 Hello, my name is Chrissie Giance. I'm 28 years old and I'm from the Netherlands. Ciao, my name is Antonio Marci. I am 29 years old and I am from Italy. Ni hao. My name is Indio Chi. I'm 32 years old and I'm from China. My work studies monetary policy in economies with domestic and international production chains. I'm interested in the interaction between monetary policy and financial stability. My research is on the role of information choice in macroeconomics and finance. I'm interested in finance and development. I do research in banking and copy finance. My work is about the policies of the European Central Bank which directly affect the risk premium on the sovereign debt of peripheral countries. I study how long-term investors change their bond holdings after a shift in regulation and how these changes subsequently affected interest rates. I found that savers choose to get more information about which bank or product they should use for their saving in recessions. My work explores how golden preferences determine financial regulation focusing in particular on the role of political connections in this process. Well, welcome indeed also to our young economists, the finalists of this year's Young Economist competition. As in previous years, each of the PhD students which you just saw in the video prepared a research paper and a poster which you can find on our website. Forum participants are invited to vote on this research on the platform for which details have been announced via email. The voting will conclude at 8 a.m. tomorrow and the winner will be awarded a prize of €10,000 at the end of the forum. Now, let me say two words about the programme. In a couple of moments, we will start the sessions on the implications of fundamental global changes for central banks. We will conclude the day with a discussion on issues relevant for the ECB's monetary policy strategy review, such as central banks inflation objective, structural forces and communication. Tomorrow, we will then turn to the topic of microeconomic stabilization frameworks with papers focusing on monetary policy and fiscal policy and we'll discuss monetary policy instruments and financial stability topics which are also highly relevant to the ongoing strategy review. This will be followed by the policy panel and the award ceremony for the Young Economist competition. By now, I'm sure all of you are familiar with online events, but nevertheless, I'll take the opportunity to briefly explain how the virtual forum will work today and tomorrow. First of all, all sessions and all panels will be on the record and webcast live. We encourage all of you to join the social media conversation and follow us on Twitter using the hashtag ECB Forum. Our participants will be able to interact live with our speakers during the Q&A sessions at the end of every session and paper presentation. I would just request that participants overall keep any questions to 90 seconds as time overall will be rather limited. A word on tomorrow's policy panel where forum participants can submit questions in advance via the email address they have received. But also, we'd like to encourage all of you who are following us to submit questions and comments for the policy panel via Twitter. And now, time to give the floor to the chair of our first session, Luiz de Gindos, vice president of the ECB. Vice president, the floor is yours. Thank you very much, Thierry. Good morning, good afternoon or good evening depending on where you are. To all the participants and viewers of the 2020 edition of the ECB Forum on Central Banking, I am very pleased to chair the first session of the conference today. But before starting, let me, if I may, give some housekeeping instructions and guidelines. We'll have, you know, first of all, you know, the presentation of the paper. The presenter will have, you know, 20 minutes in order to introduce his paper. And after that, the paper will be discussed by another person that will have, you know, available 10 minutes. Finally, we'll open, you know, the floor to the audience for comments, questions. And as Thierry has indicated, you know, I would ask you to limit your interventions to 90 seconds. So without any further delay, we can start with the first session that is going to be dedicated to the implications of fundamental global changes for central banks. Globalization or deglobalization, should it have started to reverse, is a key structural change in the world economy and the first topic for discussion today. Professor Paul Antras from Harvard University will present the first paper entitled deglobalization, global value change in the post COVID-19 age. For that, we scheduled 20 minutes as I have said before. So Paul, you have the floor. Greetings from Boston. It's great to be here. It's an honor to be here. And to speak about deglobalization. Now, let me give you a roadmap of what I want to do. Basically three main objectives. I want to first review recent trends in the global economy and assess whether we might have entered a new phase of deglobalization and whether global value change might be retrenching. Second, I want to study trade and GBC dynamics during the COVID-19 health crisis. And then finally, I want to speculate on the future of globalization and of global value change. Now, this builds on a background paper which has been made available. It's a fairly long paper. I cannot cover it all. What I'm going to do is I'm going to structure my presentation around 10 points that I think are the salient points of the paper. Now, the first couple of points are about facts, about deglobalization facts. And the first point I want to make is that I think we should be at this point in time, at least speaking more about globalization to use the economist's term than deglobalization. In the paper, I look at a variety of measures of globalization and certainly most, if not all of them have shown a decline in their growth, but not a decline in their levels. Take the left panel on the slide, which is showing you a standard measure of globalization, which is the world trade over world GDP ratio. That ratio grew dramatically in the 80s, 90s and early 2000s. And since then, it's been pretty much stagnant around 30%. If we look at measures of GBC activity, for instance, the percentage of world trade that is accounted for by global value chains, that shows a very similar pattern, very fast increase in the 80s, 90s and early 2000s and stagnation and even perhaps a mild decline in recent years. In the paper, I look at migration, capital flows, multinational activity. You could look at a bunch of measures, and some have declined a bit more than others, but I think it's clear that we're, you know, more in an era of globalization than of deglobalization. The second point I want to make is that at some level, globalization was inevitable. What do I mean by that? Well, if you plot, like I'm plotting here, the ratio of world trade to world GDP, this is a variable that one would expect cannot