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Pandemic’s Economic Shocks Fuel Scrutiny of Global Value Chains

Pandemic’s Economic Shocks Fuel Scrutiny of Global Value Chains

A growing body of research is trying to measure whether economies enmeshed in global value chains have fared better or worse during the pandemic than they would’ve if production lines were closer to home.

But there’s no definitive answer yet.

Take the report released Tuesday from the Asian Development Bank. Researchers at the Manila-based lender studied the relationship between a country’s pandemic-induced economic downturn and its level of openness to trade via global value chains, or GVCs for short. To do so, they modeled the demand blows under three scenarios: autarky (full self-reliance), classical trading (only bilateral commerce across borders), and GVCs (value-added trade with multiple borders crossed).

The result might be surprising for those who expected globalization to always absorb big jolts: “GVCs have tended to amplify rather than dampen the Covid-19 shock for the 26 economies studied, with the shock being 0.6 points smaller under autarky compared with a GVC world.”

The ADB notes that the difference is “relatively small” when compared with the realized shock of -10.9% and that the relationship fades as an economic contraction intensifies.

Survey another group of countries and the conclusions differ. An OECD analysis earlier this year concluded that “GVCs, on top of generating efficiency gains, play an important role in cushioning economic shocks” and that the “economic case for a significantly reshoring of GVCs is weak.”

So as companies re-evaluate their supply chains and try to make them more durable, they’re doing things like increasing inventories and adding vendors rather than scrapping GVCs and going full tilt into re-shoring production.

That’s because distance isn’t the main problem during the pandemic, Soren Skou, CEO of  top container-shipping line Maersk, said during a conference call earlier this month.

“If you near-shore and you put a factory in Mexico instead of China or you put a factory in Eastern Europe instead of China, that factory can still be hit just as easily in a pandemic scenario as it can if it’s based in China,” he said. “So we are not seeing any dramatic move to near-shoring as a consequence of this.”

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Daisie Hobson

Daisie Hobson is a Director at the Reshoring Institute and an engineer with many years of experience in manufacturing and project management.

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