port at dusk
Industrial port at dusk. (Image: Timelab Pro  via Unsplash) 

Learning from tumultuous times: Structural risks in international trade

Recent research into global supply chain risks highlights why high-tech products are particularly susceptible to shocks.

By Oliver Reiter and Robert Stehrer

The COVID-19 pandemic has highlighted the fragility of our economies and international trade. The measures necessitated by the pandemic, most notably lockdowns, have caused significant economic damage: according to the latest projections from the IMF’s World Economic Outlook1, world output has decreased by 3.1 per cent. The gross domestic product (GDP) of advanced economies fell by 4.5 per cent compared to 2019, while the decline in GDP was only 2.1 per cent in emerging and developing economies.

In the course of the pandemic, the resilience of global value chains (GVCs) has emerged as a topic of discussion. Has too much emphasis been placed on the efficiency of value chains and too little on their resilience? Although the supply bottlenecks experienced in 2020 can mostly be attributed to the sudden sharp rise in demand rather than to a drop in supply, and even though supply chain disruptions had largely receded by the second half of the year, they have underscored countries’ strong dependence on goods produced elsewhere. For example, pharmaceutical manufacturers have partially outsourced production to low-wage countries, and sluggish imports had an impact on parts of the systemic health infrastructure such as hospitals.

In a recently published study2 by the Vienna Institute for International Economic Studies (wiiw), we constructed a “product risk index” building on the index developed by Korniyenko, Pinat and Dew3. It consists of five subcomponents, each of which maps and quantifies potential structural weaknesses in global trade. One of these subcomponents is an indicator of the extent to which the export of a given product is concentrated in a small number of exporting countries: the larger a country in terms of market share of a given product, the higher this indicator and the more likely it is that the product will be classified as ‘risky’. When a single country has an absolute advantage in the trade of a good, disruptions in the production of that good can have far-reaching effects on all importing countries. On the other hand, when a large number of countries produce and export a given good, supply disruptions in one country will—on the whole—not have much of an impact on importing countries. Other subcomponents of our risk index capture clustering tendencies, international substitutability or the emergence of non-tariff trade measures. Taken together, these subcomponents make up the risk index and allow us to categorize products as “risky” or “non-risky”.

Out of 4,706 products, 435 (9 per cent) are defined as “risky”. Of these 435 products, 294 are intermediate goods while 141 are final goods. When we look at the product categories these risky products fall into, we find that high-tech products (optical and photographic equipment, precision instruments, nuclear reactors and parts thereof, railroad locomotives and parts thereof) account for a large share of risky products.

Development of the share of risky products in imports by region

Note: Including intra-EU trade.

Source: BACI, wiiw calculation.

The figure above illustrates the share, in terms of trade value, of risky products4 in imports for four regions, namely the United States, the EU-27, China and the world. The United States has the highest proportion of risky products across the entire period (2000–2018), while that of the EU-27, China and the world is lower. The share of risky products in U.S. imports has clearly been on the rise; a slight upward trend is also visible in the EU-27. The share of risky products dropped in all four regions during the financial crisis of 2008 and during the years 2011 to 2013, but increased again thereafter and started to stagnate in 2016.

Smaller countries with a higher proportion of imports and countries that specialize in technology-intensive products also have a higher share of risky imports.

The imports of technology-intensive industrial sectors are characterized by a high share of high-risk products

We combine trade data with data from the World Input-Output Database (WIOD) to analyse the share of risky imports by industrial sector. High-tech imports account for the highest percentage of risky imports in every country or region. Risky imports from the rest of the world feature very prominently in all regions. The share of risky imports from China in the EU-27, the United States and the rest of the world is remarkable, while that from the EU-27 or the United States is generally lower.

Share and origin of risky imports in high-tech manufacturing sectors’ total imports, 2014

Source: BACI and WIOD, wiiw calculation.

We can narrow down our findings to two important aspects: (i) the dependence on (risky) high-tech imports is high, specifically the dependence of high-tech industries on these imports, and (ii) the importance of Southeast Asia—and China in particular—as exporters of these products has grown. Building on these results, we derive some recommendations for policymakers. The below graphic includes a second dimension that is relevant for classifying possible policies. We distinguish whether a product (or industrial sector) is considered 'essential' for an economy or not, for instance, goods that are important for sustaining systemically relevant industries or goods that are of strategic relevance in technological terms. Based on this additional distinction, we classify the value chains of products as follows: value chains of essential and risky products should be robust (where robustness describes the ability to sustain production during crises), while value chains of risky but non-essential products should be resilient (where resilience refers to the ability to quickly return to normal operations after crises).

Reiter et al article graphic 3
Supply risk vs. necessity matrix. Source: Author's elaboration.

Other recommendations include collecting and providing information to companies about potential concentrations and bottlenecks along a value chain, conducting stress tests or strategic stockpiling. Another frequent recommendation in the literature is also the reshoring of value chains. However, the OECD5 points out that setting up a value chain is associated with high costs and that reshoring can lead to efficiency losses. Furthermore, while reshoring would decrease the susceptibility to foreign shocks, it increases the potential impact of a domestic supply disruption. In a similar vein, the EU Parliament6 warns against excessive, unrealistic expectations and anticipates reshoring to take place on a small scale only.

Longer-term developments such as the weakening of multilateralism or shifting of global economic power must be closely monitored as such developments are likely to increase structural weaknesses in international trade and thus also the likelihood of supply disruptions. The structural dependencies in international trade call for policy measures that will alleviate them and make value chains more robust and resilient against shocks.

  • Oliver Reiter is Economist at the Vienna Institute for International Economic Studies (wiiw).
  • Robert Stehrer is Scientific Director of the Vienna Institute for International Economic Studies (wiiw).

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

  1. See IMF (2021) Recovery during the pandemic.
  2. Reiter, O. and R. Stehrer (2021) Learning from Tumultuous Times: An Analysis of Vulnerable Sectors in International Trade in the Context of the Corona Health Crisis. wiiw Research Report No. 454, July 2021.
  3. Korniyenko, Y., Pinat, M. and B. Dew (2017) Assessing the Fragility of Global Trade: The Impact of Localized Supply Shocks Using Network Analysis. IMF Working Papers 17 (30): 1.
  4. Note that the riskiness index only has a product dimension and does not differentiate by country of origin. A product is thus considered risky regardless of where it is produced, i.e. even if it is imported from a neighbouring country.
  5. OECD (2020). COVID-19 and Global Value Chains: Policy Options to Build More Resilient Production Networks, Tackling coronavirus (COVID‑19) series, 3. June 2020.
  6. European Parliament (2021). ’Post COVID-19 value chains: options for reshoring production back to Europe in a globalised economy’, Policy department for External Relations. Directorate General for External Policies of the Union.

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