possibly grow forever. In plain words or, you know, somewhat imprecisely, but in plain words, these are variables that have natural upper bounds. They cannot be higher than 100%. So it's natural that even though you might go through phases of increased globalization, things should taper off sooner or later, okay? So again, one, you know, one cannot possibly have extrapolated from the 80s, 90s and 2000s and expect this to have continued over time. Now that obviously begs the question of, A, what drove that hyperglobalization or extraordinary growth in the world trade to world GDP ratio in the 80s, 90s and 2000s, and B, to what extent are these forces not at play anymore? Are they at less play? Or might it actually work in reverse to actually lead to a true process of deglobalization? So that brings me to the third point, which is assessing or discussing the drivers of hyperglobalization. In that respect, I would distinguish three main drivers. On the one hand, there was a technological driver, which was the information and communication technology revolution. There was a policy driver, which was the acceleration in the signing of multilateral and especially regional trade agreements. And third, there was politics, political developments that brought about a remarkable increase in the share of the world labor force that was employable from the point of view of firms in the West and the capitalist West. So this forces worked in unison and basically they increased the demand by firms in the West of labor in less developed economies because they could communicate more easily with them, transmit information, design, et cetera. And at the same time, they could ship goods from different parts of the globe at much lower cost than before because of lower trade barriers. And at the same time that this demand for foreign labor was increasing, its supply was massively increasing with especially China coming out of socialism, Eastern Europe coming out of communism. So this forces worked together to generate a very, very marked increase in the disintegration of production across borders. Now that raises the issue of, have these drivers not worked anymore and might they work in reverse? So let me move to point four, which is gonna focus on technological factors. Points four and five are gonna focus on technological factors. So the fourth point I wanna make, perhaps a bit controversially, is that I do think that technology will continue to be a complement of trade. It's gonna continue to foster globalization. Why do I believe that on the one hand, because the ICT revolution very much did, and although then we might be reaching, diminishing returns on certain technologies that were associated with the ICT revolution. There are many other technologies that are coming out now that I think have the potential to foster further globalization. What do I have in mind? I have in mind automation, industrial robots, 3D printing, but also digital technologies and open distributed ledgers such as blockchain. Now some of you might be thinking, well, that doesn't sound right. When we think about industrial robots, automation, 3D printing much has been written about the fact that these are technologies that unlike the ICT revolution are actually going to substitute for trade. They're gonna make it less necessary for firms in the West to hire labor abroad because they can get robots to do that without paying the high wages in the West. Now I would argue that this is a conceptually, it's not entirely clear that that may be the case. And more importantly, empirically, it doesn't seem to be the case. So conceptually, the main issue here to remember is that robots do not produce things out of thin air. They need parts, components, raw materials to assemble goods. And to the extent that those materials are gonna continue to come from abroad, what might happen, conceptually, is that robotization, automation by increasing firm productivity might increase firm scale, might increase demand for inputs and might actually increase demand for foreign imported intermediate inputs. Empirically, that's exactly what we've seen. There's work by the World Bank, more recent work by folks at Oxford that has shown that indeed firms that automate it in industries where automation has been higher, if anything, we tend to observe increases in trade flows, not decreases. And that's why I believe that if you coupled this with the more natural fact that digital technologies, digital platforms, blockchain are likely to be, have a positive effect on trade, I am actually quite optimistic about the future of how technology is gonna shape trade. The fifth point I wanna make is more focused on one aspect of technology that is particularly relevant for global value change, which is that in setting up global value change, firms incur very large fixed costs. They need to find suppliers, they need to build up plans by machinery. There's a bunch of upfront investments that are associated with the creation of global value change. As a result, firms rationalize those investments or their global value change when they set them up. Even large companies don't have dozens of suppliers that provide the same type of good. So the existence of scale economies is quite important for understanding why global sourcing strategies, global value chain strategies are fairly, fairly limited, okay? There's not a lot of players there. In addition, those fixed costs are not only large, but they tend to be sunk in nature. Once I've set up a production plan, if I were to wanna leave a country, it's very hard to recoup a big chunk of that investment, let alone the cause of finding suppliers, which are, by their natural nature, sunk. Because these investments are sunk, this has two very important implications. First, the exacted decision of a firm of whether they want to start off shoring, say in China or not, is very different from the exposed decision of whether they wanna pull out from that country. Because once they've invested, they basically would lose that initial investment where they wanna reshor, and at the same time, reshoring is gonna entail high fixed costs to create the new plant at home and find new suppliers at home. So the sunk nature of investments creates this stickiness that makes GVCs or the geography of GVC not to react very fast to shocks to the world economy. Relatedly, because of the sunk nature of shocks, sorry, of global value chains, only shocks that are perceived to be persistent are likely to generate significant relocation of GVCs. You can have very, very significant temporary shocks, which COVID might be an example of, but as long as the shocks are perceived to be temporary, you might not expect a lot of relocation following from them. Now, this is conceptually, I guess, empirically, there is evidence of this stickiness. There's a bunch of papers that were written right after the Great Recession. We had a very large trade collapse. You have data here from France that shows you a very marked