By Piergiuseppe Fortunato, Economic Affairs Officer, UNCTAD and Annalisa Primi, Head, Structural Policies and Innovation Unit, OECD Development Centre
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
Supply chain breakdowns and the revival of export restrictions in strategic sectors underline the importance of domestic and regional manufacturing capabilities.
Trade can be instrumental for development. But increasing concentration in global markets and repeated threats and rounds of tariff hikes are putting the global trading system, and the institutions around which it was built, under severe stress. The COVID-19 outbreak has exacerbated these tensions, precipitating the World Trade Organization (WTO) into a stalemate and leading many economies to simultaneously enact temporary export bans and restrictions on critical goods. All at a time when these goods are more needed than ever before, amidst a pandemic which has put vast parts of the planet under lockdown and limited economic activities in an unprecedented way.
Global annual growth this year might fall between 6% and 7.6% according to the OECD’s latest projections and economies in all regions of the world will shrink. Developing economies will likely be hit the hardest due to their role in global trade. Most developing economies specialise in supplying commodities. Their exports have been severely hit by the COVID-19 crisis, as demand for natural resources has plummeted, prices have collapsed, and traditional exports such as fresh, perishable agricultural products have been blocked due to logistical shortages.
Three main factors are contributing to such a negative global outlook. First, the uncertainty due to the progressive shift of the epicentre of the pandemic from region to region makes it difficult to resume business on a global scale. Second, the duration and scope of government responses are unpredictable. And third, consumer and investor attitudes are changing as the perceived risk associated with managing global production processes and organising supply chains in multiple, distant locations, rises. Confronted with growing uncertainty, new norms affecting production costs, and an unexpected lack of demand, firms are adjusting their business plans and, in many cases, reducing or stalling production activities. Once production is discontinued, both upstream and downstream activities suffer, and can lead to the disruption of entire value chains and job losses, ultimately depriving customers of essential goods and services. Moreover, as unemployment rises and lockdowns diminish consumption opportunities, demand is further reduced by lower income and consumer spending.
Certain government decisions have also affected supply chains. In the race to speed up the response to COVID-19, governments all over the world rushed to issue temporary export bans and restrictions, making it harder for themselves, and especially for developing economies, to get timely access to critical medical supplies. As of June 23, 2020, 95 countries have export bans or restrictions on medical supplies, in place. Right after the outbreak in Europe, Germany issued an export ban on protective medical equipment, while the EU introduced a temporary export ban on certain medical/protective equipment to destinations outside the Union. But export controls are not a European prerogative. Thailand, for example, introduced a temporary export ban on surgical masks after the COVID-19 outbreak.
Unilateral actions of this kind can be counterproductive, especially when global manufacturing capacity is concentrated in a few poles, while specialised components are dispersed in multiple locations around the globe. The pandemic nature of COVID-19 reveals the inadequacy of national responses issued on the basis of a “national emergency”, when in reality all countries around the world (with some hit harder than others) face a “common global emergency”. While export bans and restrictions have helped countries overcome domestic shortages in the past, a globally interconnected world requires a different, more co-operative and common approach. In the current context of shortage of quite literally vital products like masks and ventilators, export bans stand to further damage medical equipment supply chains, leading to even less global supply and higher prices.
To face COVID-19 and prepare for the post COVID-19 world, it is key to now define the rules that will limit the damage to supply chains and rebuild them better and in a fairer way, increasing what developing countries stand to gain. Three areas are of particular importance:
Multilateral agreements: Developing economies can do more by acting as a group in the ongoing WTO negotiations, given that many of the issues being discussed could affect their capacity to adequately respond to the crisis. The Group of 90, an alliance between the poorest and smallest developing countries, should: (i) call for the lifting of all export bans and restrictions on medicines, medical supplies and equipment in times of pandemic and global health emergencies, and (ii) demand that special and differential status for all developing countries in the WTO be preserved as a means to harness the developmental benefits of international trade. At the regional level, trade pacts among countries with complementary production structures can also be instrumental to limiting the costs of export bans and serve as a cushion to guarantee uninterrupted access to key commodities in times of crisis.
Regional value chains: Strengthening regional value chains should be a priority for developing countries to diversify risk, reduce vulnerability, increase resilience and foster industrial development. While Latin America and the Caribbean lag behind, the African continent could leverage the Africa Continental Free Trade Agreement to respond to COVID-19, accelerating industrialisation in multiple areas, including medical supplies. By identifying and maintaining horizontal and vertical linkages, regional pacts can ensure that small firms co-operate to reduce transaction costs and benefit from economies of scale (networks of providers, for example, can also serve as a mechanism to bring generic manufacturers into the supply chain through pooled procurement agreements). They can also help favour connectivity among different specialised providers whose inputs are directly integrated in the supply chain. Furthermore, regional pacts can offer an umbrella to negotiate long-term agreements with pharmaceutical firms, guaranteeing a reliable supply of affordable products. From a governance perspective, the secretariats of regional economic communities in Africa, Asia and Latin America have to be strengthened to be able to play such a prominent role. Furthermore, as recently proposed by UNCTAD, a fully-fledged South-South co-operation initiative on health, health research and related areas, is also needed.
Development banking: Manufacturing in developing economies needs long-term financing. In countries where capacity to develop regional manufacturing hubs exists, firms may be unable to tap into value chain opportunities or scale up production when demand rises, because of lack of funding at affordable prices. National and regional development banks need to play a stronger role in this field through new regional and south-south arrangements. The AFREXIMBANK for example, introduced the Pandemic Trade Impact Mitigation Facility. With USD 3 billion, the facility aims to finance the scaling up of manufacturing of COVID-19-related supplies across the continent and for the continent.
Advancing in these three areas requires the political will to act fast and to act united. Now is the time to rebuild supply chains, and to make them better.