Global value chains: the effects of Covid-19

Disruptions to global value chains related to the Covid-19 pandemic have once again highlighted the interconnectedness between countries, according to an OECD analysis.

In the first place, the causes of the disturbances were diverse, from sudden increases in demand, aggravated in some cases by export restrictions, to difficulties in obtaining materials and supplies from suppliers located in countries in a situation of confinement. , the delays and frictions caused by transport and logistics disruptions or the increase in border procedures.

Aware of growing evidence of the benefits of participation in global value chains, a number of countries reacted by committing to keeping markets open and ensuring the smooth operation of international supply chains.

However, adds the OECD, there are also those who wonder if more localized production can provide more security against shocks, supply shortages and uncertainty for consumers and companies, or if the benefits of deepening and expanding the International specialization in global value chains outweigh the increased risks and instability that some say are associated with these value chains.

Global value chains

These connect economic agents located in different countries and can transmit external shocks, but they also constitute a means of diversification and adaptation to shocks, including internal ones.

Determining which of these two properties of GVCs prevails when it comes to shocks, and to what extent the benefits of deepening and broadening international specialization in GVCs actually entail risks and instability, is a challenge. empirical question; the balance will usually depend on the sector, country, region and type of shock involved.

However, to date there have been few studies that quantify these alleged trade-offs.

A series of simulations recently conducted using the OECD METRO model, a computable general equilibrium (ECG) trade model based on various countries and sectors, compare the results of two simplified paradigms of the world economy in the face of selected cost shocks. similar to those seen in the recent pandemic to assess efficiency and resilience.

Pandemic

The regime of interconnected economies reflects a fragmentation of production in global value chains very similar to that which occurs today, taking into account the changes produced by Covid-19.

On the other hand, in the case of the more localized regime, companies and consumers depend less on foreign suppliers (tariffs and subsidies are considered in the model, and companies have more difficulties in changing suppliers).

The two benchmark trade regimes are exposed to the same series of shocks.

The analysis of the model shows that the shift towards the localized regime would lead to a significant reduction in GDP levels in all countries; Global real GDP would decline by more than 5% from the post-COVID-19 baseline and in some countries GDP reductions would reach double digits.

This seems to indicate that a greater localization of value chains would add new GDP losses to the economic slowdown caused by the pandemic.

Furthermore, in most countries, and for all countries on average, the localized regime is also found to be more – rather than less – vulnerable to shocks.

This is because, in the localized regime, it is smaller and less diversified domestic markets that have to withstand most of the adjustment pressures caused by shocks, while a few countries make marginal gains in terms of stability of the economy. Real GDP.

Government policy

However, it comes at the cost of a very high price: moving to a localized regime requires sacrificing a percentage of GDP, and all this to gain less than 1% stability in the face of shocks in trade costs of some importance.

Despite being based on simplified assumptions, the modeling results appear to indicate that the economic case for significant relocation of global value chains is weak.

Rather, global value chains, in addition to generating efficiency gains, are important in cushioning economic shocks.

This indicates that using government policy to significantly alter the geography of global value chains carries risks, but it does not mean that governments have no role to play.

There may be scope for governments and businesses to work together to increase the resilience of global value chains for essential goods, for example by collecting and sharing information on potential bottlenecks in global value chains, or by studying the best way to assess risks and adjust stocks of essential goods.

Creating predictable investment, trade and regulatory environments is critical to strengthening the resilience of global value chains.