decline in trade flows around right after the Great Recession, late 2008, early 2009. But most of that adjustment was at what we call the intensive margin. Trade relationships were not broken. There was no reshoring, no finding domestic suppliers or anything like that. And that's what allowed, by the way, the world economy or world trade to go back to normal, to pre-crisis levels, not pre-trends, but pre-crisis levels, very fast just because agents stuck together and when things went back to normal, they were able to reinitiate trade flows in the same manner that's before. So for this reason, I like to remind people that empirical evidence from the Great Recession, also from the Asian financial crisis, by the way, indicates that even large shocks do not necessarily need to massive relocation of production. Now, let me turn to policy factors. Okay, so that's going to be my point. My following points are going to be about the extent to which policy factors, which I've argued were very important in driving the hyper-globalization period, are likely to, are causing globalization and might actually lead to deglobalization. So in that sense, let me first point out the obvious, which is there are signs, there are clear signs of growing protectionism. I would highlight three main developments that are particularly worsen. The first one at the multilateral level is that multilateral liberalization under the umbrella of the WTO is clearly at an impasse. The Doha round is baseless. It's lasted years and years and it still hasn't been concluded. We've seen it more recently with the failure to appoint a director general at the WTO. So clearly that multilateral agenda is in trouble. What about the regional trade liberalization agenda, which was so important in the 90s? Well, that has also largely stopped. And in fact, it seems to show some signs of retreat. So Brexit is a clear indication of a retreat from regional integration. At some level, the new NAFTA, the USMCA, is also a retreat from NAFTA. So this I think is particularly worsen. And third, obviously, there's the recent US-China trade war, which has actually brought into place these actual tariffs and what might call a tariff war. Now, these are the facts. Now, the issue is why is this happening? And we need to understand why this is happening because only by doing so, we're going to be able to forecast the extent to which these things are likely to last or not. So it is tempting to say, all this is just driven by politics and some politicians chose to do that because of their private motives. I think that the consensus is that the issues are much deeper than that. And I do believe that the combination of inequality and the lack of proper redistribution have been key for fostering the type of backlash against globalization that has given rise to the election of politicians that then carried out this sort of protectionist policies. So you see that in this slide on the left panel. I'm plotting a measure of inequality in the US and a measure of trade openness. Obviously that doesn't establish causation, but it's very clear that those things have been growing very much in parallel. On the right panel, I'm showing you a simple measure of US tax progressivity. And it's basically showing you that during the same period in which inequality was growing in the US and many other parts of the globe, at least in the US, the tax system was becoming less progressive and therefore doing a worse and worse job of compensating those economic agents that were not necessarily benefiting from globalization. So this content and this content led to people voting for politicians and political parties that were less favorable to globalization. Now, obviously that takes me to the issue. Are these forces likely to go away? Is this just a fluke in the last few years? Or are these forces likely to stay? And again, here I'm a bit pessimistic in the sense that I do believe that we are likely to continue to see trade induced inequality. That is even in a world in which new technologies and better policy environments would lead to a continuation of globalization. If that globalization is fueled by automation, digital technologies, et cetera, this is likely to lead to further increases in inequality. So unless governments find a way to better deal with those that are not benefiting from globalization, I do believe the backlash is going to continue to be there and that will ultimately be reflected again in growing protectionism. So we might find ways to better redistribute or have more active labor market policies that do a better job of mitigating discontent, but it's very hard to be optimistic given our experience, at least in the U.S., in recent years. My last two points are going to be more focused on the ongoing COVID crisis. So there's much more we could talk about this. We can talk more in the Q&A, but I wanted to focus on two salient points that I think some are well-known, maybe others are less so. The first one is on the short run. So of course, COVID-19 was a very large shock. It led to essentially a halting of world trade during a few weeks in March and in April. And you see this in these two panels. On the left panel, I'm using Dutch data from the CPV that is plotting indices of world trade and industrial output, very marked decrease at the beginning, the first few months of the year. But what's very important to point out is that things have recovered very quickly. The left panel only goes to August. The data is available with a lack, but you see that the recovery has been quite fast. On the right panel, I'm using data that is a little bit less precise. It's based on satellite data that tracks the movement of ships around the globe. It's less precise, but you can get it at a much higher frequency and up to basically a few weeks ago, a couple of weeks ago or three weeks ago. The message from that right panel is very similar, very marked decrease in the initial phases of the crisis, but very fast increase. That figure is further breaking up trade flows into different types of trade flows using the fact that different types of goods are transacted with different types of ships. And you see interestingly that vehicles, which is the one type of good being transacted here that is particularly closely related to global value change, experience a disproportionately large decline. So much of what was written early in the crisis about this is really bad for global value change. It's an asynchronous shock. It's really creating lots of distortions that is really born in the data. But check the recovery since then. The recovery has been very, very fast. And in fact, the levels of trade are now higher according to this metric than they were at the beginning of the year. So if this, if we find a vaccine soon, if this proves to be a fairly temporary shock to the world economy, I do believe that trade flows are going to go back to normal in a relatively short amount of time. Finally though, this has also been a very large