3.1. International trade slowdown
International trade was the most important aspect of global economic integration. Since the 1960s, the share of foreign trade in the world economy steadily increased until the Global Financial Crisis (GFC). With an average share of 24% in 1960, it exceeded half of world GDP in early XX and reached a historic high of 61% in 2008 (World Bank). In 2009, GFC stopped the rapid growth of international trade. In the two years following the crisis, the volume of foreign trade was temporarily raised, but then further decreased, so that even a decade later, it has not reached the level from the previous period.
The current slowdown in foreign trade has a few specifics that indicate serious, structural changes in international trade. Previous periodic reductions in foreign trade were short-lived, usually one to three years. The current downtrend has been ongoing for a decade.
Further, the causes of the slowdown in trade are generally cyclical in nature, such as weakening of export economies or falling prices in the international export market. The current one cannot be explained by such cyclical factors, as indicated by the results of several empirical studies on the current trade slowdown. Constantinescu, Mattoo and Ruta (2015) find that only half of the decrease in international trade volume can be explained by the weakening of economic activity, that is, a decrease in GDP. Lewis and Monarch (2016) tested a possibility that the decline in trade volume was a reflection of a weakness in certain sectors of the world economy. Their model analyzed imports as a function of consumption, real exchange rates, and investment on the sample of several major economies. The results also show that the decline cannot generally be explained by the weakening of economies. The econometric model set by Boz, Bussière and Marsilli (2015) showed that common cyclical factors such as falling prices, declining demand and imports, all together make up less than a half of the sources of trade decline. The results of these three studies together capture all potential cyclical causes of international trade decline. They show that cyclical factors have a role to play, but neither individually nor collectively explain much of this trend.
A phenomenon that could explain a significant part of the process of weakening global trade is the sudden rise of protectionism, which is a third specific of the current trade trend. It particularly points to deeper changes in the world economy. Growing tendency to protect national economies from the environment rather than integrate into it reflects an important structural change in the international trade system. The weakening of economic activity during the GFC initiated a number of restrictive trade measures of developed and developing economies. A number of measures such as increasing tariffs, imposing quantitative restrictions and tightening customs rules escalated in the period 2008-2018. The World Trade Organization (WTO) states the following as a general feature of foreign trade: „During this period trade tensions continued to dominate the headlines and added to the uncertainty surrounding international trade and the world economy. The previous period saw a record level of new restrictive measures introduced“ (WTO, 2019, p. 2). Import restrictions imposed between October 2017 and May 2019 covered over $ 800 billion (WTO, 2019, p. 23). The coverage of new restrictive import measures introduced by the G20 economies during this period is three and a half times higher than in 2012, since the WTO calculates the coverage of trade restrictions (WTO, 2019, p. 2). According to the WTO, the total number of new trade-restrictive measures introduced in those seven months was 38. According to the Global Trade Alert (GTA), which includes trade remedies, the number of these measures is far greater. According to the GTA, the number of new restrictive measures is more than 1,000 each year or more than 2,000 measures in 2018.
The expansion of foreign trade restrictions began after the GFC. Several key trade routes have been suspended by a series of restrictive measures as early as 2012-2014. These are Russia's trade restrictions on the EU, North America and Latin America, then the sanctions imposed by the EU on Russia, in response to the annexation of Crimea. All of these restrictions are still in place.
The culmination of this trend was a trade war between the US and China, which marked the international trade in 2018 and 2019. The new policy of US President Donald Trump meant strengthening domestic production by imposing extensive import restrictions. Tariffs for solar panels, washing machines, steel, and aluminum were among the first measures that cost the Chinese economy millions, although they also affected other exporters of these products to the US market. A series of import restrictions aimed directly against China followed. Responding to direct bans on Chinese goods, there was a Chinese restriction on imports of US goods. China has imposed high tariffs (15-25%) on imports of US cars, aluminum, aircraft, pork, soybeans, fruits, etc.
The trade war of the two largest economies of the world has significantly affected the overall volume of international trade and contributed to a general loss of confidence in international institutions and liberal principles of the world economy. Yet, Trump's protectionist policies are merely a superficial reflection of a deeper and longer structural process of changing the direction of global integration.
