means such as big data, internet-of-things and other ICTs.

A new Bertelsmann report performed by ECIPE finds that developing an attractive infrastructure for digital technologies to facilitate digital services trade is not a given. On the contrary, some countries are still lagging behind in some or many of these infrastructural “endowments” which enables digital services trade to happen in the first place.

The endowments specific to digital services trade will both relate to invested capital such as telecom infrastructure, network-access capacities and the skills among the workforce to use digital technologies. These are the factors that will determine a country’s future success in digital services trade and the next frontier of globalization.

The report compares the performance of European and OECD countries, against their own predicted capacity. It therefore enables us to understand if countries over or underperform in cross-border digital services trade over the internet. One takeaway point from this analysis is that precisely Germany and France underperform in digital services trade.

The report also sheds light on the potential for countries to trade digital services indirectly as an embodied item in other industries and sectors using digital services, which extends the scope of trade in digital services even further. Here too, France and Germany could be doing much better.

That begs the question: why?

The conclusion of this study is that while Germany for instance has great potential to increase digital trade in services, and along with that output and jobs connected to digital services, that potential can only be realized in the economy if German firms get better at utilizing existing digital endowments and capabilities, including digital services themselves. 

Tuesday, 23 May 2017

APEC meetings on digital trade

In this presentation that I held in Hanoi for the APEC meetings, I argue that the digital trade can be viewed not only from a trade angle, but also from a competitiveness angle which should therefore not be overlooked. 

The reason is that digital policies will in my view first and foremost increase domestic productivity. Sure, less stringent data policies will also effect trade, inducing countries to reinforce their comparative advantage in digital goods and services, but the way in which we will see this development in our statistics will be through improved productivity. 

Read more here

Monday, 30 January 2017

Data Flows & Servicification

Here are my slides of a talk I gave at the WTO last week. The presentations sets out how data flows are economically important for the servicification of the economy / industries, and how the regulatory environment of data flows looks like today. Have a good read! 

Tuesday, 10 January 2017

Europe's Productivity Problem

There is a long-standing concern about Europe’s productivity performance, a long-term indicator for sustained economic growth. It is a measure that summarizes how effective we use our economic resources such as labour, capital and skills to create an efficient European economy.

Across the developed world, productivity is one of the most important economic catalysers because at some point economic growth through accumulating skills, capital or labour continue to naturally increase at a slower pace than before. From that moment onward, and hence in the long-run, economic growth comes down the ability to use all these factor in an efficient manner.

The concern with productivity is that aggregate productivity numbers describe a picture that is rather bleak. For over a long period of time now, the level of productivity has remained constant in the European Union (EU) as well as other OECD countries, and does not seem to be capable of showing any significant increase.

Using micro-level data of millions of firms in the EU, a recent report by the World Bank confirms this dim picture in the sense that there is very little movement of productivity over time. The figure below shows in blue the productivity developments in Europe’s manufacturing sector. After the global financial crisis (GFC), productivity went somewhat down and continued hovering around a constant level. 

Thursday, 1 December 2016

Data localization in the EU: The threat from inside

As growth in the EU has remained low and the usual channels for recovery such as greater investment or an increase in the working-age population remains far-fetched, the omen is on creating higher productivity to restore economic recovery. Here, the EU finds itself in a difficult situation as it has been caught in a productivity slump now for many years.

Therefore, any measure that would further hurt EU’s productivity would be a reasons for great concern.

One example is the measure of data localization that is now threatened to be on the table again. Data localization concerns stem from the fact that citizens feel that their data is not sufficiently protected when sent and stored abroad. That concern is legitimate and policy makers should be aware of that.

Yet data localization is not the right answer. Although policy makers should strike the right balance between societal needs and economic benefits, data localization has proven to hurt the EU's economy more than it would protect European citizens. A few factors may explain this.

First, data localization and its associated regulations excessively hurts producers and users of data as they significantly hurt EU productivity, which is a measure of the way in which we effectively use our economic resources. Our research has shown that implementing regulations related to data will ultimately render prices higher of consumers and lower economic output.

Second, data localization as such does not provide more security per se. On the contrary, data localization brings together the many data of producers and consumer making it more interesting target for cyber security attacks. Instead, spreading data would be a better option so as to make it more difficult for hackers to target a so-called “honey pot” of data.

Third, spreading the storage of data also let the best suited servers to do the job of providing safe and secured data. Obliging each member state to store its own consumers’ data on its own servers is no recipe for best practise. Some member states are just better equipped to provide good storage of data than others because they are better endowed with the economic necessities of doing so.

Fourth, upfront short-term economic losses would have to incurred by everyone. Our study shows that assuming the existing explicit barriers on internal EU free flow of data are removed, it would result in GDP gains that are estimated to be up to 0.06% of GDP, equivalent to 8 billion euros.

In short, the EU has created a single market in great part to enhance economic wellbeing of its citizens. That has been done through abolishing burdensome regulations that otherwise would inhibit productivity, ultimately hitting on economic growth.

The EU’s future economic growth lies in the digital age in which data flowing across European borders is a crucial factor, just as services, goods, capital and people. Establishing a truly single European market now also demands one for data. 

Thursday, 24 November 2016

A US retreat from TPP: What does services trade tell us?

During last weekend’s summit meeting of Asia-Pacific leaders in Peru, President Obama made the case that failure to sign on to TPP would “undermine our position across the region”. It would mean that if the US would not sign on the trade agreement, China would assert more leadership in the Asia-Pacific and opening a way to negotiate trade rules.

Trade patterns between countries underpin the economic diplomacy behind any potential trade agreement. That too for the TPP. If we focus on one area in which most TPP members have an interest for future trade, namely services, that concern of changing trade leadership may be true.

The picture below shows the so-called Trade Complementarity Index (TCI) for both the US and China with regards to all TPP members (excluding US). This index provides us with an idea how much the exports and imports of the US and China separately match with other TPP members’ needs, or are complementary. A high index means a good “fit” in terms of trade relations and indicates a great potential for a trade agreement between members. 

Note that this picture tells us the trade complementarity of cross-border trade in services or what others have called “digital deliverable services”, which are services that are traded over the Internet. Incidentally, TPP has the standard when it comes to the cross-border flow of data, a factor that reinforces trade in digital services.

The pattern that arises is that initially the gap between the US’s and China’s trade match with other TPP partners in services trade narrowed. However, since 2008 it has widened pointing out that the US has found better trade complementarity with other TPP members. Around that time the US entered the trade talks.

Whether the widening gap is really due to US involvement remains to be seen, but what clearly stands out is that at some point China was as much a good fit for trading services with these TPP partners as the US was.

Yet, already before the US jumped in the negotiation talks, China’s services trade complementarity diminished in the region. This downward trend seems to be of a longer nature, which may be due to China’s regulations in the digital economy over these years. If that’s the case, it puts a serious question whether China can lead the region in terms of services trade, an item the Chinese government is eager to capitalize on.

On the one hand, therefore, in a scenario that the US won’t ratify the trade pact, nothing tells us that this pattern could return. This would reinforce China’s role in the region regarding services trade that can be traded over the internet and indeed may therefore assert its influence to set the rules in this area.

On the other hand, Chinese decline of the trade pattern in digital delivered services is no good recipe to underpin China’s potential future role in the region. If China was serious about fortifying these trade relations, it should start thinking about some of its digital regulatory policies that enable digital services trade.