shock and it leads to rethinking. And it is a shock that I think will have ramifications for the medium to long run. And my last point is really about outlining them. So first I think that the decline in face-to-face interactions, the fact that I am in Boston, Massachusetts and not in Sentra, this is likely to persist. Obviously in a less dramatic manner, I do think that I'll be on a plane at some point again in the future. But I do think that the shock to the airline industry and also the willingness of people to kind of travel as much as they did in the past is likely to be severely impacted. Now to the extent that this international business travel is important for global value chain activity and for trade flows more broadly, I do think that we're going to have an effect in the long run. Now having said that, I'm a big fan of technology. I do think that technology is going to react to this. And I do think that technical change is likely to make virtual interactions a better substitute for face-to-face interactions. And that's going to be facilitated by the fact that this crisis is basically led at this point in time a very marked increase in the market capitalization of firms that are in this business. So hopefully they'll use that windfall to actually try to improve technology no matter that it can sustain production at long distances in a way that is smooth and a better substitute for face-to-face interactions. So I think the main worrisome I have actually more than on the technology front is more on the political landscape. By that I mean, I think that we've seen lots of diplomatic tensions in this year as a result of the crisis. The fact that this pandemic was referred as the China Wuhan virus here in the US is not particularly helpful. Even in the EU there's been a lot of tensions. It wasn't easy to pass an aid package. So I think how we come out, how diplomacy, how international relations come out of this crisis is going to be quite central for figuring out the medium to long-run effects of the pandemic. Similarly, and as President Lagarde pointed out earlier today, the effects on the pandemic have been quite dramatic on income inequality. The pandemic has affected much more poor individuals than richer individuals. So to the extent that inequality is going to go through discontent and that part of that discontent is going to be targeted toward globalization, I think we are going to have to keep a close eye on this. I think it's not just that we should be saddened by the regressive nature of the recession. I think we should also be worried about the policy and implications of that for politics in the future. So I'm almost out of time. Let me just conclude. What I've argued is that it's not obvious that the world economy is deglobalizing and I think we should more use the word little globalization rather than deglobalization. I've argued that it's hard to conclude that technological developments or that COVID per se are likely to fuel an era of deglobalization. But I do believe that we might face some challenges for the future of globalization that are likely to be institutional and political in nature because of the role of technology and of COVID in aggravating the forces that led to recent sparks of protectionism in the world economy. And that's all I have. Thank you. Thank you very much, Paul. You have adjusted perfectly to the time that you had available. And now the paper is going to be discussed by Susan Lund, partner of McKinsey. And the floor will be subsequently open to all participants. But now, Susan, you have the floor. Hello from Washington, D.C. Thank you and it's an honor to be here today. I'm going to start first by talking about what I agree with Professor Untross's paper. He's done a very nice job and made a real contribution to our understanding of the relationship between trade and GDP by saying that this was a natural regression to the mean after a period of hyperglobalization. He's convincingly shown that the factors that led to hyperglobalization, including technological change, reduced trade costs and new countries entering the world trade system have run out of steam, so to speak. And then finally, if you read his paper, he provides a very nice theoretical model that includes fixed costs that both explains why we saw an acceleration in trade in the 20 years between 1985 and 2005, but also why that may run out of steam and we may not see value chains move. So his conclusions, which I mainly agree with are first, there's little evidence of systemic deglobalization. Second, that the main threat in the future are political and institutional issues getting in the way of globalization rather than an economic case. And third, that value chains are sticky and so therefore we may not see a lot of movement. On the last point, I'll have to respectfully disagree. So my comments today, I'm going to do two things. First, I'm going to provide an alternative explanation for why we saw the slowdown in goods trade and then I'm going to take a firm level view to look at the issue of risk and resilience and why that might cause some restructuring of global value chains. So first, this chart shows you the ratio of goods exports to goods gross output. The chart would look the same if we measured it relative to GDP and what you see is the black line in the middle is the familiar picture of the slowdown in global trade where trade is declining as a share of gross output. But look at the line for China. The decline globally is almost entirely explained by China exporting less of what it produces. It's seen a dramatic reduction over the last 15 years and when you look at other developed countries in the dotted blue line at the top, you see that the ratio continues to grow slowly and other emerging markets saw a dip, but again, are more or less flat. So the question is what's happening in China? Well, two things are happening in China. The left side of this chart shows you China's exports as a share of gross output in different industry value chains. So in computers and electronics in 2007, China was exporting 97% of what it produced. In 2018, it exported 61%. The reason is the rise of the Chinese consumer market. So China has a billion consumers that have higher income than they had 10 years ago. At the same time, China is a growing share of world trade. So Chinese consumers are consuming more and you see this across different value chains shown here. Now, on the right side of this page, China has done a second thing, which has started to develop its own domestic supplier ecosystems. So when China first entered the world trading system, it largely imported intermediate goods. It assembled final goods, then it re-exported them. Its share in the value additive trade was very low, but that's changed markedly over the last 10 years. So today you see that in different industries, well, again, I'll use the example of computers and electronics. In 2007, China was importing nearly half of the inputs that it used. By 2017, it was