At the end of 2019, the countries most affected by the restrictions were China, with over 6,000 restrictions, Germany with more than 5,000, followed by Italy, the USA, France, the United Kingdom, the Republic of Korea, Spain and the Netherlands with about 4,000 restrictive measures (GTA). Trade restrictions are one of the causes of the weakening of foreign trade, not only by direct losses, but rather the change of the entire trading environment in the world economy. The marginalization of international trade rules undermines the authority and role of the WTO, on which the global trade system is based. Passive role of international institutions in these cases, in some opinions, points to the need to reorganize the WTO. According to Jacoby (2018), a redesign of the International Monetary Fund (IMF), the World Bank, the G20, the WTO and "all other institutions responsible for monitoring trade and assuming the responsibility of actors" is necessary (Jacoby, 2018, p. 60). Evenett (2019, p. 15) points out that the WTO tends to mitigate the state of trade restrictions in its reports, by not including the mentioned trade remedies in harmful restrictions since 2017. The weakness and crisis of the WTO is particularly highlighted by the fact that the United Nations in 2019 adopted the Convention on International Settlement Agreements (Singapore Convention on Mediation), and thus established a parallel model for trade dispute settlement, which is already under the authority of the WTO. This UN act is probably not an act of deliberately devaluing the World Trade Organization, but a reflection of the real need to end concrete disputes.
3.2. Reduction in foreign direct investment
As in the case of international trade, the growth in foreign direct investment, uninterrupted over two decades, halved during the GFC. For the three years (2016-2019), the flows of international capital were decreasing sharper than international trade. FDI experienced the fastest growth in the 1990s, due to the opening of many new markets in the former Eastern Bloc. The FDI volume increased at a rate of over 20% per year (UNCTAD). Since the 2001 recession in developed economies due to the GFC, average FDI growth was 8%, and in the period after the WFC, only 1%. According to data presented in the annual UNCTAD reports for 2018 and 2019, FDI in some regions was at a record low. FDI decreased by 23% in 2017 and an additional 13% in 2018, falling to less than $1300 billion, which is the lowest level of FDI since the GFC.
Several early abrupt reductions in FDI, as in the case of trade, were the result of the economic recession in the European Union and the USA. The decline in economic activity in 2001 and 2007-2009 was cyclical, and, as expected, FDI quickly reached and exceeded the previous level after the emergence of large economies from the crisis. The current decline in foreign investment is not the result of any crisis. Economic growth has slowed globally, but it is still growth, and no major economy is in recession. Thus, deeper causes of FDI fall must also be sought, and the starting point is to determine the origin of FDI that is largely adding to the downward trend. Developed countries have a huge share in the total FDI inflow, so changes in investment flows in developed countries show almost identical changes as in global flows. The inward FDI in developed countries have fallen by 27% in 2018 (UNCTAD, 2019a, p. 2) and dropped to the level of 15 years ago. The inflow of FDI into Europe is halved, with some countries registering a negative inflow as a result of the withdrawal of investment funds by US multinational companies (MNC). Outward investment from developed countries, with a 40% decline in 2018, plays a key role in the overall FDI outflow decline. Their share in total investment dropped to 55%, the lowest share ever recorded (UNCTAD, 2019a, pp. 2-3). Investment originating in developing countries has also been reduced, but to a much lesser extent, by 10%. These data shall be used later for explaining China's role in global capital flows.
Temporary return of capital to foreign markets in the aftermath of the GFC indicates that there were still profitable opportunities, and secondly, that foreign investors partly regained confidence in the stability of the world economy, or at least in the stability of the economies of the countries where they invested. The decline that followed indicates that at least one of these incentives for attracting FDI has changed.
After several decades of intensive capital investments, the global financial market reached saturation. Profitable opportunities for new investments were simply exhausted. In addition, due to the “law of convergence”, the openness and connectivity of globalized economies led to equalization of labor prices and production conditions in developed and developing countries. Globalization itself has provided rise of labor prices in the most attractive destinations of foreign capital - the countries of East and Southeast Asia, thereby depriving them of a key aspect of attraction for FDI. Both of these phenomena are "natural" limitations of globalization, but both are of relatively lasting character.
Trust in investment security, as another important condition for FDI, is severely disrupted by restrictive policies of large economies. The number and scope of restrictive measures in the area of foreign investment have a pronounced upward trend since the WFC. Restrictive measures include a number of instruments, which have negative effects on FDI in different ways. The most direct measures concern the restriction or prohibition of the inflow of foreign investment in certain economic sectors, but there are also restrictions on outward investment in certain foreign countries or sectors. The states that are home of the largest MNC are intensifying their efforts to reduce and discourage capital outflows. Such measures have been adopted by the Committee on Foreign Investment of the USA, the European Commission, Germany, the United Kingdom, Italy, as well as China.
