A new study from the European Central Bank (ECB) finds that economies that participate in global value chains more than their trading partners also have larger current account surpluses or smaller current account deficits.
This finding has important policy implications, the ECB said, as it “…implies that persistent deviations from a balanced current account do not, as is often argued, reflect domestic distortions, but are in fact welfare-maximizing outcomes against the background of differences in economies’ competitiveness. As a consequence, policies aimed at narrowing global imbalances should focus on measures that facilitate participation in global value chains.”
However, an economy’s participation in global value chains only affects its current account balance if the former changes relative to that in the rest of the world, the bank concluded.
After the global financial crisis, trade surpluses and deficits declined sharply; G20 economies saw their average absolute current account balance relative to GDP fall to 3.9% in 2015 from 4.7% in 2007. Also, rebalancing in account balances after the crisis was seen in advanced and emerging economies, the ECB said.
In the past couple of years, current account balances in some countries, such as the U.S. and China, have begun to widen again, with the U.S.’s deficit growing and China’s surplus increasing, for instance, though global trade imbalances have remained fairly stable thanks to lower commodity prices, the bank said.
More recently, analysts have detected a slowdown in the prior rise of global value chains. Possible explanations include reductions in the length of companies’ supply chains aimed at improving risk management, the adoption of local content requirements and other regulations, and changes in demand, the ECB explained. Moreover, “the observed slowdown in the fragmentation of production across borders has been a global phenomenon and is unlikely to impact global current account configurations.”
Other findings from the ECB paper:
• Evidence suggests that the impact of global value chain participation on current account balances is economically significant. For example, about a quarter of the large U.S. current account deficit during the run-up to the global financial crisis that cannot be explained by other fundamentals can be explained by its limited relative participation in global value chains.
• Participation in global value chains appears to boost growth, amplify cross-country monetary policy spillovers and render an economy’s income distribution more uneven.
– Nicholas Stern, senior editor