In recent decades, global value chains have grown in length and complexity, in the wake of business strategies seeking to reduce costs and secure access to strategic raw materials. They have also grown in opacity and interconnectivity, creating vulnerabilities that have become quite evident in recent years.

Today's Letter IEDI examines current sources of global tension that tend to accelerate transformations in the organization of global value chains (GVCs), as well as the aspects that make some of these chains more vulnerable than others. This topic is not new in the reflections of the IEDI, being recently addressed in recurring publications of the Institute, such as Letters No. 980, 989, 1012, 1036 and 1104, among others. 

To this end, the studies "Global Value Chain Development Report 2021: Beyond production" of November 2021— a joint publication by the WTO, Asian Development Bank (ADB), Japan External Trade Organization and China Development Research Foundation—and "Risk, resilience, and rebalancing in global value chains," published in August of 2020 by the McKinsey Global Institute, were addressed.

There is also information from the UN's “Human Development Report 2021/22” and the study “Global supply chain disruptions: evolution, impact, outlook” of September 22, authored by researchers at the Bank of International Settlements (BIS).

As McKinsey points out, the ruptures in the chains borne out from confinement and the restrictive measures adopted due to COVID-19 consist only of the most recent and critical of a series of other disruptions. Risks continue to escalate with the projections of natural disasters and extreme weather events, trade and technological wars, increased protectionism, geopolitical tensions, such as the Ukrainian war, and the possibility of new pandemics.

Researchers from the WTO, ADB and other partner institutions in the aforementioned study recall that, in the last decade, many chains had their activities interrupted due to environmental events, such as the earthquake and tsunami in Japan in 2011, followed by floods in Thailand, Hurricane Harvey in the US in 2017, and floods in Germany and regions of China in 2021.

According to McKinsey, in 2019, 40 climate disasters caused damage in excess of $1 billion each. With climate change resulting from global warming, the frequency and magnitude of extreme natural phenomena are expected to increase. The UN estimates that the number of medium and large environmental disasters may increase from 400/year to 560/year by 2030.

GVCs are particularly exposed to these risks because companies are often located in coastal areas, with high population and industrial activity concentration. Although the agglomeration of their activities reduces costs and improves cooperation, it also exposes chains to the occurrence of localized pandemic, environmental and geophysical shocks.

Climate change, by promoting the migration of animal species and potentially intensifying the displacement of human groups, also creates risks of new viral outbreaks that may become global pandemics, such as COVID-19. Globalization tends to amplify the shocks of this nature, according to WTO and ADB researchers.

The impact of COVID-19 on GVCs, recall the authors of the study, was much more international, of a larger scale and lasting, since dysfunctionalities in supply chains continue to be present today. The economic recession that COVID-19 triggered was the deepest since the Great Depression of 1930.

Natural and pandemic risks are added to and interact with another source of uncertainty for GVCs: social and political tensions within countries and geopolitical risks arising from the intensification of commercial and technological competition between countries and the adoption of nationalist measures.

The UN points to the advance of political polarization in countries, compromising confidence in institutions, increasing conflicts and hindering international cooperation. McKinsey and the World Bank indicate that countries with low scores on political stability indicators currently account for almost 80% of international trade.

For the authors of the WTO and ADB report, geopolitical shocks—triggered by trade and technological wars, export controls, boycotts, cyberattacks, etc.— have broader and deeper implications for GVCs. Industrial strategies increasingly influenced by issues such as resilience and national security, when seeking an "inward" development, tend to intensify these shocks and encourage the reorganization of chains.

McKinsey's estimate suggests that, for several reasons, a large international company faces, on average, one-month interruptions in its chain every 3.7 years. Depending on the sector of activity, a single prolonged disruption can destroy at least half of the company's annual profits.

Analyzing the degrees of exposure of 23 industrial chains to various types of shocks, McKinsey's study found that the risks of disruption faced by any particular chain reflect underlying vulnerabilities. For example, labor-intensive chains are more exposed to pandemic risks and climate change; others, for having few producers of strategic inputs or strong regional concentration, are more exposed to geopolitical risks and natural disasters. 

According to McKinsey, among the most vulnerable chains are communication equipment, clothing, petroleum products, transport equipment and mining. In contrast, regional chains, which are also often less exposed to cyberattacks and trade disputes, are among the least vulnerable. McKinsey's vulnerability overview is quite convergent with that of Unctad, discussed in Letter IEDI n. 1104 “Risks and resilience of global value chains”.

The constitution of more resilient chains can take many forms, according to McKinsey. In addition to the relocation of production, which in part may be induced by public policies, it also includes strengthening risk management capacities and improving transparency; building redundancy in supplier and transport networks; maintaining inventories (just in case); reducing product complexity; expanding flexibility to produce in more locations; improving financial and operational capacity to respond to and recover more quickly from eventual shocks.

Becoming more resilient does not mean sacrificing efficiency either. McKinsey's study notes that recent technological advances towards digitalization offer new solutions for: execution scenarios, monitoring multiple layers of supplier networks, accelerating response times and even changing production models that can enable the reconfiguration of GVCs. 

Considering the economy of the sector and the priorities of national policies, the study estimates that 16% to 26% of global exports of goods, worth between US$2.9 trillion and US$4.6 trillion, could be reallocated to new countries in the next five years if companies restructure their supplier networks. This may involve some combination of reshoring, nearshoring and moving to different offshore locations.

The full text is available in Portuguese.