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Global Supply Chains: beyond COVID-19 By Agelos Delis, Mustapha Douch, Jun Du and Oleksandr Shepotylo
LBGCBP Insight Paper
5 May 2020
Lloyds Banking Group Centre for Business Prosperity
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Global Supply Chains: Beyond COVID-19
Agelos Delis 1, Mustapha Douch1, Jun Du1* and Oleksandr
Shepotylo 1
5 May 2020
Abstract
This insight paper provides fresh evidence on the scale of Covid-19’s impact on international trade and global value chains (GVCs) as at early May 2020. It first summarises the disruption
in international trade in relation to China, where the pandemic started; and using the most
updated monthly statistics, it analyses the ripple effects on other countries. Building on the current knowledge of global value chains and the UK’s position in relation to these, it then
discusses the future of global value chains, and whether the UK can play an important and integrative role.
1 Economics, Finance and Entrepreneurship Department, Aston Business School, Aston University; *Contacting author: Professor Jun Du, Email: [email protected], Telephone: 07713085539; Twitter: @LBGCBP, @jundu1mecom, @shepotylo, @delis_agelos, @douch_m
Disclaimer: The views expressed in this Insight Paper are those of the authors and do not necessarily reflect those of Lloyds Banking Group.
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The Coronavirus caught the global economy by surprise. Global financial markets initially tumbled
by 20-25% and the price of oil dropped to levels last seen in 1999.1 Flash PMI survey data record
a developed world downturn exceeding that seen during the global financial crisis. 2 With a
significant standstill, production stops and jobs are lost. Some commentators argue that the
pandemic could even unravel the globalization process itself.
Globalisation involves complex and interweaved links among producers in many countries, known
as Global Value Chains (GVCs). Producers rely on highly specialized intermediate inputs, often
produced by only one supplier located thousands of miles away. However, GVCs serve as a
double-edged sword at a time of supply chain disruptions such as in the case of COVID-19. On
the one hand, integrating into GVCs involves a reliance on highly specialised intermediate inputs.
Businesses may experience supply chains breakdowns due to severely disrupted multinational
activities along their GVCs, and also due to undermined international logistics. However, on the
other hand, globalization allows firms to source inputs from many different countries, which
would help diversify risks from disruptions.
In this Insight paper, we consider the impact of Covid-19 along global value chains, starting from
where the pandemic was initiated to where it has been transmitted. Using the most recent data, we
quantify the disruption and look beyond it to the implications for the UK.
When China caught Covid-19
Although the global economy was not particularly strong at the turn of the New Year (Roach,
2020), many had high hopes of a blossom spring with a positive turn in international trade
following the US-China Phase One trade deal.3 But early in January 2020, China was the first
country to be hit by the outbreak of Covid-19. This led to an unprecedented quarantine in Hubei
Province and draconian health restrictions in most regions across China. As a consequence, the
Chinese economy was brought to a standstill for two months and disruptions to supply chains
were acute.
According to Chinese Customs Statistics, the value of Chinese exports in the first two months of
2020 fell by 17.2% Year on Year (YoY), while imports slowed down by 4% YoY. [Exhibit 1] On
the other hand, just before the pandemic, Chinese trade demonstrated a solid growth pattern,
1 See https://www.theguardian.com/business/live/2020/mar/12/stock-markets-tumble-trump-europe-travel-ban-ecb-christine-lagarde-business-live. 2 See https://ihsmarkit.com/research-analysis/flash-pmi-surveys-signal-steep-developed-world-downturn-april20.html. 3 See https://www.ft.com/content/a01564ba-37d5-11ea-a6d3-9a26f8c3cba4.
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annually 2.4% for exports and 7.9% for imports, following the easing of trade tensions between
US and China, before taking a sudden reduction.
Exhibit 1: Export and Import of China between 2019 and 2020 Note: This figure shows the dynamics of bimonthly exports and imports of China measured in billions of USD in Jan-Feb, 2019 – Jan-Feb, 2020. Source: General Administration of Customs of People’s Republic of China (GACC)
Europe and the US get ill too
The drop in Chinese trade was not felt similarly across all continents. In particular, the comparative
figures for the same months in 2019 and 2020 illustrate vividly a collapse in Chinese trade with the
EU and the US. [Exhibit 2] Exports to the EU fell by 29.9%, while imports from the EU declined
by 18.9%. The drop in exports and imports to the US was 27% and 8%, respectively. The latter is
unexpected given that China and the US signed the Phase 1 deal on January 15, 2020. However,
the expected growth in trade did not materialize due to the pandemic.
