Letter IEDI n. 1012–The COVID-19 pandemic and the risks to GVCs
The coronavirus crisis has highlighted risks to which Global Value Chains (GVCs) are subject, making clear they are an important means of spreading the adverse economic shock from one country to another and from one sector to another
Even before it became a pandemic, the COVID-19 outbreak had already caused disturbances in GVCs, due to their dependence on inputs and components produced in China. For this reason, it has been discussed how to make GVCs more resilient, either through the diversification of suppliers or through the return to greater nationalization of these chains.
The document “COVID-19 and Global Value Chains: Policy Options to Build More Resilient Production Networks” published by the OECD analyzes the economic impacts of the pandemic on global value chains, presenting policies to promote security of supply and ensure a sustainable economic recovery.
According to the OECD, four different types of pandemic impacts on GVCs can be listed. The direct impacts due to employee sick leaves and health protocols that have resulted in lower production in certain companies. The indirect ones, related to the scarcity of inputs coming from places that were directly affected by the pandemic and had to interrupt production.
The other impacts include those on demand—considered the most serious, with a global dimension—and those on countries' trade and investment policies, affecting the flows of international goods, services and capital.
If, on the one hand, the globalization of chains has left companies vulnerable to these impacts domestically and abroad, on the other hand it has also brought solutions that would not be possible if their configuration was only national and/or vertical.
As the OECD points out, there is no evidence that domestic value chains did better than GVCs during the pandemic. Therefore, it is not possible to say that the internationalization of chains has aggravated the COVID-19 crisis.
For companies to ensure chains resilience—understood as the ability to quickly return to normal operations after disruptions—the OECD says it is necessary to improve their risk management strategies, expanding their ability to identify and assess it, to increase transparency information among the various activities that add value and to promote an agile chain management.
Companies that prioritize robustness—understood as the ability to maintain the normality of operations even during crises—usually turn to a wide range of alternative suppliers, while those that value resilience tend to prefer long-term relationships with a smaller set of suppliers.
According to the OECD, governments should support firms' efforts to build more resilient GVCs. They can do this, for example, through the collection and sharing of information on bottlenecks in chains, reviewing the network of international trade agreements and investment regimes, promoting a favorable regulatory environment and digital technologies for risk management, and improving government procurement procedures for essential goods.