So, we've talked about this trade network, and if we take a closer look at that trade network, we realize it consists of supply chains, and let's talk about that. A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. That is, a supply chain is all the inputs that I need in order to make my particular output which is then going to go to a whole bunch of other folks who will treat that as input. The supply chain represents the steps it takes to get the product or service from its original state to the consumer. So, we can begin with raw materials. Okay? They go to various suppliers, they go to manufacturers, they go to distributors, they go to a retailer, and finally, to the consumers. The critical thing with supply chains is that this part right here, this node of manufacturing, is in itself a system, as the various nodes communicate with each other, as they're linked. A good, if you will, is the personification, if you will, or the consolidation of the supply chain of these networks. All right? These networks can be represented, in a sense, by the final good that they produce. And what are the factors in determining the shape of supply chain? Well, some of is the nature of the good. Many of these supply chains begin with a raw material that may be only available in certain places. Geography is going to play a role. That is, I'd rather have the previous step in my manufacturing process relatively near me. Infrastructure—do you have the infrastructure? For example, one of the major problems with newly industrializing countries, particularly, for example, in Latin America and in Africa, that even if the nature of the good would dictate, even if geography dictates, they simply don't have the infrastructure to participate in this global supply chain at the level that they might want. There's also distribution of power between countries and companies. Let's never forget that this isn't this equal power game. That because of history, because of resources, different players come onto the table with different piggy banks, if you will. You also need human capital. For some of these products, you might need a trained workforce, a workforce that at the very least is literate, that can be trained. A workforce that you can depend on. So, that's going to be a factor. And the costs of inputs, and particularly labor. Although we're moving away from this, what is called the "race to the bottom." That is, that the way to enter into globalization was to offer the possibly—the cheapest labor. We've seen that with automation, et cetera, that differential cost of labor might no longer be such a strategy. That, that race to the bottom may no longer pay off. So, supply chains are a system. As the individual companies make self-interested decisions... Who do I sell to, who do I buy to? This produces the supply chain for that industry that exhibits self-organizing behavior. Each deal sort of made on its own. These decisions collectively aggregate. Okay, now we've got these different manufacturers, okay, and these sub-manufacturers. And to create a governance structure for that global industry. So, you have the manufacturing suppliers, you have the retailers, you have the consumers. And all of these, in a sense, are not based on some top-down decision by some kind of global czar, if you will. They are based, as we saw with systems, on each individual decision. Each one of those individual decisions producing the system. The results of which, or the behavior of which, cannot be predicted, again, based on the characteristics or the wishes of any of the particular elements. Most of this trade is in something called "intermediate goods." This is a wonderful quote from Gereffi and Korzeniewicz. And I want to emphasize these two, because this book and their work, really brought the idea of supply chains to the fore. "In today's global factory, the production of a single commodity often spans many countries, with each nation performing tasks in which it has a cost advantage." That might be a simplification, but I want you to be thinking about this. So, you've got this flow of intermediate goods. Take a look at, for example, at what used to be called NAFTA. The trade between Canada, the United States, and Mexico largely in intermediate goods. This is why the renegotiation of NAFTA, for example, was so important for auto manufacturers, because auto manufacturing in North America really can take parts in all three of these various countries. And again, we see that China is now also involved, particularly in its trade with the United States. So, think about it this way, a phone may be designed in the United States. The inputs produced are in Korea. Final assembly of the phone is carried out in China, then marketed and serviced back in Europe or in the United States. It's going to make this cycle. Now, intermediate goods have increasingly become important. This is from 1962. This is primary goods, these are the commodities, okay, that we talked about. And notice this percentage of trade, this has increased to a certain extent, but not that much. Final goods have also, but the real revolution has been in intermediate goods. That's what's really shown the growth during this process of globalization. Precisely, there's more complex—each product in a sense representing a system. Each product representing a whole production system behind it. And speaking of phones, these are all the various parts that might go into a phone. You can tell this is an old slide because phones don't look like this anymore. And why? Why these intermediate goods? Because a freer trade, a set of policies; Because of technology. The kind of—the available tools that we have to design and manufacture; And because of the lower cost of transport. All three of these. The transport that now makes it possible on these huge container ships to take these massive amounts of goods. The technology to coordinate these various movements and create these new goods. And the policy of free trade which means that you can manufacture any part of your good in another part of the world, and there's really no political advantage, in a sense, to making it outside of your own country. So, clearly, the role in the network, where you are in the supply network and what you contribute makes a big difference. Think about this network. Which node would you rather be? Well, probably A, okay? Because A is central here. Or if you're going to be in some kind of subsystem, you want to be B or C. These are the countries that everybody else is dealing with. Or if you want to translate this, okay, into high school cliques, again, American high school cliques. I never got over high school, that's why I keep referring to it. This is the leaders in various cliques. So, this might be the quarterback as part of the jocks. This might be the best singer, okay, that's part of the drama kids. And this might be the one who has access— This is old, this is when I was in high school— To all the music, to all the LPs, et cetera. He's got or she's got the best stereo system, or the best car or whatever it might be. But clearly not all nodes—they might be, they should be equal. All the nodes should count for the same— But because of the structure of the network, because of the structure of power, some nodes are going to be more central than others. And this translates into a value chain. All right? So, this is the value added, which can also translate into how much money you get from this particular good, and this is the stage of manufacturing. And what you really want to do is you want to be in market analysis or product design. That's where you get the really big money. Who gets to put their brand name on it? And in a different project, for example, I worked on the domination by very few countries of acceptable brands. That is, if it's imported from country x it has greater value. All right? Because you want to be in this. Then down here is the actual manufacturing. You want to be in the input sourcing. It—much better than assembly, the final assembly tends to pay the least. Okay? And then as you go back up the network, you want marketing, sales and distribution, post-sales and services. So, in some ways manufacturing is the least favorite spot. You want to be at this market end of analysis or at this post-sales services. But if this is the only thing that's left, this is better than simply being a commodity export. You want to be in this. But again, where you are in this process, okay, what you contribute to this process is going to make a big difference to how much you get out of globalization. Now given that, what are the risks involved? Okay, we've looked at the structure of trade, we've seen the network of trade, we've seen the supply chains of trade. What are the risks that are involved with this supply chain, with this current globalization system?
