Global and regional production networks

• The hyperglobalisation of the early 2000s has given way to a phase of slow globalisation (slowbalization). However, globalisation remains deep and complex, with heterogeneous dynamics along its multiple dimensions.

• The intensity of world trade in goods has strengthened, relative to industrial production. Relative to GDP, however, it is held back by the tertiarisation of emerging countries and depends on fluctuations in commodity prices. Overall, trade in goods rose to 25% of global GDP in 2022, on the same levels as before the 2008 financial crisis.

• The importance of international flows of services, such as professional business services, is growing, partly due to digital advancements and the skills available in emerging countries. In 2022, world trade in services exceeded 7% of GDP, twice as much as in the early 1990s.

• Foreign direct investment (FDI), on the other hand, is weak, suffering first from the centrifugal pushes and high uncertainty generated by geopolitical tensions and repeated global shocks. FDI flows fell by a total of 17% over the last three years 2020-2022.

• As regards the geographical structure of trade in goods, the explosion of China and emerging Asia is a strong factor in globalisation: the intercontinental barrier to trade has been reduced. The Centro Studi Confindustria has constructed two indicators of trade regionalisation: both signal a stabilisation of the global dimension of trade and do not identify a clear trend towards regionalisation.

• Heterogeneity between macro-areas is strong. China, while consolidating its role as the world's leading exporter, has reduced the weight of its foreign sector; at the same time, Asian trade is increasingly globalised. Conversely, European industry is strengthening its internationalisation, but focusing on the regional component of trade.

• Global value chains (GVCs) have proven to be very robust and persistent. Trade in intermediate goods (entering new production processes abroad) has returned to pre-financial crisis 2008 levels (above in most advanced and emerging countries, excluding China).

• The geographical structure of capital goods and specific intermediates, which are more integrated in GVCs (as parts and components), is globalised and stable over time. Among the supply chains, agri-food and construction are more regionalised; health care and textiles, on the other hand, are globalised.

• The use of trade agreements between distant countries (especially by the EU) has contributed to the globalisation of trade. But in recent years protectionist measures have increased and the World Trade Organisation (WTO), whose role cannot be played by drilling intergovernmental bodies, such as the G7 and G20, which neither have stable bodies nor are able to make their decisions binding. The future of the global rules system therefore requires a profound reform of the WTO.

• The Russian crisis has widened political distances between the United States and emerging Asian powers (China and India), pushing towards selective globalisation between friendly countries. The policies for the strategic autonomy of European industry fit into this framework.

• There are clear signs of decoupling (decoupling) in technology trajectories, linked to the green and digital transition of the US and China. Since 2018, China's market share in the US has shrunk by four percentage points.

• This decrease is the result of profoundly different dynamics of US purchases of specific Chinese products, for example, a strong decrease in electronic media and an equally strong increase in lithium batteries.

• It is emphasised that a decoupling US-China can only be realised in cases where at least one of these conditions is present: a domestic production capacity that can be increased in the short term or alternative 'friendly' suppliers specialising in the same type of product.

• The industrial policies of the world's major economies are influenced by, and help define, the impact of exogenous shocks and ongoing technological transitions.

• The EU has focused on analysing and reducing dependencies in technological and industrial sectors deemed strategic, with the aim of strengthening the resilience of the single market, a prerequisite for the Green Deal and the Digital Strategy. The regulatory approach, as defined by the Industrial Strategy 2020, lacks, however, adequate support from EU resources and instruments, which are indispensable to activate the substantial public and private investments needed for the double transition of European industry.

• The three synergetic measures with exceptional allocations implemented between 2021 and 2022 by the US represent a step forward compared to the European approach. They enhance US production capacity directly and through the strengthening of macro-regional capacity and push towards a recomposition of the supplier chain according to political affinity.

• The global affirmation of Chinese industry has also been fostered by the Made in China 2025which aims to establish China as a global technological power by 2049.

• Alongside China's technological and industrial advances, however, limitations emerge, highlighted in two important initiatives: the Belt & Road Initiative has made China the main international creditor of many emerging countries, which are not always able to repay their debts; the Regional Comprehensive Economic Partnership is the world's largest trade pact but appears to be 'shallow', limiting itself to cutting tariffs.