importing only 19%. So it's developed its own domestic suppliers. And these two factors together mean that China is much more of a consumption internally domestic focused economy and it relies less on global trade. And this alone explains the slowdown. Now, at the same time, services trade continues to grow. And this is where I would agree globalization is not over, perhaps it has a different trade, a different complexion. This shows you the growth rate of different types of services trade over the last 12 years. And you see telecom and IT services are growing very rapidly. Business services, intellectual property, royalties, travel services, finance and insurance, it's all growing actually faster than global goods trade over that same period except for transportation, which is heavily linked to global goods trade. So the conclusion would be that, yes, we are definitely not in an era of deglobalization. The decline of goods trade relative to GDP is a sign of success rather than failure of globalization. And it reflects the natural development of China's economy. We might expect the slower growth of goods trade to GDP to continue as India and other developing countries follow the same path of developing their domestic markets. Third, services trade is growing faster than goods trade. And so there's no evidence of deglobalization, but rather a different type of globalization moving forward. Now, could value chains shift? This is getting more speculative, but we released a report in August called risk, resilience and rebalancing in global value chains. It's a research that we started at the McKinsey Global Institute a year ago before pandemics were part of our lexicon. I'll share some of the highlights. Point number one is that supply chains are not chains. They're actually complicated interconnected networks of suppliers. This chart shows you the known tier one and tier two suppliers of Dell and Lenovo. And what you see is that they have thousands of suppliers each, roughly a quarter of which are shared between them, and that the suppliers interact with each other. So when a shock hits any one of the nodes in this network, it will be amplified throughout the network in unpredictable ways. Second point is that external shocks to global supply chains happen quite frequently. We did a survey of supply chain experts to find out how often is production disrupted. And what we found is that on average, it's quite frequently. So companies can expect a one to two week disruption in manufacturing production every two years. They can expect a one to two month disruption and production every 3.7 years. So while any single shock may not be persistent, the accumulation of all the different types of shocks out there, whether they are geophysical, hurricanes and typhoons, cyber attacks, pandemics, trade wars, military conflict, and on and on means that companies are being bombarded. This is no longer a once in a hundred year event or even a once in 10 year event. The third point then would be that this is very costly. When we look at the income statements and ballot sheets of companies, we find that the cost of these shocks over a decade would wipe out nearly half of one year's EBITDA. And that's quite substantial. And this gives companies an idea of how much they could invest in resilience and still come out ahead. In a survey that we did of global executives in the supply chain industry in May after COVID broke out, we found not surprisingly that nearly all of them said building resilience was important, but maybe more surprisingly 44% said that they would be willing to increase resilience and sustainability at the expense of short term efficiency. Now there are many ways to do that. And the list on the right shows you some of them. The most common is dual sourcing. And that simply means finding a second supplier for a critical input ideally in a different location than the first supplier. Companies can hold more inventory. You'll see that many chose the option of mere shoring suppliers so that they can more closely manage them or regionalizing supply chains. Now many of these actions do have to do with changing the geography of trade. And so my last chart would say that one implication of further regionalization and near shoring would be that we might see supply chain shift. It will not be a short term move. There are some costs and this takes time to identify new suppliers and invest in new capabilities in different locations. But when we look at a set of economic factors, including the extent to which there are fixed costs in industries, the extent to which you need specialized talent and any evidence of movement already. And then we look at non-economic factors like have governments around the world declared goods in this industry an essential good or important for national competitiveness. We came up with a very rough estimate. And of course it varies by different supply chain, but what you see is that you could imagine maybe 15 to 25% of global goods trade shifting to different sets of countries and where it sits today. Some industries like semiconductors, it would be driven entirely by non-economic factors and policy changes rather than a business case. Whereas in the industry like apparel and textiles, you see there's a strong business case and indeed production is already moving. None of this is to say that this means quote reshoring to Europe or the United States. Not sure this production may move from one country, for instance, China to Vietnam or the Philippines, but it does mean that there are potentially movement underway that countries and policymakers should be aware of and potentially companies as well. I am now out of time and I look forward to the discussion. Thank you very much, Susan. Now before opening the floor to the audience, I would go back to Paul. I don't know whether Paul you want to make some comments on the presentation made by Susan. Sure. Thanks, Luis. So thanks so much, Susan. That was a great discussion. I love it when a discussion tells me that he or she does not fully agree with me because I know I'm going to learn something. Having said that, I think we agree on more than I thought when you first said that there was some scope for disagreement. I think on point one, we essentially agree close to 100%. Yes, you kind of make some subtle points about services and the role of China moving up the value chain. That's probably part of the story. We might disagree on what India is going to do. And I think it's likely to go first through a phase of globalization, further globalization before moving up the value chain, but it's sort of small stuff. On the second point, I do 100% agree with you that anything we say at this point is speculative. So your guess is as good as mine, I guess. I would just point out that it may well be the case that we're in the cusp of big changes that I'm not foreseeing and that past empirical evidence is not relevant at this point in time. But looking at what I've seen from past shocks