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Exhibit 2: Exports and Imports of China in relation to the regions of the world, % change, between Jan-Feb of 2019 and 2020 Note: This figure shows percentage change in exports and imports of China in Jan-Feb, 2020, by regions of the world, as compared to the same period of 2019. The EU is included in the broader region of Europe. Source: General Administration of Customs of People’s Republic of China (GACC)
An explanation of why such a fall materialised for Chinese trade with Europe and the US probably
has to do with the interdependence of European and American firms in relation to Chinese firms.
In order to understand the magnitude and mechanism of the supply disruption (shock) in China
and its propagation across the world, we map China’s complete global trading network using
official Chinese monthly data. We analyse China’s importance to global trade by ranking its trade
relationships with various partners based on their centrality scores: that is, measures of how
connected they are to other important trading nations. A higher score suggests a higher
dependence on trade with China.
Among the top 20 trading partners in 2019, seven were from Europe, alongside the USA,
accounting for a large proportion of trade, together with China’s regional trade partner Japan.
[Exhibit 3]
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Exhibit 3: Importance of China’s trading partners Note: This table shows the ranking based on the Eigenvalue Centrality of China’s trading partners based on HS2 products exported internationally in Jan-December 2019 and Jan-Feb 2020. The European countries were better placed in the ranking for 2020, with France and Germany at
the top, thereby highlighting that the EU’s two biggest economies were having an increasing
reliance on trade with China. Consistently, European countries and the US are among the top trade
partners of China. But this alone is not enough to explain the dramatic decline in their trade with
China.
For the other countries, the decline in trade with China was less prominent, albeit still sizeable.
Two additional interesting facts stand out. For Africa the decline in imports from Africa (20.5%)
was higher than the fall in exports (13.8%) departing from the pattern of the reduction in exports
being higher than the reduction in imports; and exports from Oceania into China actually
increased.
These results, especially those for the EU and US, are puzzling, since standard trade models would
have predicted a more or less similar magnitude of the fall in trade between China and each of its
trade partners. Looking closer at specific countries, evidently high- and middle-income countries
are the most affected. [Exhibit 4]
0.95
0.955
0.96
0.965
0.97
0.975
0.98
0.985
0.99
0.995
1
1.005
Germany
Hong Kong (China)
Japan
Russian Federati
United States
France
Korea, Rep.
Malaysia
Thailand
United Kingdom
Viet Nam
Australia
BelgiumCanada
Italy
Netherlands
Taiwan
Indonesia
Singapore
TurkeyFrance
Germany
Hong Kong (China)
Japan
Russian Federati
Korea, Rep.
United Kingdom
United States
Australia
Netherlands
Pakistan
Singapore
Thailand
United Arab Emir
Viet Nam
Canada
Indonesia Italy
Malaysia
Philippines
GVCs Centrality
2019 Jan-Feb 2020
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Exhibit 4: Importance of China’s trading partners Source: General Administration of Customs of People’s Republic of China (GACC) A refined picture emerges with inspection of the top ten trading commodities affected negatively
by COVID-19 disruption. [Exhibit 5] For exports, these were capital goods, such as nuclear
reactors, boilers, machinery & mechanical appliances, electrical machinery & equipment, followed
by labour intensive final goods, such as furniture and some textiles and garments, and finally
intermediate goods, like iron, plastics and organic chemicals. The imported goods most disrupted
included several types of intermediate inputs, such as organic chemicals and plastics, which could
be the result of the production being halted in China. The highest reduction in imports was seen
for precious stones & metals. These are luxury goods with a high-income elasticity. This also
highlights the strong impact of the growing and sophisticated Chinese middle class’s luxury
shoppers on the global trade in such goods. Interestingly, Chinese imports of meat and minerals
fuels increased. The first increase is probably explained by the lock- down’s effect on food
production, and is evidence that international trade can assist countries facing an emergency, while
the second is related to the recent fall in oil prices and decisions to fill strategic oil reserves and
commercial stockpiles.4
4 See https://www.ft.com/content/9f89f35a-7142-4fde-b9da-344a823027a1.
-25
-20
-15
-10
-5
0
5
10
Hong Kong (China)
Korea, Rep.
Japan
East Asia
& Pacific
Russia EU
Germany
United Kingdom
Netherlands
France
Europe & Central A
sia
Latin Americ
a & Caribbean
Middle East & North
Africa
Sub-Sahara
n Africa
United States
Canada
North Americ
aIndia
South Asia
Chinese trade with the world, by countries, change between Jan-Feb 2019 and 2020
Export Import
$ bn
Export regional total Import regional total
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Exhibit 5: Importance of China’s trading partners Source: General Administration of Customs of People’s Republic of China (GACC) In addition, it is important to note that of the ten commodity categories with the highest reduction
in exports and imports, four are common – nuclear reactors, electrical machinery & equipment,
plastics and organic chemicals – reflecting the intensely fragmented production networks between
China and the world, even within a narrowly defined commodity range in global value chains.
