Exploring the Localization of World Manufacturing
In today's “Factful Friday”, I want to take a first look at the localization of world manufacturing. This is an important part of the more general de-globalization, or peak globalization conversation.
To set the stage, the Figure 1 (left panel) shows that manufacturing as a whole is not broken or sagging. Data from the OCD's TIVA data set (2023 edition) shows global output has grown consistently. There is a clear, but short-lived dip from the Great Trade Collapse (Baldwin 2009), and possibly a slowing of growth, but the main fact is that. Growth in world manufacturing GDP has been undeterred by major shocks. This is an important hint that drivers of localization lies not in manufacturing itself, but rather in its internationalization.
Figure 1
The second set of background facts can be seen in the right panel of Figure 1. It separates out all the manufacturers with at least 2% of the world total. China’s dominate role stands out. With a 38% share that nearly equals the combined shares of the US, Japan, and Germany combined. Also curious, but tangential to the main line of thought, is the fact that Korea and India have surpassed Italy and France in their global manufacturing shares.
The heart of our discussion lies in the next set of charts (Figures 2 to 4), illustrating the trend of manufacturing 'localization'. This term the domestic sourcing of manufacturing. A bit of background is in order.
Figure 2
From the TiVA database, we can find the world’s final demand for manufactured goods. Since supply equals demand, final demand for manufactured goods is also the world’s manufacturing GDP. The database also tells us what share of the world demand is satisfied by local production as opposed to foreign production.
Figure 2 (left panel) shows the stark and perhaps startling fact is that world manufacturing demand has been increasing been satisfied by local production, rather than imports. In short, world manufacturing has been localizing, not globalizing since 2008. The shift, while not dramatic (it falls from 38% to 34%), leaves no doubt. At the global level, manufacturing is de-globalizing.
The next step is to dig into the country composition of this localization. The right panel of Figure 2 shows that China has experienced a remarkable shift from global to local sourcing. Figure 3 shows the same for the US, albeit with a later start date. Japan's trend shows signs of a slowdown, possibly influenced by the pandemic, making it crucial to observe future data for clear conclusions.
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Figure 3
Germany's case is unique (figure 4 right panel). As it is so close to other manufacturing hubs in Euorpe, it’s level of globalisation is higher and declining slower. As for the rest of the world (RoW), the pattern is quite different. The rest of the world (right panel) has seen a trend that remains relatively flat and high.
Putting all this together suggests that the localization of manufacturing is: 1) for real at the global level, and 2) primarily driven by localisation in the largest manufacturing nations.
Figure 4
If all goes to plan, next week's “Factful Friday” will delve deeper into localization.
Stay tuned for more insights into the evolving landscape of global manufacturing!
References
Baldwin, Richard (2009). The Great Trade Collapse: Causes, Consequences, and Prospects. VoxEU.org eBook, November 2009.
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University of St.Gallen
1 年Intriguing data and analysis: just a quick check with Figure 1, China’s share should be 27% rather than 38% as in the text?
Helping firms and governments navigate the complexities of international trade regulation and geopolitics
1 年Very interesting Richard thanks for putting this together. I couldn't help but notice that the shift in China's data as shown in Panel 2 coincided with the adoption of it's Indigenous Innovation Policy, which James McGregor did such an amazing job unpacking in his study for the US Chamber of Commerce, here" https://www.uschamber.com/sites/default/files/documents/files/100728chinareport_0_0.pdf.
Mikel Gazta?aga Cinto
Chief Economist for Asia-Pacific at UNDP
1 年Very interesting, Richard. One key point is that the “localization” of global and Chinese manufacturing has little to do with “deglobalization” if we understand by that the deceleration or even reversal of economic integration across countries. The rise of China’s domestic economy seems a far more plausible explanation.