More than past forty years, a significant amount of manufacturing production all across the world has been arranged in ways that it is now known as global value chains (GVCs) –it refers to international production sharing, a system in which production is divided into tasks and activities that are carried out in multiple countries. In GVCs, the services and operations are spread across national borders and the production process becomes more complex. A wide range of tasks is involved including design, production, marketing, distribution, and final support to the consumer. It has a substantial implication on the industrial development of both developing and developed markets.
The Role of China in GVCs
As implied, intermediate goods and raw materials are shipped around the world several times and then a whole new location is chosen to assemble the goods. The final product is again exported to the final consumers distributed across multiple markets both developed and developing. For numerous goods, China is at the center of these GVCs – for instance, being a creator of products and components of high-value, as a great consumer of products and industrial commodities at a global level and as a massive customer marketplace. China is also responsible for producing numerous intermediate inputs and plays an active role in processing and assembling operations.
The best example would be Foxconn, an electronics contract manufacturer. Mainland China is the primary location for its assembly plants which produce for various companies including Intel, Apple, and Sony. China, along with the United States, Japan, and the European Union, makes for the nucleus of the production network worldwide.
The impact due to the containment measures is quite apparent in data about Chinese industrial production, which has declined by 13.5% in the month of January and February cumulatively. When you compare it to the previous year, the reduction in production is drastic. The fall in the production is also connected to major shrinks in inflows of international trade. The country’s imports crashed by 4% in the US dollar in the combined month of January and February whereas exports fell by 17 % over the same period of time-based on the data provided by Chinese trade statistics.
Europe and GVCs
Remarkable slumps in imports, as well as exports, have been observed among products that are usually used as intermediates in the production process including electric- electronic equipment and textiles. Exports from China have plummeted to every region all around the world. The fall has been considered on a global level, apart from North America where trade tensions were already there from the past year between the US and China. The portrayal of an abrupt decline in goods coming from China is equivalent when looking at the condition of many individual European countries such as France, Spain, Germany, Italy, and Austria.
Germany Impacted
The disintegration in the activity of production at the core of various GVCs essentially has affected producers and consumers in countries with frequent up and down in the products’ value chains. The fall in Chinese imports indicates the unavailability of crucial production parts. In the manufacturing sector of Germany, merely the quarter of industrial production has taken place due to the limited import of inputs. 10 % of the total imported inputs including electronics, textile, and computing manufacturing sectors are generally received from China.
Trade Tension between the US and China
There is also a dramatic reduction in the total imports of inputs such as telecommunication equipment, computer, motor vehicle bodies, and trailers to the US when compared to February 2019. It also implies growing trade tensions between the US and China.
The initial drop in trade and production seen in China will severely affect the countries’ supply chain. The consequent fall in demand owing to the enforced restrictions on the movement of individuals fused with concerns associated with the health and safety of employees has resulted in factory shutdowns which will drastically impact operations of entire GVCs.
Talking about China, it is the very first country to undergo a complete cycle of epidemic, manufacturers will now have to tackle the double negative consequences – the first being their own lockdown and the second reason being the fall in demand from consumers. The downward spiral of global manufacturing is highly at the risk of increasing and causing acute degeneration to operations of various cross-border supply chains.
The Second Shock and FDI
The second shock is not limited to trade and production but it is also taking investments into its clutches. Very recently, the International Monetary Fund has announced an astounding outflow of capital from emerging markets amounting to US$83 billion, which has been recorded as the largest outflow to date, however, at the same time an unparalleled number of over 80 countries have called for emergency financing.
Although Foreign Direct Investment (FDI) is generally believed to be less volatile, the effect of COVID-19 on investment is certainly going to be considerable. In the most recent forecast, UNCTAD reported a 30-40% decline in global FDI during 2020-21, based on the recent revision of earnings of major multinationals. Hence, it is estimated that this second shock due to the damaged demand and production in several industrialized economies and the divestment from developing countries is going to have long-running effects on the production worldwide.
Conclusion
If the global economy manages to come out of this prolonged economic affliction, a synchronized policy response as corroborated by the United Nations and various other multilateral institutions appears to be the most promising alternative to avoid economic crisis. However, so far, the discourse around current and future policy responses have demanded the national re-evaluation of established economic models specifically with regards to the international production of goods.
The disarrangement of GVCs due to COVID-19 most likely leave as a long-term legacy: a substantial decline in the potential of developing countries to industrialize through connecting to GVCs. The pandemic demands for escalation of efforts to strengthen multilateral approaches for policymaking and assisting countries in adopting other strategies to facilitate sustainable and inclusive industrial development.