A closer look at the change in Chinese exports to the EU and the US shows a strikingly similar
pattern. The three products most affected in terms of Chinese exports to the World are also the
three most affected in both the EU and the US. Overall, 7 out of 10 products that suffered the
biggest decline in exports to the EU are in the top 10 for the world, while for the US it is 8 out of
10 [Exhibits 5 & 6]. Hence, it is clear that the composition of trade with the EU and the US
explains to a large extent the steep decline in trade in relation to China. This is especially the case
with the huge reduction in electronic machinery and equipment and labour-intensive consumer
goods such as furniture and plastics. [Exhibit 6] While the sudden shutdown of the economy has
led to clear supply restrictions in consumer goods industries, it may not be straightforward to
separate the supply shock of Covid-19 from longer-term US-China trade war effects on high-
technology electronic goods. The latter developed , from the start of 2019 through US sanctions
aiming to exclude China from US supply chains by restricting Huawei supercomputer industrial
groups and other Chinese high-tech companies.5
5 See https://www.ft.com/content/c6993200-1ff3-11ea-b8a1-584213ee7b2b.
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Nuclear re
actors,
boilers,
machinery
and…
Electr
ical m
achinery and e
quipment;…
Furnitu
re; beddin
g, mattr
esses, m
attres
s
Men's o
r boys'
overcoats,
car-c
oats,
cap
Iron and s
teel
Article
s of ir
on or stee
l
Plastic
s and ar
ticles
there
of
Article
s of a
pparel a
nd clothing ac
cessorie
s
Toys, g
ames
and sp
orts re
quisite
s; part
s…
Organic c
hemica
ls
Natural
or cultu
red pearl
s, prec
ious or…
Organic c
hemica
ls
Aircraf
t, space
craft,
and parts
there
of
Nuclear re
actors,
boilers,
machinery
and…
Optical,
photograp
hic,cinemato
graphic,…
Plastic
s and ar
ticles
there
of
Vehicles o
ther than
rai lw
ay or t
ramway
Electr
ical m
achinery and e
quipment;…
Meat
Mineral fu
els, mineral
oi ls and p
roducts
Export
Chinese trade with the world, by commodities, change between Jan-Feb 2019 and 2020 $ bn
Import
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Exhibit 6: Importance of China’s trading partners Source: General Administration of Customs of People’s Republic of China (GACC)
The intertwined webs of GVCs: now and for the future
As China begins to recover and the supply-side trade shocks to most major economies abate, an
unprecedented, synchronised, broad and probably deep set of demand-side shocks is now
expected to reverberate through the global supply chains. China again was among the first to feel
the incipient demand shock. Chinese workers returned to work in April, but for some their work
no longer exists.6 The reason is that widespread cancellations of international orders and delayed
payments led to liquidity problems, and a large number of closures of businesses that relied on
global demand. During February-March 2020, Chinese official statistics show that the
establishment of new foreign trade enterprises was lower by 24.4% compared to the same period
last year. At the same time, 12,000 existing foreign trade enterprises closed down (NBS, 2020),
including once successful businesses with registered capital of levels as high as 10-20 billion
RMB Yuan. An example is Gaoyue International Trade Ltd. in Fu Jian Province.
The emerging evidence indicates that the sectors in China that are most affected in the current
wave of Covid-19 include raw materials industries, textile and clothing manufacturing, logistics
and containers and agriculture – a combination of final consumption goods as well as intermediate
goods, reflecting the supply side disruption in global markets. But just as trade liberalisation
6 See https://www.reuters.com/article/us-health-coronavirus-china-ports/chinas-ports-brace-for-second-hit-as-virus-spread-wipes-out-exports-idUSKBN21J4OF.
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produces winners and losers, this pandemic does too. There has been a surge in demand for
medical gear and equipment for example.7
Globally, there is a wider discussion about the future of global value chains. On the one hand,
there is reflection about the reliance on global value chains, and in particular about the reliance on
China; and there is tendency to propose de-globalisation. Policymakers have already started
debating whether after lockdowns relax the business models are going to change dramatically.
European Commission President Von der Leyen called for the “shortening” of global supply
chains because the European Union is too dependent on single suppliers.8 Similarly, President
Macron has called for the value chains of domestic firms to become more French, and for
strengthening French and European “economic sovereignty” by investing at home in industrial
sectors and in high tech. and medical sectors.9
Is this the beginning of the end of globalisation?
