Keun Lee & Isabel Álvarez identify factors that can enhance or undermine the growth-boosting potential of globalisation

By Keun Lee and Isabel Álvarez*

Geopolitics are a major driver of the deglobalisation now being spearheaded by the United States. But there are also economic arguments to be made for bringing supply chains closer to home. So, what are the economic costs of globalisation, and do they outweigh the benefits?

To answer this question, one must start by distinguishing between “backward” and “forward” participation in global value chains (GVCs). Backward participation covers the imported intermediate goods on which a country’s production relies; it is essentially the share of foreign value-added that is incorporated into gross exports. For example, when Vietnam produces and exports Samsung Galaxy phones, it uses a lot of imported high-tech inputs from South Korea and elsewhere. So, its backward-GVC-participation index is very high, and its domestic value-added is rather low.

Forward participation in GVCs refers to the use of a country’s exports as inputs in production by its trade partners – that is, the value-added they contribute to others’ exports. When the US exports automobile parts and components to Mexico for assembly, its forward-GVC-participation index is high.

Recent research suggests that backward GVC participation is more likely to boost a country’s economic growth, whereas forward participation is more likely to undermine it. But beneath this headline lies a lot of nuance.

For starters, forward GVC participation tends to do more harm to economic growth in economies that lack flexibility. One possible reason for this is that, when such economies shift lower-value-added parts of their supply chains elsewhere, they often fail to re-allocate the relevant human and physical resources. So, while it is apparent that multinational corporations have benefited from, say, shifting manufacturing away from the US, it is less clear that the country’s economy has done so. Some groups of workers have certainly suffered.

This might go some way toward explaining why, as another study finds, the negative effects of forward GVC participation depend significantly on which elements of the GVC are offshored. In South Korea’s information-technology (IT) sector, final assembly of goods was largely moved abroad, with research, prototype development, and marketing remaining at home – and growth suffered considerably. But in automobiles – where assembly lines were kept largely within South Korea – forward GVC participation had little negative impact.

The effects of backward GVC participation also vary widely. In Spain, for example, such participation in the pharmaceutical, food, and industrial sectors, as well as aggregate manufacturing, has had a positive effect on overall economic growth, but little positive impact in the case of automobiles. In South Korea, backward GVC participation in most sectors did not make a positive contribution to the country’s economic growth at all, and in some sectors – such as computing and financial services – it has affected economic growth negatively.

Industrial and corporate structures seem to make all the difference here. South Korean industry is dominated by large, diversified conglomerates with vertically integrated value chains. So, more backward linkages in South Korea mean that the foreign intermediate goods it is importing are more likely to be replacing domestically produced goods and value chains. This can result in the loss of certain value chains that used to operate within national borders.

By contrast, Spanish industry is highly specialised and integrated across borders, particularly with neighbouring European countries, rather than vertically. So, the intermediate goods it is importing may well represent more efficient and cost-effective inputs for domestic production.

The pharmaceutical sector illustrates this. The degree of backward GVC linkages in Spanish exports is higher than 30% for this sector, with Spain acting as a “node” for a highly integrated European industry. Spain does not control the highest-value-added segments of this network; rather, it operates close to final-consumer markets. At the same time, however, it boasts strong scientific and technological capabilities, which have enabled it to continue upgrading its domestic firms. From 1995 to 2020, Spain’s pharmaceutical exports grew exponentially.

In the meantime, backward participation has particularly uncertain effects on economic growth in less-developed and developing economies. As Thailand’s automobile sector and Vietnam’s IT sector illustrate, emerging economies tend to have a high degree of backward GVC participation, which can help create jobs. But because they tend to correspond to low domestic value-added, there is a limit to the technological upgrading and productivity gains the sector can achieve. This helps to explain why the so-called middle-income trap has proven so difficult to avoid.

While GVC participation is not universally beneficial, the economic case for withdrawing from GVCs is hardly clear-cut. A nuanced approach would consider which value segments are locally controlled, and what policies can enhance GVC participation’s positive effects. Rather than reject GVCs, perhaps governments should be working to increase the flexibility of their industrial structures or promote an increase in domestic value-added.

Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea, is Professor of Economics at Seoul National University and the author, most recently, of Innovation-Development Detours for Latecomers: Managing Global-Local Interfaces in the De-Globalisation Era (Cambridge University Press, 2024). Isabel Álvarez is Professor of Applied Economics at Universidad Complutense de Madrid. Copyright: Project Syndicate, 2025, and published here with permission.