or even more recently, you mentioned resilience and we had a big earthquake in Japan in 2011, there's been flooding in Thailand, there's been large shocks to global value chains and we have failed. I'm sure that has triggered many discussion on boardrooms about what needs to be done and 70% of people say we should be doing that or that, but you start crunching numbers and it's not happening. And it's not happening, I think, because of this fixed cost, this sunk cost that basically lead firms to say, okay, you know what, now we've passed the shock, so let's try to write this a little bit longer. We also see it in, I didn't mention this, but beyond the sort of the big shocks that the Great Recession and this earthquakes and so on, which of course have short time effects. It's more about the relocation after. I would also argue that having looked at US data, like very detailed micro level, firm level data in the US, this issue of even buy sourcing or dual sourcing, it is very infrequent. I mean, we can see exactly with census customs data, the extent to which certain firms in the US are buying or bringing into the US the same input from various sources and we just don't see an awful lot of that. It's true that it happens and it's true that it's the largest companies, big chart you had there, they do some of that for sure. But the median firm in the US is nowhere near doing anything close to dual sourcing. So, and I think there is, I'm just pointing out that there's a good reason for this. COVID is going to lead to lots of discussions in the boardroom about resilience and this and that. I'm just, I'm a little bit less clear that it's actually going to materialize into action anytime soon. But of course there's long term factors and I talk a little bit about those in the paper in the long run, many things can happen, but I would not expect a massive de-globalization or significant relocation of production in the next, say, five years. And I'll leave it at that. Okay, thank you very much, Paul. Now, you know, the floor is open for the audience for the different participants. I think that we have no questions yet. I don't know whether, you know, anybody wants to raise their virtual hands. I think that we have started to receive some questions. While we're waiting for questions, I'd be happy to respond to one of your points, Paul. I do think that we agree mainly. As we look forward though, I think that we do see evidence that trade moves slowly over time to different sets of countries. In the case of the Japan tsunami in 2011, Toyota itself, which was the father of lean manufacturing and just in time production, decided to fully regionalize to the extent that it could. Production networks, because that tsunami took out critical components that were distributed to Europe and North America. And so global production went down. After that, they actually moved to fully regionalize and insulate three different regional supply chains, Asia and European and North America. And so in 2016, when we had another earthquake in Japan, global production did not go down. Now in the aggregate macro data, I agree we don't see trade flows going down because often in North America, production moves to Mexico. So it's still a trade flow, but it was important for Mexico. And it was an example of I think production moving, but this doesn't mean an end to globalization. It's just a different set of countries perhaps playing. Thank you very much, Susan. I think that we have, you know, the first question by Wolf Gundram from Bruegel. Wolf, you have the floor. Yes, thank you very much. I really wanted to ask a question on the China numbers, which I found quite striking. I mean, the fact that China and China's globalization has decreased. At the same time, we know that China is building very consciously its value chains around the Belt and Road Initiative and is building essentially supplier networks. And I'm just wondering what's the evidence really on the relative importance of the value chains that China is building and the fact that it seems to become less open and less engaged externally. And the other quick point that I would like to raise concerns the, what I would call sometimes protectionist instincts that now exist in some capitals, including in the capital of Europe in Brussels, where there has been, there is a policy discourse that, you know, one of the lessons we should draw is really that our value chains have become very vulnerable and, you know, we need to basically reassure and especially when it comes to medical supplies, we need to reassure, because otherwise we are very vulnerable to future shocks. And I was wondering whether the panelists would like to comment on this phenomenon as well. Thank you. Thank you very much, Wolf. Paul and Susan, Paul. Susan, you want to start with the China question and then I'll take the other one, maybe? So the China question is a really good one about the impact of the Belt and Road Initiative. So two thoughts. One is that currently it's too small to be picked up in the China goods exports numbers. Certainly there's some machinery and equipment. A lot of what they're exporting, though, is construction services and other sorts of services to actually build various infrastructure projects. But we'd have to look at the details of what they're exporting. So my hunch is that exports of things like mobile phones and clothing have gone way down and maybe there's been an uptick in some types of industrial goods exports to Belt and Road Country. But overall, I think so far it's been relatively small and a lot of that would fall under services trade. Thank you, Susan. Go ahead, Paul, please. On the issue of the reshoring of related to medical and health products and so on, I think that's a good point. I do think this is such a massive shock that is going to lead governments to try to kind of make efforts to develop this industries locally in the expectation of future pandemics, which might take 80 years, but having gone through this, I'm sure that's going to prompt action. This is more generally the case. I mean, governments try to kind of make sure they can secure a minimum amount of production of goods that are perceived to be essential or say national security. And that's not new. What's going to change is what exactly are we going to realize now as things that are essential for national security. So there is going to be some action. I do believe that as important, crucial as they are right now, I mean, in terms of sort of aggregate magnitude, I don't think this is going to be huge moving forward. But it is definitely, I agree with that possibility. Thank you. We have a second question. It's going to be posed by Lorenzo Codone. Lorenzo, you have the floor. Thank you. Thank you very much. It seems to be very optimistic about the future of globalization and especially technology. Don't you think that the kind of technological developments that we have seen over the past few years might inevitably lead to quasi-monopoly