Risk, resilience, and recalibration in global value chains
Current global value chains are highly efficient, specialised, and interconnected, but they are also highly vulnerable to global risks. The Covid-19 pandemic has been a stark demonstration of this point, causing supply-side disruptions in the first quarter of 2020 as China and other Asian economies were hit by the outbreak of the virus which eventually spread globally, leading to business closures in countries all around the world (Seric et al. 2020). The ensuing supply chain breakdown prompted policymakers in many countries to address the need for economic self-sufficiency, along with strategies to better deal with global risks, even at the expense of the efficiency and productivity gains that globalisation has brought (Michel 2020, Evenett 2020).
Escalating geopolitical tensions and trade restrictions
Addressing this need for self-sufficiency – especially with regard to economic dependence on China – has given rise to geopolitical tensions, exemplified by the escalation in trade interventions in the lead-up to early December 2020 (Evenett and Fritz 2020). Close to 1,800 new restrictive interventions have been imposed in 2020. This is 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).1 The adoption of discriminatory trade interventions outpaced liberalisations, despite the increase in new trade-liberalising measures or the lifting of some emergency trade restrictions during the period.
Figure 1 Number of new trade policy interventions implemented each year
Note: Reporting lag-adjusted statistics.
Source: Global Trade Alert, chart taken from Industrial Analytics Platform
China registered the highest number of both trade-discriminatory and trade-liberalising interventions of any country: almost 3,300 (43%) of the 7,634 discriminatory trade interventions implemented between November 2008 and early December 2020, and 1,315 (48%) of the 2,715 trade-liberalising interventions over the same period applied to China (Figure 2). 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 Number 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, chart taken from Industrial Analytics Platform.
Signs of resilience in current global value chains
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 (Meyer et al. 2020), 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 (Miroudot 2020).
The Container Throughput Index of the RWI – Leibniz Institute for Economic Research and the Institute of Shipping Economics and Logistics (ISL), for example, suggests that severe global trade disruptions first hit Chinese ports at the outbreak of the pandemic before spreading to other ports around the world (RWI 2020). The RWI/ISL Index also shows, however, that Chinese ports recovered swiftly, bouncing back to pre-pandemic levels in March 2020, and strengthening still further following a slight setback in April 2020 (Figure 3). The index further suggests an upturn in container ‘throughput’ for all other (non-Chinese) ports, although this recovery started later and has been weaker than China’s.
Figure 3 RWI/ISL Container Throughput Index: China and the rest of the world
Note: The RWI/ISL Index is based on container handling data collected from 91 ports around the world. These ports account for the majority of the world’s container handling (60%). With globally traded goods being mainly transported by container vessels, this index can be used as an early indicator of developments in international trade. The RWI/ISL Index uses a base year of 2008, and figures are seasonally adjusted.
Source: RWI – Leibniz Institute for Economic Research/Institute of Shipping Economics and Logistics, chart taken from Industrial Analytics Platform.
Similar trends have also been observed in world manufacturing output. China’s production output may have been 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 4). In step with the international spread of Covid-19, the production output of other countries was curtailed around two months later. Economic recovery in these countries seems to be much slower than in China; two months after China’s manufacturing output returned to pre-pandemic levels, the rest of the world was still lagging behind.
Figure 4 Index of world manufacturing output for selected regions
Note: This data uses a base year of 2015, and figures are seasonally adjusted.
Source: UNIDO, chart taken from Industrial Analytics Platform.
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 5). While output for four of these five industries increased by (far) more than 10% in China, the corresponding output in industrialised economies over the same period decreased by more than 5%. 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 5 Manufacturing 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, chart taken from Industrial Analytics Platform.
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 compared to 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 EU2 (Figure 6).
Figure 6 Share of major trading partners in Chinese merchandise trade
Note: Merchandise trade refers to the sum of merchandise exports and imports.
Source: UNCTAD, chart taken from Industrial Analytics Platform.
ASEAN as an export target region had been of increasing importance leading up to the pandemic, with year-over-year growth exceeding 20% towards the end of 2019. This growth rate was much higher than that of China’s exports to many other major world markets, including the US, Japan, and the EU (Figure 7).
Although China’s exports to ASEAN were also affected by the containment measures associated with Covid-19 – decreasing by about 5% right at the beginning of 2020 – they were less severely affected than China’s exports to the US, Japan, and the EU. When China’s manufacturing output began recovering from the crisis in March 2020, its exports to ASEAN increased again and grew by more than 5% in March/April 2020, and by more than 10% every month between July and September 2020.
Figure 7 Growth 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, chart taken from Industrial Analytics Platform.
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.
Balancing risks and opportunities
If highly specialised and interconnected global value chains become more spatially dispersed and regionalised, transport costs – as well as vulnerabilities to global risks and supply chain disruptions – may decrease (Javorcik 2020). But strongly regionalised value chains may prevent firms and economies from efficiently allocating their scarce resources, from increasing their productivity or realizing higher potentials from specialization. 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 (Arriola 2020).
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 and 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).
Globalization at the 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 rollout 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.
Editor’s note: This column was originally published on 17 December 2020 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.
Arriola, C, P Kowalski and F van Tongeren (2020), “Localising value chains in the post-COVID world would add to the economic losses and make domestic economies more vulnerable”, VoxEU.org, 15 November.
Evenett, S J (2020), “Chinese Whispers: COVID-19, Global Supply Chains in Essential Goods, and Public Policy”, Journal of International Business Policy 3: 408–429.
Evenett, S J and J Fritz (2020), “Collateral damage: Cross-border fallout from pandemic policy overdrive”, VoxEU.org, 17 November.
Javorcik, B (2020), “Global supply chains will not be the same in the post-COVID-19 world”, in Baldwin, R and S Evenett (eds) COVID-19 and Trade Policy: Why Turning Inward Won’t Work, CEPR Press.
Meyer, B, S Mösle and M Windisch (2020), “Lessons from past disruptions to global value chains”, UNIDO Industrial Analytics Platform, May 2020.
Michel, C (2020), “‘Strategic autonomy for Europe – the aim of our generation’ – speech by President Charles Michel to the Bruegel think tank”, 28 September.
Miroudot, S (2020), “Resilience versus robustness in global value chains: Some policy implications”, in Baldwin, R and S J Evenett (eds) COVID-19 and Trade Policy: Why Turning Inward Won’t Work, CEPR Press.
Qi, L (2020), “Chinese Exports to the U.S. Get a Lifeline From Coronavirus-Related Demand”, The Wall Street Journal, 9 October.
RWI – Leibniz Institute for Economic Research (2020), RWI/ISL-Container Throughput Index.
Seric, A, H Görg, S Mösle and M Windisch (2020), “Managing COVID-19: How the pandemic disrupts global value chains”, UNIDO Industrial Analytics Platform, April.
1 The Global Trade Alert database includes policy interventions such as tariff measures, export subsidies, trade-related investment measures and contingent trade-liberalising/protective measures that may affect foreign commerce.
2 The United Kingdom is excluded from EU statistics in this column.