COVID-19 is disrupting the operation of global supply chains, causing many businesses (and countries) to rethink where they source their products. Is the pandemic accelerating trends already underway? Were trade policies \u2013 both liberalizing and protectionist \u2013 inducing some degree of \u201cnearshoring\u201d to avoid tariffs or to focus on regional trade made easier and less costly through free trade agreements?<\/p>\n
In the case of the United States at least, the answer may be yes.<\/p>\n
Supply chains encompass all the people, technology and resources that go into producing a final product or service. Supply \u201cchain\u201d is an oversimplified term as they are not linear; they are more like interconnected networks.<\/p>\n
Historically, supply chains were extremely short \u2013 you, or maybe your village, were the entire chain. As economies grew more complex, so did supply chains, enabling more firms to specialize. Companies are now able to source from a wide variety of suppliers to reduce costs and improve efficiency.<\/p>\n
Advances in communication technologies and transportation made it both inexpensive for products to cross national borders multiple times and easier to coordinate complex activities at a distance. Resources, labor and technological expertise in multiple countries are leveraged as value is added throughout global supply chains. International production strengthened many companies\u2019 competitiveness. Many multinational companies also invested in production overseas as part of their supply chain strategies.<\/p>\n
As supply chains stretched, imports became increasingly important in the U.S. American manufacturers rely heavily on imports for the\u00a0inputs<\/a>\u00a0into their American-made goods whether those goods are consumed domestically or ultimately\u00a0exported<\/a>.<\/p>\n For many years China<\/a> has been the go-to for much of this intermediary production, with companies attracted to its large supply of low-wage workers and China\u2019s specialization in certain manufacturing. The concentration of manufacturing in China has led to mounting concern over whether China is competing unfairly through subsidization, market access restrictions, technology transfer and localization requirements. These and other policies have attracted more manufacturing to China and away from both advanced economies like the United States and other low-cost producers in Asia, a trend that may be now reversing.<\/p>\n The COVID-19 pandemic brought this concern into sharp relief, sparking policy discussions over whether U.S. innovators and producers have become over-reliant on China for resources, inputs and final production. But even before the pandemic, the subtext of the\u00a0U.S.-China trade war<\/u><\/a>\u00a0was U.S. pressure on companies to reexamine and \u201crebalance\u201d the structure of their supply and production networks as incentivized by mounting tariffs.<\/p>\n And even before the tariff war heated up, businesses were seeking ways to shorten their global supply chains to reduce their vulnerability to external disruptions such as changes to trade rules, natural disasters, or other crises, according to a 2017\u00a0report\u00a0<\/u><\/a>by The Economist Intelligence Unit and Standard Chartered.<\/p>\n So now that COVID-19 has caused severe disruption to supply chains, the question on everyone\u2019s minds is: will it cause a retreat in participation in global value chains? Or, was participation in global value chains already peaking before the pandemic and if so, will the pandemic hasten the decline?<\/p>\n We can calculate trends in global value chain (GVC) participation using the\u00a0UNCTAD-Eora Global Value Chain (GVC) Database<\/a>. Though supply chains and\u00a0value chains<\/a>\u00a0are not exactly analogous, both show the spread of supply networks across countries. A country\u2019s global value chain participation index can be calculated by summing the foreign value added (FVA) and the indirect value added (DVX) content of its exports, and dividing this by its gross exports.<\/p>\n The chart below shows participation in GVCs generally flattened out from around 2010-2012 after dipping in 2008. It does not show a retreat from global supply chain involvement (though India shows a slight decline). COVID-19 renders the future trajectory unpredictable.<\/p>\nHas Global Value Chain Participation Peaked?<\/h2>\n