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Changi Airport, Singapore (Image: Chuttersnap via Unsplash)

Risk, resilience and recalibration in global value chains

China’s post-COVID-19 recovery may hold clues to the future of global value chains.

By Adnan Seric, Holger Görg, Wan-Hsin Liu and Michael Windisch

Current global value chains are highly efficient, specialized and interconnected, but also highly vulnerable to global risks. The COVID-19 pandemic has been a stark demonstration of this point, causing supply-side disruptions in the first quarter of 2020, as China and other Asian economies were hit by the outbreak of the virus which eventually spread globally, leading to business closures around the world. The ensuing supply chain breakdown prompted policymakers in many countries to address the need for economic self-sufficiency, along with strategies to better deal with global risks, even at the expense of the efficiency and productivity gains that globalization has brought.1

Escalating geopolitical tensions and trade restrictions

Addressing this need for self-sufficiency—especially with regard to economic dependence on China—has given rise to geopolitical tensions, exemplified by the escalation in trade interventions in the lead-up to early December 2020.2 Close to 1,800 new restrictive interventions have been imposed in 2020 – over one and a half times the number in each of the two previous years, when the China-US trade dispute and a new wave of protectionism intensified. The adoption of discriminatory trade interventions outpaced liberalizations, despite the increase in new trade-liberalizing measures during this period and the lifting of some emergency trade restrictions.

Number of new trade policy interventions implemented each year

Note: Reporting lag-adjusted statistics.

Source: Global Trade Alert

China registered the highest number of both trade-discriminatory and trade-liberalizing interventions of any country: almost 3,300 (43 per cent) of the 7,634 discriminatory trade interventions implemented between November 2008 and early December 2020, and 1,315 (48 per cent) of the 2,715 trade-liberalizing interventions over the same period applied to China. Amid rising US-China trade tensions in 2018-19, China already faced a particularly high increase in trade restrictions relative to other countries, which further intensified during the COVID-19 crisis.

Number of trade policy interventions between November 2008 and early December 2020

Note: This figure presents the top 5 most exposed countries. Reporting lag-adjusted statistics.

Source: Global Trade Alert

Signs of resilience in current global value chains

COVID-19 supply chain disruptions provide an unprecedented opportunity to examine the resilience of GVCs. Data on trade flows and manufacturing output over the course of the pandemic indeed suggest that the supply chain disruptions of early 2020 were of a temporary nature, and that extended GVCs currently interlinking many firms and economies seem to be resilient to trade and economic shocks at least to some extent.

The Container Throughput Index of the RWI Leibniz Institute for Economic Research and the Institute of Shipping Economics and Logistics (ISL)3, for example, suggests that severe global trade disruptions first hit Chinese ports at the outbreak of the pandemic before spreading to other ports around the world. The RWI/ISL Index also shows, however, that Chinese ports recovered swiftly, bouncing back to pre-pandemic levels in March 2020 and strengthening still further following a slight setback in April. The Index further suggests an upturn in container throughput for all other (non-Chinese) ports, although this recovery started later and has been weaker than China’s.

RWI/ISL Container Throughput Index: China and the rest of the world

Note: The RWI/ISL Index is based on container handling data collected from 91 ports around the world. These ports account for the majority of the world’s container handling (60%). With globally traded goods being mainly transported by container vessels, this index can be used as an early indicator of developments in international trade. The RWI/ISL Index uses a base year of 2008, and figures are seasonally adjusted.

Source: RWI – Leibniz Institute for Economic Research/Institute of Shipping Economics and Logistics

Similar trends have also been observed in world manufacturing output. China’s production output may have been the first to be hit by strict virus containment measures, but the country also saw an early return to economic activity. Its manufacturing output had rebounded to pre-pandemic levels by June 2020, and has continued to rise since. In step with the international spread of COVID-19, the production output of other countries was curtailed around two months later. Economic recovery in these countries seems to be much slower than in China; two months after China’s manufacturing output returned to pre-pandemic levels, the rest of the world was still lagging behind.

Index of world manufacturing output for selected regions

Note: This data uses a base year of 2015, and figures are seasonally adjusted.

Source: UNIDO

China’s strong economic recovery relative to other countries is even more starkly reflected at the industry level. The figure below shows year-over-year changes in output for September 2020 for China’s five fastest growing industries, all of which are highly integrated in manufacturing GVCs. While output for four of these five industries increased by (far) more than 10 per cent in China, the corresponding output in industrialized economies over the same period decreased by more than 5 per cent. Although manufacturing of computer, electronic and optical products in industrialized countries and across the world expanded in September 2020, their growth rates were still weaker than China’s.

Manufacturing output growth by industry in September 2020

Note: This figure presents the output change of the five industries with the strongest growth in China in September 2020.

