Manufacturing Localization, TechnologyBackfire, and Economic De-globalization

Qu Shenning*, and Yang Danhui

Institute of Industrial Economics (IIE), Chinese Academy of Social Sciences (CASS), Beijing, China

Abstract: Since the global financial crisis, global value chain (GVC) have beencontracting amid the trend toward economic de-globalization. With GVC participation ratein mind as the core indicator of economic de-globalization, in this paper we create a multicountrygeneral equilibrium model to characterize the mechanism by which manufacturinglocalization affects GVC participation rate. Our theoretical derivation shows that changesin the local manufacturing status of final products in various countries directly influence theGVC participation rate of those countries. When the local proportion of a country’s finalproducts reaches a certain level, rising local proportion of intermediate inputs, economicgrowth below the world average level, and technology progress all cause the country’s GVCparticipation rate to decline, giving rise to de-globalization at the manufacturing and tradelevels. We further provide a comprehensive interpretation based on an empirical test of thedeep-seated causes of economic de-globalization in relation to such economic phenomenaas increasing trade concentration, the “technology backlash” effect of the new industrialrevolution, and economic growth driven by the combined forces of trade protectionism andquantitative easing.

Keywords: Manufacturing localization, technology backfire, new industrial revolution,

JEL Classification Code: E23, F41, L16

DOI: 10.19602/j.chinaeconomist.2023.01.04