The acute and unexpected nature of the economic and social crisis resulting from the COVID-19 pandemic could trigger important changes in the world economy. One of them concerns the global value chains (GVCs), as pointed out in a recent report released by UNCTAD, which will be analyzed in this Letter IEDI. The theme is gaining attention worldwide and is not new, as suggested by Letters IEDI n. 1012, 989, 980 and 978, among others.

UNCTAD, the United Nations agency for trade and development, assesses the possible directions that the global production system could take until 2030, after the escalation of trade tensions between different countries—notably the USA and China in 2019—and after the disruptions to inputs and components supply caused by the pandemic in 2020.

For UNCTAD, international production chains are going through a “perfect storm,” as the COVID-19 crisis pushed forward and intensified challenges arising from three megatrends: the New Industrial Revolution towards the so-called industry 4.0, the growing economic nationalism, and the urgency of socio-environmentally sustainable economic growth.

With the New Industrial Revolution, the advance of digitalization should increase the importance of intangible assets and boost servitization, concentrating even more value at the ends of the smile curve. It is also likely to improve the coordination of more complex chains, encouraging their internationalization.

Other technologies, however, will not necessarily have the same effects. In the case of advanced automation (artificial intelligence and robotization), by making activities more capital intensive and reducing the competitiveness of cheap labor in emerging economies, it may encourage verticalization and reshoring to developed countries and enhance manufacturing activity, smoothing the smile curve.

According to UNCTAD, additive manufacturing through the use of 3D printers tends to have sector-specific impacts, at least until 2030, especially in longer and less vertical chains. This technology enables production on smaller scales, allowing greater proximity to consumer markets, and favors more decentralized governance, with value capture at the ends of the smile curve.

The pace and extent of adoption of these key technologies will, however, depend on the political environment for foreign trade and foreign investment. UNCTAD says that, in this context, the observed megatrend is of greater interventionism and protectionism by individual countries, which tend to weaken multilateralism in favor of regional and bilateral agreements.

In the last decade, technological competition between nations has not only led to the ressurgency of industrial policies in more than 100 countries, according to UNCTAD, but has also stimulated actions to accumulate and protect technological development and ensure sovereignty in sectors and assets seen as strategic.

As a consequence, new restrictions on international trade and investment have emerged, imposing costs on GVCs, especially those more vertically specialized. Letter IEDI no. 1004, Jun/20, had already highlighted that not only UNCTAD but other organizations, too, identify these global trends.

With COVID-19, UNCTAD believes that countries may grant a “prize” to companies that diversify their trading partners, avoiding dependence on a few suppliers/markets, which multinationals are likely to do through greater regionalization. The nature of the coronavirus crisis may also help to rescue multilateralism.

The environmental challenge, in turn, imposes pressures on GVCs from different channels: consumer demand, guidelines adopted by banks and capital markets that finance businesses, policies to combat climate change and the very occurrence of environmental disasters, all of which will require greater resilience of GVCs.

For UNCTAD, the negative effects of climate change will be particularly significant in developing countries, especially those specializing in food and agricultural products, making it even more difficult to join and move up in global chains. Countries with larger domestic markets and more diversified trade patterns, on the other hand, should better absorb climate shocks.

The effects of these megatrends are multifaceted and interconnected, sometimes reinforcing one another, sometimes pushing value chains in opposite directions. UNCTAD identifies four possible trajectories for GVCs up to 2030, which are not mutually exclusive: reshoring, regionalization, replication and diversification.

For the agency, value chains, trade and investments are heading for a period of turbulence that will present ample challenges and opportunities for developing countries.

As international flows are slowing down and industries are restructuring, countries need to pay attention to the ongoing international transformations, seeking to identify opportunities. They should also take care of domestic and regional demand to attract investments in new areas of infrastructure and in relevant activities so as to generate jobs and promote sustainable development, as established by their UN-agreed commitments.

The full text is available in Portuguese.