Global value chains remain resilient a year after COVID-19

Global value chains remain resilient a year after COVID-19

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  • Initial concerns about GVC viability have turned out to be largely unfounded, and a major reshuffling of GVCs seems unlikely
  • There has been no massive reshoring of production from developing to developed countries
  • There has been no collapse of the financial sector and asset markets, and consumer purchasing power has held up
  • Further extension and deepening of international production networks are desirable to enhance resilience

Contrary to initial fears, global value chains (GVCs) have mostly remained intact over the past year, with no massive reshoring or relocation of operations out of East Asia taking place in the wake of the COVID-19 pandemic, according to a new analysis.

Fukunari Kimura, chief economist at the Economic Research Institute for ASEAN and East Asia (ERIA), said initial concerns about GVC viability have turned out to be largely unfounded, and a major reshuffling of GVCs now seems unlikely.

“Many claimed that the pandemic would mark the end of GVCs and that there’d be a massive ‘reshoring’, with production pulled back from developing to developed countries. Others claimed that GVCs needed broadening to boost resilience and that companies should avoid concentrating their operations in one location such as China,” Fukunari said.

“But GVCs have mostly remained intact over the past year, with more intensive use of communications technology.”

For countries other than China, the first impact of COVID-19 was negative supply shocks. In February 2020, at the onset of the pandemic, imports from China—both parts and components and final products—suddenly stopped. But as China successfully contained COVID, import supply quickly restored in a month, Fukunari said. As COVID spread to other countries, lockdowns and other measures caused negative supply shocks, though the effects were minor and temporary in East Asia.

In many countries, there were initial positive demand shocks for personal protective equipment (PPE), and countries importing such goods experienced panic around sudden spikes in demand, while some countries introduced export restrictions on PPE and other “essential” goods to prioritize domestic demand. But after the initial shock, things calmed down and the market ensured stable supplies of most goods—except vaccines.

COVID-19 also generated positive demand shocks for telework and stay-at-home related goods. Sales of laptops, communication-related equipment, dishwashing machines and water purifiers boomed. East Asian exports to North America and Europe recovered primarily due to these positive demand shocks.

Meanwhile, lockdowns and social distancing, businesses closing and income losses reduced the demand for a wide range of goods and services. The slump in GDP was felt all over the world. But unlike the global financial crisis (GFC) in 2007–08, many countries implemented mitigation policies on an unprecedented scale. So, there was no collapse of the financial sector and asset markets, and consumer purchasing power held up.

“While some particular sectors—such as the garment industry, transportation, tourism and on-site services—have suffered serious damage, major reshuffling of GVCs seems unlikely,” said Fukunari.

“The world has not observed any massive reshoring or relocation of production operations. Machinery international production networks (IPNs)—characterised as a task-by-task international division of labour—have been more robust and resilient than other types of transactions as they proved to be in past crises including the GFC and the East Japan Earthquake.”

The limited exceptions are companies with sensitive technologies that require semiconductors or sensitive materials such as rare metals, as well as companies producing PPE. Some of these reshored and others moved part of their production from China to other countries. 

For example, Japan’s Ministry of Economy, Trade and Industry provided two subsidy programs in 2020-21 for supply chains targeting these products. One was for reshoring and the other for diversification, mainly to ASEAN countries.

“Further extension and deepening of international production networks are desirable for enhancing resilience. India’s participation in these would have helped do that so its decision to walk out of Regional Comprehensive Economic Partnership (RCEP) negotiations was unfortunate,” Fukunari said. “By improving the investment climate and enhancing connectivity, South Asia could also participate in tightly connected East Asian production networks and thereby achieve more rapid economic growth and poverty alleviation.”

Photo by CHUTTERSNAP on Unsplash

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