 European and Italian critical dependencies

• The tension between commercial openness and national autonomy accompanies the history of economic relations between states. The European Union was created to ensure free access to strategic products (European Coal and Steel Community). The Italian development model has always been based on manufacturing, i.e. the transformation of raw materials and semi-finished products, including imported ones.

• Global value chains (GVCs) amplify the effects of shocks between production nodes, even those not directly related to foreign markets. More than one third of Italian manufacturing participates in GVCs.

• In a polycrisis and politically fragmented world, there is a need to strengthen supply chains, especially in strategic productions, such as those driving the transition green and digital.

• The European Commission, as part of its Open Strategic Autonomy objective, has launched a study of the vulnerabilities of supply chains in order to develop targeted industrial policies.

• The Centro Studi Confindustria, expanding on the Commission's analysis, has identified with a high level of product detail the critical dependencies, or vulnerabilities, of EU countries from abroad, also in comparison with those of the United States and China. Critical product selection criteria concern: geographical diversification of imports, substitutability with exports and, for European countries, substitutability with intra-area trade.

• Over the past decade, about 8% of European imports (from non-EU markets), by value, have been critical. They concern about 380 products, slightly less than 8% of all those purchased abroad. In particular, the EU is vulnerable in the ICT supply chains (Information and communication technology) and, to a lesser extent, agribusiness and textiles.

• However, European dependencies are smaller in number and value of products (out of the total) than those of the US and China. Moreover, critical EU imports have been rather stable over the last two decades, while those of China and the US have grown. Significant, however, are the changes in the prevailing supply countries. China is increasingly the main source of US and, especially, EU vulnerabilities.

• Overall, therefore, Europe's critical dependencies are the result of long-term choices of specialisation and reallocation of international production chains, linked to the growth of emerging countries, China in the lead.

• As far as the Italian economy is concerned, supply vulnerabilities concern 16% of imports in value and 7% of product varieties. These percentages are in line with those recorded for Germany and France.

• Italy's critical import is rather diversified in terms of product origin, in contrast to Germany and France (and the EU as a whole), where China is the main supplier. Italian vulnerabilities are concentrated, by value, in the commodity, chemical and energy sectors. Those of Germany and France (and the EU) mainly concern the ICT, media and computer supply chain.

• Restricting the analysis to industrial supplies (of intermediate inputs and capital goods), 333 critical products were selected, for which Italian industry has been permanently vulnerable in recent years. They represent about 9% of the value of Italian imports (about EUR 17 billion).

• Italy's most important industrial supply chain is confirmed to be commodities, chemicals and energy, followed by transport; textiles and metals are also added as product variety. China is by far the largest supplier of critical products for the industry: 25% in value (mainly ICT) and 22.5% in variety (mainly textiles). It is followed by the United States, Turkey and India in terms of product numbers; in value terms, Switzerland is second, standing out in pharmaceuticals and chemicals.

• Finally, two further selection criteria were considered: the strategic nature of the products (according to various institutional sources) and geopolitical and climate risks in the supplying countries (according to SACE indicators).

• Of the critical products for Italian industry, slightly less than half can be defined as strategic: 148 products, for more than EUR 10 billion of foreign purchases (61% of the critical import in value). These are mainly minerals, metals or other raw materials and pharmaceuticals and active ingredients, which mainly concern the commodity-chemical-energy, health and ICT sectors.

• In particular, 28 minerals, metals or other raw materials (out of 67 that are critical) are strategic because they are involved in the green transition: they are mainly used in iron and steel production and are worth 32% of all strategic imports.

• Almost half of the critical supplies of the Italian industry can be defined as high geopolitical or climatic risk (49% by value and 46% by variety). In particular, for a hundred or so products, there is a high supply from non-EU countries with a medium to high political risk. These are mainly minerals and metal products; among the sectors, transport, textiles and agri-food stand out. Adding the climate risk dimension, the textile supply chain continues to be highly critical along with ICT, media and computers.

• Intersecting the selection criteria by strategicity and risk, we obtain a final list of 62 products that are highly critical for Italian industry. Although they are relatively few products, they trigger about 5 billion Italian purchases from abroad (a good 38.5% of critical imports). They mainly concern the ICT and transport sectors.

• When defining European policies, it is necessary to identify the criticalities of the industrial system, distinguishing between raw materials and semi-finished products, in order to promote strategic choices (including extraction and circularity).

