However, there are some goods or materials we simply cannot produce here. Americans love coffee, but the nation’s climate prohibits us from growing enough to satisfy our habit. Devoting all of Hawaii’s land to coffee cultivation wouldn’t come close.

Further, trade gives the US economy flexibility—in what we consume, produce, and prioritize in the sectors and skills at which we are comparatively skilled. Our workforce has exceptionally skilled scientists, engineers, and managers, which allows many Americans to focus on those jobs while other countries focus on different parts of the production process. The value chain demonstrates how these indirectly related fields contribute to trade-supported jobs, as they provide some of the value that makes trade efficient enough to employ longshoremen, truck drivers, and factory workers.

Policymakers must also recognize how trade can sometimes lead to job loss for domestic workers. Programs like Trade Adjustment Assistance are key aspects of trade policy that support the entire US workforce, and even more can be done to help workers with job and skill training before economic change happens. 

Friend/Near shoring

In the debate over where to make things, there is a push by some to do more “friend-shoring” and “nearshoring.” These phrases refer to prioritizing trade with neighboring countries (nearshoring) or our formal or informal allies (friend-shoring). Both efforts are responses to some of the vulnerabilities found in international trade—from COVID-induced shipping snarls to war.

Friend-shoring helps our supply/value chains be more transparent and, hopefully, reliable. The United States’ existing relationship with friendly nations enables better communication on trade issues and lets investors from both nations feel comfortable financing new ventures. Further, friend-shoring ensures that the value chain rewards our allies instead of our geopolitical and economic competitors.

Alternatively, nearshoring can spur bilateral trade that will employ Americans in both import- and export-heavy sectors. The proximity lowers transportation costs and potential disruptions while simultaneously encouraging cooperation in border regions. For example, Texas exports more than any other state, with Mexico being its primary recipient. Both border regions invest billions in each other’s productive capacity and pursue complementary parts of the value chain (aircraft parts, computer parts, and semiconductors in Texas, and trucks, automotive parts, and finished computers in Mexico).

Of course, policies that change existing supply chains have some tradeoffs along with their benefits. Our friends and neighbors have the capacity to satisfy much of our demands, but they do not have the same competitive advantages as others. A YETI tumbler made in Sweden or Canada would be much more expensive than one made in Thailand.

Trade Policy in Action

The best example of both friend-shoring and nearshoring is the United States-Mexico-Canada Agreement (USMCA). The policy has been largely successful as the two nations are our biggest trading partners—doubling US-Chinese trade—and are our largest export markets.

Beyond the numeric volume of North American trade, what we import and export between each country illustrates the value chain’s symbiotic nature. Looking at US-Mexico trade numbers, we often trade the same products back and forth (machinery, fuel, vehicles, etc.). However, each partner imports and exports specific kinds of goods, enabling each economy to specialize in how they add value. We export machinery like integrated circuits, office machinery, and engines, while we import machinery such as computers, video screens, and broadcasting equipment. American intermediate manufacturers, designers, and raw material extractors contribute their expertise to the products we export to Mexico, and the more finished goods we import enable our workforce to utilize their skills. Put simply, we export materials to Mexico, who builds them into productive products, which lets us add value and create more materials we can export.

To read the full report, click here

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1. Did globalization decline during that period?
2. To what extent did North America and China decouple their supply chains?
3. Did regionalization (“nearshoring”) increase?

In its broadest sense, the term “globalization” captures the interaction of national economies through the movement of people, ideas, capital, technology, goods, and services. Globalization so defined has already crossed a threshold from which it will likely never return, barring a global conflict or a failure to respond adequately to climate change. Indeed, individuals across the world today are more connected than ever before. Consider, for example, that almost two-thirds of the world’s population owns a smartphone, or that the estimated number of international tourists in 2023 exceeds 1 billion. Such human interconnectivity will only increase over time as communication and transportation-related technologies continue to advance. There has also been rapid growth in services trade, and especially in intermediate services.1 When observed through this broad lens, globalization remains deeply rooted and change is one of its enduring characteristics.

Among the many facets of globalization, our focus is on international trade, and on global value chains (GVCs) in particular. The volume of trade flows in goods and services has withstood significant challenges in the past, and stands to do the same in the future, even as patterns of trade flows change. Already, many of the negative impacts of the COVID-19 pandemic and increased geopolitical tensions have been met with creative workarounds, demonstrating the resilience of international trade and global supply networks. Changes in the patterns of cross-border trade in goods and services do not indicate a decline in globalization. Our quantitative analysis provides strong evidence that value-added trade supporting the production of goods and services did not recede during 2000-2021, nor was there evidence of a global trend toward reshoring. Instead, the evidence suggests that 2021 was a high mark for the global exchange of goods and services as measured by international value-added production linkages. Regarding the question of whether there has been a decoupling between North America and China, our analysis finds no evidence of decoupling of value-added production linkages. In fact, we find that China and North America increased their value-added production linkages between 2017 and 2021, implying significantly greater linkages than those that could be estimated using gross trade statistics.

Our analysis utilizes the GVC Indicators database created by the University of International Business and Economics (UIBE) in Beijing. The GVC Indicators database breaks down value added into that which flows through GVCs, and that which does not.2 See the appendix for a description of the data and methodology. In the charts that follow, the term “forward GVC participation” captures the degree to which a country’s domestic value added is exported through global value chains. “Backward GVC participation” captures the extent to which a country’s final production includes value added that is imported from global value chains. For each measurement, a higher percentage indicates greater relative importance of value added that is imported or exported through GVCs compared to value added sourced domestically. Thus, higher levels of backward and forward GVC participation indicate greater global integration of production networks.

We concentrate on the world’s three major trading entities: China, the European Union (EU), and North America, defined as the three nations in the USMCA (Canada, Mexico, and the United States). Our calculations for the EU in all years include GVC activity for the 27 member countries as of 2021, and therefore exclude the United Kingdom. Value added originating from China, the EU, and North America accounted for 54% of worldwide value added involved in GVCs in 2021, and final production by the three entities accounted for 57% of GVC-involved final production. Other significant GVC trading nations in 2021 which are not included in our main analysis include India, Japan, Russia, and the United Kingdom.3 In our analysis, we address reshoring within North America and the EU while considering how each bloc’s linkages with China have evolved over time.

To read the full paper, see below. 

Guy Erb is a former U.S. trade policy official and investment banker.
Scott Sommers is a PhD student in Economics at the University of Minnesota.

To read the full paper, please click here.

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