Lessons from past disruptions to global value chains Header
Aerial view of the Meuse river, Hoek van Holland, Netherlands. (Image: GAPS via iStock Photo)

Lessons from past disruptions to global value chains

The recovery of supply chains can be supported through trade policies and firm-specific initiatives.

By Birgit Meyer, Saskia Mösle and Michael Windisch

We are truly living through exceptional times. Crude oil prices in the futures market have plunged into negative territory for the first time in history1 while we have witnessed the first quarterly contraction of China’s GDP since 1992 when official records started2. The COVID-19 pandemic has already proven its ability to completely redefine our global economy.

Trade is no exception in this regard: the World Trade Organization forecasts a decline in the world merchandise trade volume of between 13 per cent and 32 per cent in 2020 as a consequence of the COVID-19 pandemic, with a high likelihood of surpassing the historic slump observed during the global financial crisis of 2008-2009.3 This is the second major blow in a relatively short period of time to the seemingly secular trend of expanding global trade and increasing economic integration.

We have witnessed a rapid increase in global trade, from around 20 per cent in 1970 to over 50 per cent of world GDP in 2008. The strongest drivers of this trade expansion have been Europe and East Asia. Since 2009, the development of global trade in nominal terms relative to world GDP has become more volatile, with a quick rebound in 2010 and a sizable contraction in 2015 and 20164.

Merchandise trade in world GDP by region

Source: World Development Indicators, own calculations.

The COVID-19 pandemic has hit the global economy at a time when world trade and the global division of labour have already been strained due to rising protectionism. Rising tensions over trade, in particular between the United States and China, have seriously hampered global trade recently. In 2019, trade volumes declined for the first time since the global financial crisis, according to the CPB World Trade Monitor. While growth continued to be sluggish at the beginning of the year, partly reflecting the drop in exports and imports due to the lockdown in China, the full effect of the COVID-19 pandemic has yet to be reflected in the data. Freight volumes in the Red Sea and Suez Canal, an important shipping route, were around 25 per cent below their usual levels at the beginning of May.5

Monthly trends in world trade

Note: Volumes, seasonally adjusted. Year-on-year changes of sum of imports and exports.

Source: CPB World Trade Monitor, own calculations.

The world trade system is crucial for distributing inputs to manufacturing production across the globe. Multinational enterprises are an important driver of the fragmentation of production: they account for two-thirds of international trade.6 Around every second trade transaction in manufacturing involves intermediates. Intermediate goods are usually shipped between different production sites for further processing. The expansion of global value chains (GVCs) over the past decades has reshaped the geography of world trade and has allowed some developing countries, particularly in Southeast and East Asia, to engage in the production of more complex manufactured goods by specializing in distinct activities in GVCs.

Share of intermediates in manufacturing trade by region

Note: Data from 2018 are used.

Source: CEPII BACI 2020, own calculations.

The highly complex system of GVCs relies on the smooth functioning of global trade, which has been severely affected by COVID-19. In addition to the drop in demand, containment measures are hampering the flow of goods between countries. Over 80 per cent of global trade is transported by sea.7 Shipping data show that the number of inactive container ships in East Asia and the Pacific soared immediately after the first lockdown measures were implemented in China. Exporters in the rest of the world reported a lack of containers during that time.8

Container ship congestion due to COVID-19

Note: Begin of lockdown in Wuhan City was on 23 January 2020.

Source: Refinitiv Eikon, own calculations.

While the situation in East Asia has started to normalize with the re-opening of the Chinese economy, shipping congestion in other parts of the world has been on the rise amid lockdowns, most notably in South Asia, North Africa and the Middle East as well as in Europe and Central Asia. The fall in global demand contributes to reduced (and slower) shipping activity. Moreover, most countries have introduced safety measures at ports — including quarantines and the prohibition of crew changes — leading to transport disruptions and delays. A recent analysis of satellite data shows that sailings to destinations where the change of crews is restricted dropped significantly more than sailings to destinations with less stringent restrictions, such as screening rules.9 Time delays in international trade and associated supply chain uncertainty have been shown to increase costs and to negatively impact trade.10

In addition, both land transport and air cargo have suffered sharp blows. The reintroduction of border controls in many European countries in mid-March led to severe congestion at the borders. The price for air cargo has risen dramatically as more than half of the world’s air cargo is usually transported in passenger planes which are currently not operating due to travel restrictions.11

Truck border crossing times at European borders

Note: For each border checkpoint, the maximum average daily waiting times are calculated from 6-hour intraday average waiting times provided by Sixfold. A European 7-day moving average is subsequently calculated.