power for some companies that would basically produce political conflicts and protectionism? Good question. Lorenzo, Paul, Susan. Happy to weigh in. Yeah, maybe I came across as super optimistic during the presentation. I am actually, and I do think that for the reasons that I mentioned, there is going to naturally going to be a complementarity between technology and trade. I do touch upon some of the issues you raise in the paper, the fact that global value chain activity, naturally through an automation and new technologies, the way they might raise trade is by actually raising and put demand, which is driven by increases in the optimal scale of firms. So this same conceptual framework that explains the complementarity tells me that large firms are going to become larger, small firms are going to become smaller, and that's obviously going to interact with market power. So we might want to think about antitrust issues that might be particularly relevant in this new age. Similarly, I do touch upon the issue of the backlash, but that may lead because, you know, the market power, the influence of these companies, the inability of governments to make sure that these companies are not shifting profits to lower corporate tax rate jurisdictions. This is only likely to, the demands on regulators are only likely to go up. So if there's no response on the regulation side, I fully agree that that might lead to increased tensions and if the tensions are not dealt with, might lead to protectionism. So that is a concern I have, but again, it's more of a policy concern and that's where I describe it in the paper. Susan, you want to weigh in? Yeah, I would add to that that I think that technology, first of all, there are, there's lots of academic research showing that it is leading to a superstar effect across industries where the largest firms can invest the most, they gain market share and get larger. So that is definitely an issue that we need to grapple with. You know, I think at the same time though, one of the things that automation, AI, blockchain, all these things do is reduce the importance of labor costs in trade. Now, Paul has argued, there's no evidence, which may be right to that. This has completely substituted for trade, but I think going forward, what it means at a micro level is that firms consider different things when they consider where to put production or suppliers. And it's no longer a wage cost that are the driving importance in most types of manufacturing. Rather, it's access to skilled talent, it's protection of an intellectual property rights, it's quality of infrastructure. And so it's a different set of factors rather than purely low wages for most types of manufacturing and textiles and a payroll furniture would be the remaining very labor intensive industries where wage costs play a role. Thank you. Thank you to both of you. I think that we had a third participant, Livio Estraca. Thanks a lot, Vice President, and thanks for the great presentation, Paul. Very insightful. I have a question about the stickiness of the GVCs. So you mentioned the sound costs as being relevant. I just want to stand. So I understand the argument of fixed costs of establishing a new trade relationship, but I'm not sure I understand the sound cost. So are you implying that the decision is back or looking as opposed to forward looking? I mean, we all, we don't learn in other schools that some cost should be relevant in theory. So the decision should be forward. Looking one. So I just wanted to ask you to elaborate on this argument, the sound costs matter for the stickiness of GVCs. Thank you. Thanks for the question yet. I'm grateful you raised this. I mean, when you have limited time, you have to explain things quickly and some, some things then are not, are not fully clear. The argument I'm making is the following. I'm making the argument that. I'm making the argument that when you're deciding to, you know, set up a new plan or have a new supplier in a new country, in order to create that link, often you need to incur significant upfront costs. Okay. So that's the fixed cost argument. Initially think in the 70s and 80s, early 80s firms were largely in the West say, and then they started making these decisions to go abroad. And for some large companies, it was a no-brainer. And they did that because they could lower costs. But for smaller companies, even though they knew that wages were lower there, they just couldn't make it work because the initial investment was too large for them to bear. So that fixed costs basically let to globalization, but limited local, selective globalization, only the large firms won. The point I'm making is that because this fixed costs are sunk. Once you've made the investment, once you've gone to China or you've gone to Thailand, if you're thinking about reshoring, the high fixed cost option is no longer offshoring. It's actually reshoring. That is when you're deciding whether to stay in Thailand or go back to the US, what the fixed costs that you're going to incur, those are going to be related to reshoring, not to offshoring. So that completely changes. You know, it could have been the case that initially you want to take Thailand because wages were low. Now wages in Thailand are up. And initially at that new wage, you wouldn't have gone to Thailand. But now that you're there, you might as well stay and you might actually not want to reshor. Because that fixed costs that you initially paid, you cannot recoup. You cannot sell the factory and the machines that face, you know, at the value that is relevant for you because maybe they're specialized and their alternative use is not as profitable. Hopefully that's a bit clearer. But that's what I have in mind. That it's not a fixed cost that you can recoup the moment you leave a country. Good. Susan, do you want to add anything? No, I will leave. I'll leave that one. Okay, good. Well, I think that we do not have, there is another one, you know, they are coming. So we have to wait a little bit. Christine Forbes. Christine, you have the floor for your question. Susan and Paul, very nice presentations. So both of you, both of you focused on globalization is measured by trade flows and global value chains. And I was wondering if you would comment on globalization is measured by capital flows and how that interacts with trade and global value chains. As I'm sure you know, global capital flows have fallen much more sharply than trade in 2008. A major factor behind that was the contraction in global banking flows, particularly in Europe. And there's also been a shift in the form of global capital flows where smaller shares bank lending and a larger share is international debt issuance. So I was just wondering if you could talk about how those trends may have affected the globalization and trade and going forward if global capital flows remain muted, how that might affect the developments in trade and global value chains going forward. Christine, Paul, Susan. I'm happy