1. Comment
June 30, 2022updated 13 Jul 2022 10:54am

David Tennant

How emerging markets can prepare for shifts and shocks affecting global production and trade

Global production and trade patterns have altered hugely in the past five years, but emerging markets can make this work to their advantage, writes David Tennant of the University of the West Indies.

Six important shifts in global production and trade patterns have occurred between 2007 and 2017. These are as follows:

  1. Goods-producing value chains have grown less trade intensive, signalling that more production is happening in proximity to major consumer markets.
  2. Services is playing a growing role in trade and, increasingly, service inputs are sourced from international providers.
  3. Trade based on labour cost arbitrage is declining in many goods-producing value chains.
  4. Global value chains (GVCs) are growing more knowledge intensive and are employing a larger share of highly skilled labour.
  5. Value chains are becoming more regionally concentrated.
  6. Digitalisation is increasing and will have varied impacts on global production, with communication technologies likely to promote the growth of GVCs and facilitate offshoring, while robotics and automation could reduce the advantages of production in low-labour-cost emerging economies, possibly leading to backshoring.

Since 2017, the effects of these shifts have been magnified by the ‘triple-P’ exogenous shocks that have severely impacted global production and trade. These are:

  1. The Covid-19 pandemic has caused severe supply chain bottlenecks, with a high level of uncertainty still lingering. Companies now face the challenge of making their supply chains more resilient without weakening their competitiveness. Businesses are under increasing pressure to reduce or even eliminate their dependence on sources that are perceived as risky, while consumers demand lower prices.   
  2. Politics – that is the geopolitical rivalry between the US and China – has heightened the need for strategic autonomy in critical sectors. The US and China’s efforts to curtail each other’s economic and technological capacities and build up their respective spheres of influence is contributing to the shortening and regionalisation of production systems. Other governments, as they seek to avoid being at the mercy of either of the two rivals, are putting pressure on domestic companies to reconfigure their GVCs, including through backshoring and nearshoring.
  3. Vladimir Putin’s invasion of Ukraine has added another layer of complexity and vulnerability to an already strained global production and trade environment. Industries for which critical parts of the supply chain are either produced in or transported through Ukraine or Russia have been severely disrupted. Transportation costs have also increased significantly with the soaring oil and gas prices.

How can emerging market businesses position themselves to exploit profit-making opportunities?

The resilience of GVCs is now paramount, with significant focus being placed on geographical diversification of production sites and suppliers. Companies in the US and the EU have been advised to consider producing a substantial proportion of key goods within the region where they are consumed, and governments are contemplating policies that will promote GVC resilience, particularly in critical sectors of the economy. 

Are there opportunities for companies in closely located emerging markets to benefit from these nearshoring trends – and, if so, what can business leaders do to best position themselves? 

From the shifts highlighted earlier, for economies and businesses to exploit nearshoring opportunities, focus cannot be placed exclusively on the provision of low-cost labour. Where, then, would such focus be better placed?

  1. The recent rapid growth in trade in services suggests great potential in this area, but not all services are created equal, as GVCs are growing more knowledge intensive. Suppliers thus need to conduct market research to ascertain viable opportunities in the provision of services in knowledge-intensive industries.
  2. With major companies prioritising speed to market and proximity to customers, opportunities exist for entrepreneurs that seek out, develop and strengthen regional value chains. 
  3. Opportunities exist for entrepreneurs that adopt sound environmental practices and explore green business opportunities. Green logistics are gaining traction among many companies, as are eco-friendly warehouses, advanced energy management systems, and the use of electric and solar-powered vehicles in supply chains. 
  4. While the current context provides opportunities for nearshoring, it also presents challenges for suppliers to GVCs. This is because global companies are actively reassessing which parts of their value chain to inwardly source. Businesses therefore need to be flexible and agile, continuously monitoring where value is moving in their industry and adapting accordingly. Because lead firms in GVCs increasingly require control, trust and collaboration at all points in the value chain, the core characteristics now required of suppliers are openness, transparency and relationship management.

What is the role of government policy in emerging markets?

The policies adopted by OECD countries with respect to backshoring will have important implications for the opportunities that remain open to emerging markets. The US and UK governments have sought to encourage backshoring by incentivising innovative activities and tacit knowledge creation, and by providing administrative support, targeted public investment in infrastructure, research facilities and worker training schemes. These areas give important insight into the government policies that emerging markets must adopt if they hope to put their entrepreneurs in a position to compete for nearshoring opportunities. 

Entrepreneurs’ ability to capture value from services and knowledge-intensive industries, while being flexible, resilient and environmentally friendly, and building deeper and more collaborative relationships within supply chains, is dependent upon having the capacity to be innovative and to create knowledge, which is in turn dependent on having access to a very highly skilled labour force and to cutting-edge market information that is built on a foundation of solid infrastructure and administrative efficiency.

So what policies should be pursued?

  1. Sound education policies focusing on all levels of education are critically important to the preparation of a workforce that positions economies to capitalise on opportunities. Simply having a literate and numerate workforce with low wages is no longer sufficient.
  2. Government policy with respect to administrative efficiency and provision of reliable and effective physical and technological infrastructure is another critical enabler. Research into the specific requirements of targeted industries should be conducted to guide policymaking in this regard.
  3. Government policy also needs to address the market gaps that exist in relation to the availability of and access to business financing, particularly for new, dynamic companies seeking to capitalise on emerging opportunities. There is a role for governments to encourage and incentivise the venture capital ecosystem. National and regional development banks need to play a strong role in providing financing to companies seeking to develop the capacity to tap into value chain opportunities. 
  4. Finally, governments need to play a critical coordinating role in the development and strengthening of regional value chains, through regional trade agreements that can be designed to encourage small companies to cooperate to reduce transaction costs and benefit from economies of scale.

Topics in this article: , ,