• In particular, it is necessary to: encourage European integration in the market segments already covered (extraction, first and second processing, finished products); define 'technologically' achievable objectives, with the allocation of adequate European resources; identify and strengthen priority supply chains, including through industrial cooperation agreements with third countries.

The international strategies of Italian companies

• The companies most active in international markets reacted to the various crisis episodes (in particular in 2008-2009 and 2011-2013) by moving towards complex forms of participation in foreign markets, within global value chains (GVCs), and recorded, on average, a positive performance in terms of employment, productivity and added value.

• For the company, being included in GVCs entails several advantages: increased specialisation in core activities, exploiting the comparative advantage resulting from the international division of labour; increased market share, thanks to economies of scale; spillover productivity from supply links with the most innovative and productive multinational companies; reduction of transaction costs (less opportunistic behaviour between companies, increased selection of business partners and development of technological innovation).

• Over the past three years, governing global production and supply interdependencies has proven problematic, especially for those types of companies that have a 'tight' international supply chain with little supplier diversification. It has become more important to take into account the trade-off between exploiting competitive cost advantages and vulnerability, because the supply chain is not stronger than its weakest production node.

• It is therefore becoming increasingly relevant for companies to increase the degree of resilience of global value chains, i.e. the ability to react to unforeseen and unpredictable events while preserving their efficiency.

• Various strategies can be implemented: from relocation of activities (production and/or supply) to a different country, to expansion (redundancy) or supplier diversification.

• The reshoring of production is generally a more complex strategy than that of supply, due to high sunk costs associated with investments in the destination country. One of the necessary conditions is the presence of supply networks that are already structured and thus able to make use of strong positive externalities in the country to which production is relocated.

• The return of productive activities to EU countries would favour reindustrialisation, which, however, requires human resources and especially specific skills that are not always immediately available. The backshoring of production could also lead to higher prices, where technological innovation has not made production more competitive in-house compared to theoffshoringIt is therefore only desirable in strategic sectors.

• The data collected in the survey of the Centro Studi Confindustria and Re4It (Reshoring for Italy) on the strategies of offshoring e reshoring of manufacturing companies in 2021 confirm a limited use of backshoring of production (total or partial). The main reasons for companies to bring production back home relate to rising costs (also related to the growth of the offshoring) and time in global production chain management.

• The reshoring of supply is a less economically costly choice, as it does not have costs that are difficult to recover; it is only feasible if there are suitable suppliers in the country to which the company wants to relocate. According to a survey by the Economist, the share of companies adopting the nearshoringrelocation of its supplies to geographically closer countries, or the backshoringin the country of origin.

• The results of the survey CSC&Re4It and the recent one by Centro Studi Tagliacarne-Unioncamere (April 2023) confirm the presence of the backshoring supply among Italian manufacturing companies, identifying increased resilience, reduced distance and improved product quality as the main factors influencing this choice.

• Approximately 75% of the total respondents to the CSC&Re4It survey purchased supplies totally or partially from foreign companies and 21% of these made a backshoring total or partial supply. The proportion of companies surveyed by the Tagliacarne-Unioncamere Study Centre declares an increase in Italian suppliers ranging from 15% (if they are local, i.e. present in the same region) to 20% (Italian suppliers outside the region).

• The choice of backshoring of supply is fully compatible with offshoring of production, as relocating the supply chain does not necessarily entail relocating any production activities carried out abroad and in certain cases constitutes a way of strengthening the global value chain.

• The reconstruction of a strategic pharmaceutical supply chain revealed specific critical dependencies on foreign countries. These dependencies were partly mitigated by both a backshoring calibrated, aimed at boosting internal production capacity, and by duplicating suppliers, mainly national. However, it remains essential to maintain trade and production links with foreign countries, and in particular with China and India, the world's main suppliers of active ingredients, evaluating, where possible, selective re-entries into the European Union.

• The back/nearshoring should be stimulated not by ad hoc policies, but by policies for territorial attractiveness and business competitiveness, exploiting synergies with existing policies in favour of the 'Green New Deal', digitalisation and skill upgrading. With reference to the 'Green New Deal', the shortening and regionalisation of value chains is one of the main ways to foster sustainability, as it allows the reduction of emissions and greater ethical and social control of production.

• The shortening of global supply chains could accompany the adoption of alternative paradigms to linear production, such as the circular economy; this is more feasible in a national or European context, with common regulations and lower transaction costs.