A road map for reviving global value chains
Covid-19 has unleashed an unprecedented health crisis across nations and highlighted the global governance deficit. Global value chains (GVCs) have occupied nearly 70 per cent of international trade (OECD, 2013) and contribute 22 per cent of the output. The GVCs involved the dispersal of production, leveraged economies of scale and international division of labour encouraged hyper-specialisation and built upon market power to spur growth, improved job markets, and reduced poverty. These have brought many countries closer to their Sustainable Development Goals.
The GVCs are devastated in almost all countries. GVC trade is dampened, inter-firm relationships are threatened, and trade nationalism and protectionism have resurfaced on the economic landscape. Globalisation, which had slowed down since 2008, is in an apparent suspended animation with the punctuation of world trade negotiations.
The pandemic has hampered the supply of raw materials, intermediate inputs and final goods. World GDP is expected to fall by 8-10 per cent. In India, as per the National Statistical Office, the GDP has declined by 23.9 per cent in the first quarter of 2020, the worst ever in 40 years. Developing countries with weaker health systems and small open economies are most severely affected.
The impact of the pandemic is realised in four episodes:
1. Direct onslaught of the pandemic: Many firms had stopped operating to prevent their employees from falling sick. Factories in China and Bangladesh were also closed to check the spread of the disease.
2. Supply chain impact: There was a disruption in the supply chain due to closure or suspension of international transportation systems because of restrictions on the movement of people and material. As a result, supply and production at many locations that were part of the global value chain had to be stopped. A large number of workers lost their livelihoods. In Bangladesh, garment-exporting firms had to cut production as they could not import textiles from China.
3. Demand impact: The demand for essential commodities (e.g. food and medical supplies) had increased suddenly while supplies were strained due to production constraints and containment measures. The demand for masks, PPE kits, ventilators and testing equipment increased. Many firms were forced to shift to productions as per the market demand. On the other hand, the demand for many commodities contracted due to economic distress, loss of jobs, fall in incomes, and changes in consumer behaviour. In Bangladesh, nearly 1.2 million workers were retrenched. (WRC Report, March 2020). The loss of jobs was higher in informal and unorganised sectors as also travel and hospitality. The demand volatility affected the domestic supply chains as well, and the GVCs exacerbated it through the transmission of economic shocks.
4. Trade and investment policy-related risks: These have increased manifold. The ban on export of food and medical goods, along with domestic pressures to re-nationalise productions to protect supplies, has caused uncertainties for free and transparent trade and investments. Covid-19 is expected to reduce foreign direct investments by 30-40 per cent this year.
The pandemic has forced most of the affected countries to rethink policies on GVCs. There is a need to improve the resilience of GVCs to combat the catastrophe. Different stages of the pandemic will need to be catered to differently: 1. The crisis: In this stage, the focus should be to maintain essential supplies and healthcare services in the face of emergency containment measures to minimise the spread of the virus and resultant challenges.
2. The recovery: It is imperative to begin the recovery by enabling the GVCs to reach earlier production and trade levels. It requires swift decision-making and even a shift in policies, both at the firm and government levels.
3. The new normal: The new normal, which does not mean that there will be no virus. Rather, the co-evolution of the virus and economic activities will have to be managed through government interventions and policies. It may even necessitate the reformulation of policies and amendment of regulations governing tax systems, trade, and labour.
However, there cannot be uniform policy prescriptions for all economies. The pandemic has exposed the growth paradigm across nations, without any distinction between the developed and developing. It did not allow enough time for governments to gather knowledge, and expertise from diverse disciplines, including public health, epidemiology, economics, law, politics, sociology, psychology, and, of course, ethics to achieve effective policymaking. As a result, collective global action through cohesive economic policies fully reflecting upon the pandemic economy is still to emerge. A new growth paradigm has, of course, emerged, with health and environment as its two key constituents.
For the re-energisation of the GVCs, there are some key prerequisites. These include risk mitigation through a non-discriminatory selection of firms by the governments, a conducive regulatory environment which is not a source of policy-related risk, transparency in the value chain, agility, reactivity of the businesses to respond to changes and capabilities, allowing suppliers’ redundancy.
Protectionism or renewed trade nationalism is not a solution. Even restructuring of GVCs and re-shoring of some firms in the chain may involve additional economic and social risks. It is a costly affair. It may outweigh perceived gains in terms of security of supplies and jobs. It is also likely to reduce economic activity. Even local trade may suffer from reduced economic activities.
The solution lies in allowing the firms to recover from shocks with transparent and non-discriminatory financial incentives, encouraging intense use of technology and allowing e-commerce firms more space even in the essential commodities market. At the firm level, markups should be reduced to check the rise in consumer prices.
For ensuring the revival of the GVC trade, the governments will need to ensure speedier decision-making, containment of the virus through behavioural changes in the short term and the development of a vaccine in the long term.
Enhanced mobility of persons and goods for an expeditious fruition of economic activities, financial stimulus to businesses, enhanced investments in health technologies, and effective social safety nets for the most vulnerable populations also need immediate attention. Many governments have used helicopter money to infuse more liquidity into their economies, but they may have to do more to enhance international trade by including in it the services and infrastructure.
A recalibration of tax laws, policies and instruments may be necessary. The monetary controls, regulations and customs procedures will also need to be redefined, made easy and paperless. For this, world trade negotiations should be restarted with renewed vigour to deepen cooperation through rule-based trade and services for growth with equity in a more diverse and knowledge-based world economy.
Views are personal