Source: UNIDO

China’s swift and strong recovery seems to indicate that Chinese firms are more resilient to global shocks than most others. In fact, the value chains Chinese firms are deeply involved in seem to be more resilient. One reason for this might be China’s success in quickly containing the local spread of COVID-19. Another reason could be that the country has more regionalized value chains compared to other countries. China has become a particularly attractive investment destination and trading partner for neighbouring economies over the years, especially the Association of Southeast Asian Nations (ASEAN). It has also focused on building international economic relationships within its own neighbourhood through, for example, the Belt and Road Initiative, and the negotiation and conclusion of the Regional Comprehensive Economic Partnership (RCEP).

China’s deeper economic integration with ASEAN countries is evident in its trade data. According to UNCTAD data, the ASEAN bloc has become China’s largest trading partner, surpassing both the US and the EU4.

Share of major trading partners in Chinese merchandise trade

Note: Merchandise trade refers to the sum of merchandise exports and imports.

Source: UNCTAD

ASEAN as an export target region had been of increasing importance leading up to the pandemic, with year-over-year growth exceeding 20 per cent towards the end of 2019. This growth rate was much higher than that of China’s exports to many other major world markets, including the US, Japan and the EU.

Although China’s exports to ASEAN were also impacted by the containment measures associated with COVID-19, decreasing by about 5 per cent right at the beginning of 2020, they were less severely affected than China’s exports to the US, Japan and the EU. When China’s manufacturing output began recovering from the crisis in March 2020, its exports to ASEAN increased again and grew by more than 5 per cent in March/April 2020, and by more than 10 per cent every month between July and September 2020.

Growth in Chinese exports by destination

Note: Bilateral exports at current prices. Year-over-year changes from September/October 2019 to September/October 2020.

Source: General Administration of Customs of the People’s Republic of China

This apparent regionalization trend in China’s trade structure is expected to have implications for how GVCs might be recalibrated, with ripple effects for China’s traditional trading partners.

Balancing risks and opportunities

If highly specialized and interconnected GVCs become more spatially dispersed and regionalized, transport costs as well as vulnerabilities to global risks and supply chain disruptions may decrease. But strongly regionalized value chains may prevent firms and economies from efficiently allocating their scarce resources, from increasing their productivity or realizing higher potentials from specialization. Moreover, greater reliance on a more limited geographical area may reduce manufacturing firms’ flexibility, limiting their ability to find alternative sources and markets when hit by country- or region-specific shocks.

Changes in US imports from China can serve as an illustration of this point. Due to US-China trade tensions, US imports from China had been declining up until the first months of 2020. Yet reducing their reliance on China in favour of more regionalized value chains did not shield US firms from the economic shock the pandemic triggered. In fact, March/April 2020 saw a surge in US importsin particular of medical suppliesfrom China, as the country scrambled to meet domestic demand.5

Globalization at the crossroads

In spite of GVCs showing some degree of resilience in the face of the current global economic shock, the temporary (yet extensive) supply disruptions have induced many countries to reconsider the potential benefits of regionalizing or even localizing their value chains. These recent developments, together with the increasing power of emerging economies relative to advanced economies in trade issues and negotiations, make it difficult to predict how future GVCs can best be recalibrated, restructured and reorganized. Even though the roll-out of effective vaccines in late 2020 and early 2021 may loosen the grip of COVID-19 on the global economy, ongoing protectionist and geopolitical trends suggest that the world is unlikely to see a return to business as usual. There is still a long and challenging way ahead.

We thank Muriel Rotermund for her research support, as well as Aiden Selsick and Niki Rodousakis for their editorial guidance.

  • Adnan Seric is Research and Industrial Policy Officer at the Department of Policy Research and Statistics (PRS) of UNIDO.
  • Holger Görg is Professor of International Economics at the University of Kiel and Head of the Research Area “Global Division of Labour” at the Kiel Institute for the World Economy (IfW Kiel). He is also Director of the Kiel Centre for Globalization.
  • Wan-Hsin Liu is Senior Researcher at the Kiel Institute for the World Economy (IfW Kiel) and Coordinator of the Kiel Centre for Globalization.
  • Michael Windisch is Junior Specialist on Industrial Development at the Department of Policy Research and Statistics (PRS) of 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).

References

  1. See e.g. Michel, Charles. (2020) ‘Strategic autonomy for Europe - the aim of our generation’ - speech by President Charles Michel to the Bruegel think tank. 28 September 2020; Macron, Emmanuel. (2020) Emmanuel Macron speaks at UN General Assembly (22 Sept. 2020).  
  2. The Global Trade Alert database includes policy interventions such as tariff measures, export subsidies, trade-related investment measures and contingent trade-liberalizing/protective measures that may affect foreign commerce.
  3. RWI – Leibniz Institute for Economic Research. (2020) RWI/ISL-Container Throughput Index.
  4. The United Kingdom is excluded from EU statistics in this article.
  5. Qi, Liyan. (2020) Chinese Exports to the U.S. Get a Lifeline From Coronavirus-Related Demand. The Wall Street Journal. 9 October 2020.

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