Risk, resilience and recalibration in global value chains

By Adnan Seric, Michael Windisch, UNIDO, Holger Görg, Wan-Hsin Liu, Kiel Institute for the World Economy 1

COVID-19 supply chain disruptions provide an unprecedented opportunity to examine the resilience of global value chains. Data on trade flows and manufacturing output over the course of the pandemic suggest that the supply chain disruptions of early 2020 were of a temporary nature, and that extended global value chains currently interlinking many firms and economies seem to be resilient to trade and economic shocks at least to some extent.

Figure 1Number of new trade policy interventions implemented each year. Note: Reporting lag-adjusted statistics. Source: Global Trade Alert

Escalating geopolitical tensions and trade restrictions

Geopolitical tensions have risen, in a race to address the need for self-sufficiency—especially with regard to economic dependence on China—exemplified by the escalation in trade interventions in the lead-up to early December 2020. Close to 1,800 new restrictive interventions have been imposed in 2020 – over one and a half times the number in each of the two previous years, when the China-US trade dispute and a new wave of protectionism intensified (Figure 1)2. The adoption of discriminatory trade interventions outpaced liberalisations, despite the increase in new trade-liberalising measures during this period and the lifting of some emergency trade restrictions.

Amid rising US-China trade tensions in 2018-19, China already faced a particularly high increase in trade restrictions relative to other countries, which further intensified during the COVID-19 crisis. (Figure 2)

Figure 2Number of trade policy interventions between November 2008 and early December 2020 by country affected

Note: This figure presents the top 5 most exposed countries. Reporting lag-adjusted statistics.
Source: Global Trade Alert

“COVID-19 supply chain disruptions provide an unprecedented opportunity to examine the resilience of global value chains.” #DevMatters

Signs of resilience in current global value chains

China’s production output was one of the first to be hit by strict virus containment measures, but the country also saw an early return to economic activity. Its manufacturing output had rebounded to pre-pandemic levels by June 2020, and has continued to rise since (Figure 3). In step with the international spread of COVID-19, the production output of other countries was similarly curtailed. However, two months after China’s manufacturing output returned to pre-pandemic levels, the rest of the world was still lagging behind.

Figure 3Index of world manufacturing output for selected regions

Note: This data uses a base year of 2015, and figures are seasonally adjusted.
Source: UNIDO

China’s strong economic recovery relative to other countries is even more starkly reflected at the industry level. The figure below shows year-over-year changes in output for September 2020 for China’s five fastest growing industries, all of which are highly integrated in manufacturing global value chains (Figure 4). While output for four of these five industries increased by (far) more than 10 percent in China, the corresponding output in industrialised economies over the same period decreased by more than 5 percent. Although manufacturing of computer, electronic and optical products in industrialised countries and across the world expanded in September 2020, their growth rates were still weaker than China’s.

Figure 4Manufacturing output growth by industry in September 2020

Note: This figure presents the output change of the five industries with the strongest growth in China in September 2020.
Source: UNIDO

China’s swift and strong recovery seems to indicate that Chinese firms are more resilient to global shocks than most others. In fact, the value chains Chinese firms are deeply involved in seem to be more resilient. One reason for this might be China’s success in quickly containing the local spread of COVID-19. Another reason could be that the country has more regionalised value chains than other countries. China has become a particularly attractive investment destination and trading partner for neighbouring economies over the years, especially the Association of Southeast Asian Nations (ASEAN). It has also focused on building international economic relationships within its own neighbourhood through, for example, the Belt and Road Initiative, and the negotiation and conclusion of the Regional Comprehensive Economic Partnership (RCEP).

China’s deeper economic integration with ASEAN countries is evident in its trade data. According to UNCTAD data, the ASEAN bloc has become China’s largest trading partner, surpassing both the US and the EU3 (Figure 5).

Figure 5Share of major trading partners in Chinese merchandise trade

Note: Merchandise trade refers to the sum of merchandise exports and imports.
Source: UNCTAD

“China’s swift and strong recovery seems to indicate that Chinese firms are more resilient to global shocks than most others.” #DevMatters

Although China’s exports to ASEAN (Figure 6) were also impacted by the containment measures associated with COVID-19, decreasing by about 5 percent right at the beginning of 2020, they were less severely affected than China’s exports to the US, Japan and the EU. This apparent regionalisation trend in China’s trade structure is expected to have implications for how global value chains might be recalibrated, with ripple effects for China’s traditional trading partners.

Figure 6Growth in Chinese exports by destination

Note: Bilateral exports at current prices. Year-over-year changes from September/October 2019 to September/October 2020.
Source: General Administration of Customs of the People’s Republic of China

Balancing risks and opportunities

Strongly regionalised value chains may prevent firms and economies from efficiently allocating their scarce resources, from increasing their productivity or realising higher potentials from specialisation. Moreover, greater reliance on a more limited geographical area may reduce manufacturing firms’ flexibility, limiting their ability to find alternative sources and markets when hit by country- or region-specific shocks.

Changes in US imports from China can serve as an illustration of this point. Due to US-China trade tensions, US imports from China had been declining up until the first months of 2020. Yet reducing their reliance on China in favour of more regionalised value chains did not shield US firms from the economic shock the pandemic triggered. In fact, March/April 2020 saw a surge in US imports–in particular of medical supplies–from China, as the country scrambled to meet domestic demand (Qi 2020).

Globalisation at a crossroads

In spite of global value chains showing some degree of resilience in the face of the current global economic shock, the temporary (yet extensive) supply disruptions have induced many countries to reconsider the potential benefits of regionalising or even localising their value chains. These recent developments, together with the increasing power of emerging economies relative to advanced economies in trade issues and negotiations, make it difficult to predict how future global value chains can best be recalibrated, restructured and reorganised. Even though the roll-out of effective vaccines in late 2020 and early 2021 may loosen the grip of COVID-19 on the global economy, ongoing protectionist and geopolitical trends suggest that the world is unlikely to see a return to business as usual. There is still a long and challenging way ahead.

1. The blog is extracted from a post published by UNIDO’s Industrial Analytics Platform (IAP), a digital knowledge hub that combines expert analysis, data visualisations and storytelling on topics of relevance to industrial development. The views expressed in this column are those of the authors and do not necessarily reflect the views of UNIDO or other organisations that the authors are affiliated with.

2. The Global Trade Alert database includes policy interventions such as tariff measures, export subsidies, trade-related investment measures and contingent trade-liberalizing/protective measures that may affect foreign commerce.

3. The United Kingdom is excluded from EU statistics in this article.