Isolating China: Deglobalisation and its Impact on Global Value Chains

Published date01 November 2022
Date01 November 2022
Subject MatterArticles
Isolating China:
Deglobalisation and
its Impact on Global
Value Chains
Badri Narayanan Gopalakrishnan1,
Sumathi Lalapet Chakravarthy1,
Tavishi Tewary2 and Vranda Jain2
As global value chains (GVCs) account for 80% of global trade, the revival of pro-
tectionism, amidst the looming trade tensions between United States and other
trading partners, particularly China will dampen the international input–output
relations. By using a multi-regional and multi-sectoral dynamic computable gen-
eral equilibrium model, this study analyses China driven GVCs. The study explores
the impact of tariff change on China and its major trading partners on economic
variables like consumption, investment, government expenditure, exports and
imports and sectors like electronic goods, coal, crude oil and machine equipment
for the five-year period, that is, 2021–2025. GTAP 10 database has been used. The
findings of the study suggest that although China’s dominance may diminish, yet it
would continue to be one of the prominent players in GVC. Further, based on the
results, the global economy can look forward to fragmented and locally oriented
supply chains. At the sectoral level, the shorter supply chains would lead a further
disjoint global trade system with a wider range of suppliers for similar products
and hence increased regionalisation of production.
JEL Codes: F10, F17, F60, F16, D58
Globalisation, tariffs, global value chains, China, trade, CGE model
1 Innite Sum Modelling, Seattle, WC, United States.
2 Jaipuria Institute of Management Noida, Uttar Pradesh, India.
Corresponding author:
Tavishi Tewary, Jaipuria Institute of Management Noida, Noida, Uttar Pradesh 201309, India.
Foreign Trade Review
57(4) 390–407, 2022
© 2021 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325211045463
Gopalakrishnan et al. 391
The Great Recession of 2008–2009 culminated as a turning point of global pro-
tectionism (Baldwin & Evenett, 2009; Constantinescu et al., 2020), with visible
decline in global trade and gradual movements away from trade integration. This
was further accentuated by United Kingdom’s decision to exit European Union
(EU). In the recent past, the ‘America First’ economics undertaken by US
President, Mr Donald Trump has initiated a protectionist spiral (Fajgelbaum
et al., 2020; Li & Whalley, 2020). By extending restrictions on certain product
categories, sectors and countries, United States resorted to one of the most
exhaustive-cum-restrictive trade policies in the last seven decades. The surge in
import tariffs from 2.6% to 17% (around 12.6% of US annual imports during
2017) led to retaliatory tariffs by trade partners affecting close to 6.2% of US
annual exports during the same period (Lau & Tang, 2018). In a recent study,
Evenett (2019) has recapitulated that not just the advanced countries, developing
countries too have started resorting to trade barriers, leading to weakening of
global trade (Robinson & Thierfelder, 2019). As in the past, the argument for-
warded for protectionism emanates from the justification to rectify balance of
payment disparities, protect infant and import competing industries, boost
domestic employment and incorporate it as a tool for nation building (Evenett,
2014; George, 1949). On the contrary, the discourse by the proponents of free
trade leads us to believe that protectionism has wide and far-reaching economic
consequences (Osabouhien et al., 2014). It inhibits the purchasing power and
availability of imported articles for consumers. Firms have to source inputs from
relatively expensive markets and eventually pass on the increased trade cost as
higher prices to consumers. This dampens domestic consumption and invest-
ment, and creates spillover effect on productivity, distribution and growth (Amiti
et al., 2019; Grossman & Helpman, 1991; Rose, 2019; Stiglitz, 2002). The sub-
sequent terms of trade effect may have severe consequences for low-income
countries, whose reliance on technology and research and development imports
from advanced nations are high (Freund et al., 2018).
Owing to the involvement of bigger and advanced nations and the magnitude
and breadth of tariff imposition, leading to an anti-globalisation rhetoric, the
current scenario is being viewed as unprecedented in the post-war era and has
therefore invoked greater interest amongst academicians, researchers and policy-
makers. Further evidences, for example, the study by Constantinescu et al. (2015),
reporting a decline in income elasticity of trade over the long run, evoke wider
discussions. Another recent development catching attention is the gradual shift
from traditional trade policy instruments towards newly introduced murky protec-
tionist measures (Cernat & Madsen, 2011)—often exercised in the form of bail-
outs and stimulus packages. Though these measures, in principle, do not violate
World Trade Organisation obligations, they expose trading partners to the risk of
beggar-thy-neighbour trade policies. This has been observed in the tapering off
of new protectionist measures by G20 nations (Hoda, 2016).) and further substan-
tiated by the Global Trade Alert report (Evenett & Fritz, 2017). Import tariff,
however, is one of the persistent resorts to indulge in protectionism.

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