Global supply chains may be a thing of the past
Bloomberg
The trend of companies setting up global supply chains seems to have has peaked, and this could hurt the global economy, according to a report from Wells Fargo on Wednesday.
Global trade has been growing at a slow rate over the past few years. The sluggishness has hit advanced and developing economies.
Some of this slowdown appears to reflect deceleration in intermediate inputs used in production, the study said.
Although hard data is still scarce, evidence suggests that fewer companies are breaking up the production process into multiple stages in different companies so they can take advantage of low-cost labor in developing economies.
Although this trend often hurt workers in advanced economies, global supply chains boosted global productivity as technology was put to efficient use in factories throughout the developing world. This led to higher real incomes and living standards in those countries.
A proxy of trade in intermediate production goods, the global exports-to-GDP ratio, increased from 17% in 1995 to 25% prior to the recession. It has stalled over the past three years.
This suggests the global supply chain process, although probably not going in reverse, reached its apex a few years ago, Wells Fargo said. This means weaker global income.
“If the fragmentation of trade has indeed topped out as we suspect, this may be a key factor suppressing growth in productivity and, in turn, keeping a lid on global income growth,” said Jay Bryson and Erik Nelson, economists at Wells Fargo and the authors of the report.