Source: Sixfold, Kiel Institute calculations.

The scope of these disruptions in trade is unprecedented. The current downturn of trade can be attributed to a reduction in demand and supply, in particular in sectors most affected by the COVID-19 containment measures, and an increase in transport costs. Previous research on disruptions in global trade reveals that policies that reduce time and uncertainties along GVCs are essential for rapid recovery.

A study by Inoue and Todo (2020) simulates the impact of a lockdown of Tokyo, a major economic hub, on supply chains in Japan.12 The lockdown of a major city quickly proliferates through supply chains and the longer the lockdown is in place, the more firms further downstream or upstream from the plants located in Tokyo are affected. The economic damage increases over-proportionally with each day. The risk every firm in the supply chain faces depends on its particular location within the chain, its competitive or contractual position and its adjustment flexibility, which is intricately linked to its inventory position. A higher degree of diversification, financial capabilities and flexibility across activities allows firms to absorb shocks.

Even when the short-term effects due to disruptions in supply chains are enormous, recovery can take place within a few quarters.13 Production input or supplier substitution are key to slowing down the proliferation of shock and a fast recovery. Furthermore, general business continuity plans to build up resilience and to outline what actions to take in times of disasters are helpful to better cope with disruptions in supplies and logistics problems.14

Pre-emptive measures can help mitigate the impact of supply chain disruptions. In 2003, during the SARS crisis, many Asian companies along GVCs increased production in response, built buffer levels and stocked up inventories. Many firms developed business plans, establishing parallel sites or shifting operations, and invested in IT to enable remote working.15 In addition, arranging alternative transportation methods, transport routes and production arrangements reduce logistics bottlenecks and minimize the risk along value chains. Long delays in GVCs are costly. Missing key components due to late arrival can cause idle time, making many in-time deliveries worth more than the value of the components being transported. This is why parts and components are one of the most time-sensitive goods.16

Similar to previous crises, governments have introduced anti-recession measures and mobilized billions of dollars to mitigate the economic consequences of COVID-19. In previous crises, financial assistance from local banks and trading partners was particularly important, for example in the post-disaster phase after the Great East Japan earthquake in March 2011.17 Similarly, a key to the recovery of trade during the financial crisis was the reduction of financial frictions for trade granted by banks and governments.

Lessons from past disruptions to global value chains Image
Police check traffic at the entrance to quarantined city due to COVID-19, Sofia, Bulgaria. (Image: djumandji via iStock Photo)

In contrast to previous epidemics like SARS or economic shocks like the financial crisis, travel and movement restrictions, social distancing measures and the shutdown of many businesses to slow the spread of COVID-19 imply that labour supply, travel, transport and trade are strongly and directly affected in ways unknown before. The crisis has hit many major global economic centres almost simultaneously. Global monitoring, international coordination and cooperation are key in containing both the economic shock and the pandemic. A multilateral approach to policy making and intergovernmental cooperation will lead to greater policy effectiveness. Historical experience demonstrates that after the Second World War, international cooperation was crucial for rapid economic recovery, as was knowledge and technology exchange.18

Supply chain disruptions are currently hampering economic activity. International trade can nonetheless contribute to the economic recovery from the COVID-19 pandemic. Previous disruptions in transport have shown how important fast recovery is to keeping trade routes open since supply chains are sensitive to logistics bottlenecks. Precautionary measures hindering trade should only be temporary and not lead to more protectionism in the long run. Many of the current anti-export measures might lead to serious trade distortions and uncertainties, hitting developing countries particularly hard. Not additional trade protectionism, but keeping transport routes and ports open, ensuring the right of transit, and trade facilitation will help protect the trade of essential goods such as medical and agricultural products, and crucial inputs. Avoiding trade restrictions also helps maintain quality standards and an exchange of knowledge and technologies, including for medical equipment and pharmaceuticals.

Global disruptions in supply chains and trade require global collaboration in containment measures and recovery-assisting policies. At the same time, national policies and firm-specific initiatives can support a quick recovery and increase resilience to future shocks in supply chains.

  • Birgit Meyer is Assistant Professor at the Institute for International Economics at the Vienna University of Economics and Business (WU).
  • Saskia Mösle is a member of the Research Center International Division of Labor at the Kiel Institute for the World Economy (IfW Kiel). She is also a PhD candidate in Quantitative Economics at Kiel University.
  • Michael Windisch is Junior Specialist on Industrial Development at the Department of Policy Research and Statistics (PRS) of the United Nations Industrial Development Organization (UNIDO).

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).

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