Global Value Chains in times of crisis

We all know about the importance, growth and dynamics of Global Value Chains. AN interesting question now being asked is due to the Covid pandemic and the large scale disruption of GVCs and movement of goods across borders, should there be a regionalisation or nationalisation of GVCs? Should we look more inward.

A WEF blogpost on this seems to differ. The impact of the pandemic on global value chains has been brought out in detail. However, whether it should lead to nationalisation of supply chains is sought to be answered thus:

If the global economy is to avoid prolonged economic distress, a coordinated policy response, as advocated by the United Nations and other multilateral policy institutions, serves as possibly the most promising path out of a looming economic crisis. So far, however, the discussion around current and future policy responses has seen increasing calls for national re-examination of established economic models, in particular with respect to the international production of goods. In a number of developed countries, leading government politicians have called for a rethinking of their companies’ approaches to international outsourcing of production, with a view to avoiding future supply bottlenecks while increasing resilience of supply chains. For example, the French Minister of Economy and Finance has called for EU governments to rethink their approach to value chains in order to assure “sovereign” and “independent” supplies. In the meantime, this view has gained further traction among some of the other high-level policy makers and commentators.

These calls for “sovereign” or “national” supply chains suggest that companies ought to re-think the spread of production across the globe. In the past, outsourcing was in many cases driven by multinational firms’ desire to optimize their operations by minimizing costs, reducing inventories and driving up asset utilization. If anything, COVID-19 shows that it may perhaps be too simplistic to base decisions about production locations solely on such easily observable economic factors. Many companies may not fully appreciate their vulnerability to global shocks through their supply chain relationships and the costs this imposes. This may no doubt be reflected in companies’ future risk assessments before they decide to relocate production or when they re-consider their location choices.

A substantive nationalization or regionalization of supply chains, however, has the risk to further reduce diversification of suppliers in the world economy and reduces opportunities for developing and emerging economies, especially those outside Southeast Asia, to benefit from GVC-associated capital flows and access to international markets, human capital and knowledge. Such a development will almost certainly deal a significant blow to developing countries' industrialization efforts and impede the socio-economic progress that has been recorded in many developing regions over the past years. The disruption of GVCs due to COVID-19 may therefore leave as a longer-term legacy: a significant reduction in developing countries’ potential to industrialize through linking into GVCs for many years to come. The COVID-19 pandemic calls for increasing our effort towards strengthening multilateral approaches to policy making and assisting countries in opening up other ways to enable inclusive and sustainable industrial development.

Whether national governments will become more insular after the pandemic plays out is anyone's guess. The interdepenence of the global economy and the impact this has on local economies during medical emergencies has just played out. Whether the reaction to look inwards will be a passing phase or a national strategic rethink is debatable.