to answer that. So I think that's a great observation. But I think that to use Paul's term, what we saw in global capital flows prior to 2008 was hyper globalization and a lot of it was bank lending, as you point out, and even interbank lending. And a lot of that was between European nations with the creation of a single market. And so when some of that went away after the financial crisis, maybe that was a bubble. And now we've reverted to long-term trend. I think that going forward, it's going to be interesting to look at foreign direct investment. So if my assertion is correct, and over the next five years, we do see companies decide to start to shift some of the geographic footprint of their supplier base. You might see more foreign direct investment. You can also see, you can already see some of the pickup for instance, in Mexico, where a lot of the Asian contract manufacturers like Foxconn and Flex and others are expanding production in Mexico. For instance, you serve them the US and North American market. So this period of value chains being at play may lead to more foreign direct investment. However, I want to remember that offshoring was also accompanied by outsourcing. So the number of captive supplier plants around the world is only a small share of the total supplier base. So switching production often doesn't mean that you shut down a factory in China or Thailand and build one somewhere else. It simply means you look for a supplier in a different country. You get to know them, companies qualify them, and then you start shifting orders. And if that is the case in those industries, then you wouldn't necessarily see an impact on pickup in capital flows. Thank you very much, Susan. I think that we have time for one additional question. Jim Bullard. Jim. Thank you. And thanks for the opportunity to comment. I want to press Paul on his first point about the limits of global trade, because I think this is fundamental. You've had this period of hyper globalization. And what do we really expect to happen going forward? At what point will we be to the equilibrium amount of global trade? I've challenged my staff to think about Europe as a big integrated area. North America is a big integrated area. And China is a big integrated area. And I think that we have to think about how much trade do we really expect to occur between these three blocks? Do we expect it to be ever increasing? And the chart seems to say, well, you know, maybe that 30% number is, you know, is getting closer. But I think this is fundamental to how we think about, you know, coming out of the 80s and 90s, we've always wanted to say, well, more trade is going to be better. So I have one suggestion, which is the U.S. And I think that we have to think about the U.S. and the U.S. trade deficits. Don't even keep track of their trade deficits. Completely free trade across borders. I think there are some trade barriers with cross states, but we don't even keep track of them. That would give you some metric for what you could expect. Ultimately from, from global trade and get some idea of whether we're close or far away from what we eventually expect. So I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. I think that's a good point. Paul. Thanks, Jim. Yeah, I can definitely take this. I do comment very briefly on that on the paper, but it's a good point. I mean, and as, as, as you're hinting, the base way, the best way to answer this is just consider some extreme. Say counterfactuals would happen. What would happen if on the one hand, you move to completely free trade. And the answer to that of what the ratio of trade to trade is, what the ratio of trade is. And what I'm saying is a function of just how large are the blocks that are trading with each other relative to not trading with each other. Or more generally, if you think about countries all trading freely with each other, it's going to matter the dispersion of sites and there's some natural upper limit. Even in a free trade world, we wouldn't expect a hundred percent of what's produced to be exported. Now. Since you raised this issue, I need to raise a subtle issue because we need to be a bit careful when plotting things like the world trade to world GDP ratio in the sense that the numerator and the denominator are not in the same units. The numerator is a gross output sales measure. GDP is a value added measure. And it could be the case, and it is a case for some countries where trade is actually higher exports might be higher than their national product just because they bring a lot of foreign inputs that then they embody in their exports and the gross value of their exports is much larger than the value added content of their exports. So that the reason I mentioned this is because when that one does counterfactuals, you need to bear that in mind. It could be the case that even though there's an upper limit in the share of activity that can be exported to the extent that the world production becomes more and more fragmented and we use more and more foreign value added in our exports and we, you know, goods go through many stages across countries. The gross value of trade flows could actually grow a lot, even if the value added content of those exports does not. And that's something that you might want to take into account in some counterfactuals. Alternatively, you can be a bit more kosher than I was and plot things as sort of comparing apples to apples and compare trade flows to gross output, for instance. And I don't do that just because it's so typical and so widespread the use of trade to GDP ratios that I did that here, but that's something that I would tell your folks that are running this counterfactuals to be a bit mindful of. Susan, do you want to add anything before closing? No, that's a very good point though. This is why the chart that I showed you was relative to gross output in which trade can be higher for particular countries than 100%. Well, thank you very much for both of you. It has been great interventions. I retain that Paul, you have coined the term as lobalization. I think that it's going to be patented because I think that it's a very good description of the main message of your presentation. So thank you very much again to both of you. Thank you very much to all the participants. And now I turn again the floor to Thierry that is going to give us some indications as to how we are going to proceed over the next minutes. Okay, perfect. Thank you, Vice President. And thank you all of you for that interesting session and taking us through the sort of the global picture and globalization. Of the next 15 minutes, good news is we will have a short break. We will resume at 3.45 sharply. And perhaps I would like to say, well, if you would like to use this 15 minutes wisely, please do have a look again at our website with the papers and the posters of the young economists and for the participants in particular, please, of course, feel free to cast your votes. So see you shortly. Thank you.