The total number of restrictive foreign investment measures introduced in 2018 alone is 418 (GTA). According to UNCTAD (2019), the share of restrictive measures in total measures related to FDI increased from 10% to 34% in 2003-2018, that is, measures contributing to FDI liberalization were reduced from 90% to 66%. This is the largest restriction share since 2003. In addition, in 2018, 22 business projects that had been started with foreign capital were blocked, which is twice as high as in 2017 (Hanemann and Lysenko, 2019, p. 15).
FDI are generally considered positive for the economy of a host country, so restrictions in this volume are unexpected. Investment restraints are common in national security sectors and often in the energy sector. However, since the WFC the number of protected sectors has increased encompassing some of the most profitable services and products. Most new measures relate to investment restrictions in the fields of telecommunications, the Internet, production of electrical components (semiconductors, diodes, and transistors), robotics, artificial intelligence, IT systems used in key industries, etc. (UNCTAD, 2019b).
Particularly frequent is the introduction of screening, mandatory assessment of the inflow of foreign investment by an authorized agency. This mechanism was introduced by 24 countries, which together account for more than a half of the world's cumulative FDI. Also, more than 40 amendments to the list of sectors or economic activities subject to screening were adopted in the 2018 and 2019.
Direct impact of new restrictions on the total volume of FDI cannot be quantified. They are, to a certain extent, a direct cause of the decline in FDI, but more importantly they create unfavorable investment climate, which in the coming period will contribute to further disinvestment.
3.3. Deconstruction of global value chains
One of the key aspects of modern globalization is the international segmentation of production processes. The goal and driver of international production segmentation was to achieve the most cost-effective structure for each stage of the production process. This is the core activity of modern MNC. Almost all exporting companies, with or without the participation of foreign capital, are parts of global value chains (GVC), also called production chains or supply chains. In its broadest form, globalized production is seen as a global production network, grouping of interconnected but geographically dispersed production units. Global production networks have become a dominant feature of the modern world economy. One third of total international trade takes place between global corporations and another third within their GVC, meaning that most global exchanges take place within global manufacturing networks.
The flow of inputs within GVC cannot be measured by even the most accurate foreign trade data for a given group of products between countries involved in its production. Namely, statistics always show the final value of an exported product, not considering that the value of import of components for that product is only slightly lower (for added value) than the value of the exported product (Stanojević, Kotlica, 2018, p. 26). For more complex final products, it is not uncommon for a product to cross several borders or the same border several times at different stages of production. Trade statistics, at each transit, record the entire value of the product. External trade data have thus become over-dimensioned. Instead of this data, the indicator of economic integration in international production is foreign value added (FVA). Foreign value added is the value of an imported semi-finished product that is ready for further processing and export. This data is collected by the OECD (Trade in Value Added Database - TiVA), WIOD (World Input-Output Database) and UNCTAD (Eora Global Value Chain Database) using partially different methods. In this analysis, we have used UNCTAD data as it relates to the most recent period.
From 1990 to 2010, the rise of share of FVA in exports was gradual - 7 percentage points in 20 years, but steady, without interruptions (UNCTAD, 2018, p. 22). FVA, like most economic indicators, fell sharply in 2008 and 2009 due to the WFC. As in the case of foreign trade and investment, there was a temporary, moderate recovery of FVA, and then, for no apparent reason, it has been declining since 2015 in a large number of countries. FVA was globally reduced in 10 years from 31% in 2008 to 27% in 2018. UNCTAD (2019b, p. 2) estimates that stagnation or a slight decline will continue in the coming years.
The host countries of the largest multinational companies, the US and the UK, are also facing a steady decline in FVA, as does Germany, whose international production is mainly taking place in the European Union's neighborhood, with negligible share in Asian markets. In the years after GFC, FVA share in US exports decreased from 12 to 9.5%, in the UK from 33% to 26%, in Germany from 52% to 43%, in France from 38% to 33% (author’s calculation).
The shortening of GVC was caused by the same causes as the decline in trade and FDI. Multinational companies are retreating into national contexts partly because of the global market volatility, caused by the GFC, and partly due to the mentioned changed conditions, which no longer provide extreme profits. With the convergence of international input prices, too long GVC no longer justifies high transportation costs. Extraterritorial production may still have justification in lower taxes or geographic proximity to the market, as classical motives, but global value chains have actually become regional value chains.