The short answer is no. However, limited decoupling may happen, and some reconfiguration of
global value chains is inevitable.
The global supply chains built over recent decades are very complex networks, illustrated using
the most recent Global input-output table in 2014. [Exhibit 7] The overwhelming sense, drawn
from the network viewpoint, is that no sector or country is…an island! Indeed, the formation of
global value chains follows the principle of efficiency. Production fragmentation and complex
supply chains are the result of businesses sourcing best possible inputs in order to produce outputs
at lowest cost. So long as efficiency remains the principle, global value chains will not fade away,
but instead be strengthened in the longer term after the initial disruption.
7 See https://uk.reuters.com/article/us-health-coronavirus-china-suits/china-encourages-export-of-medical-suits-to-meet-overseas-demand-amid-virus-outbreak-idUKKBN20R0WP. 8 See https://ec.europa.eu/commission/presscorner/detail/en/speech_20_675. 9 See https://www.ft.com/content/3ea8d790-7fd1-11ea-8fdb-7ec06edeef84.
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Exhibit 7: Intertwined web of global value chains. Note: GVCs network, which represents the links between 56 sectors in each country with other sectors in the world. Source: World Input-Output Database (WIOD), 2014. Based on author’s calculation.
In particular, the global supply chains facilities were effective prior to the Covid-19 crisis. The
foundation of global value chains is still strong. Demand will fall in the prospective recession, but
this is not expected to be a sufficient reason to decouple from global production networks. On
the contrary, this would be an extra reason to rely on global value chains to improve productivity.
There will therefore be a cleansing effect from the crisis, as from any other crisis. The least
productive firms will exit, and the surviving businesses will learn from the crisis and emerge
stronger. For example, businesses will have discovered alternative suppliers and potential
customers over this period that they had not previously known. They will operate more flexibly,
both in sourcing materials or talents. and in producing and marketing; and hence they will be more
resilient. The upshot is that business interests will dictate strategy-making, in relation to
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specialisation versus diversification. There is overwhelming evidence that global value chains
facilitate business interests by a wide margin.
The present worries about over-reliance on global value chains are well justified in the case of
products related to national security, such as medical gear.10 Many countries will reflect on this
aspect of the crisis and re-balance between efficiency and safety. Hence, we should expect to see
some decoupling of national production networks from the global value chains in these areas.
However, what governments will do and what governments should do are different matters. In
our view, due to clear positive externalities, both at the medical, humanitarian and also economic
levels globally, the best strategy to deal with a crisis like Covid-19 is greater international
collaboration. Nobody can predict what the next crisis will look like or where it may occur, to draw
up a complete list of commodities warranting national security considerations. The most reliable
and efficient insurance by far would be to build a strong international safety network. As yet, a
strong global consensus still seems necessary to be established for building this network, a
consensus which is unfortunately hard to reach. But this does not mean we should lose this
ambition.
UK in GVCs: post-Brexit and Covid-19
The UK plays a central role in global value chains, with many of its sectors showing continued
competitiveness. The UK is unique among EU countries for consistently increasing domestic
contents of production over time (IJtsma et al., 2018), generating increasingly higher value in global
value chains. According to the calculation of eigenvector scores of centralities, the majority of
sectors in the UK appear to be highly important within the global production network. [Exhibit
8]
10 See https://www.piie.com/blogs/trade-and-investment-policy-watch/yes-medical-gear-depends-global-supply-chains-heres-how-keep.
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Exhibit 8: Intertwined web of global value chains. Note: GVCs network which represents the GVCs networks of UK financial sectors (sector 41). Source: World Input-Output Database (WIOD), 2014. Based on authors’ calculation.
At present, the UK seems likely to plunge into a significant decline in its economic activity,
especially since Brexit will make it more difficult to maintain the existing value chains with other
EU countries in its near vicinity, and will make it more costly to create new ones that will be located
further away. UK small and medium- businesses had already started exploring non-EU markets
long before the Covid-19 pandemic and have shown a remarkable pattern of trade diversion
responding to the Brexit referendum (Mustapha, Du and Vanino, 2020). Covid-19 may be another
push for UK businesses to look beyond the EU. However, this is a precarious moment for small
businesses, as the breakdown of supply chains, lost production capacity and liquidity problems can
combine to end businesses prematurely. Governments need to do whatever is necessary to ensure
small business sectors are not broken as a result of the crisis.
Further, the UK is the second largest service market in the world, and it remains the second largest
cross-border service provider globally, behind only the US. The UK financial services, business
services and professional services sectors feature as providing one-third of value-added in
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manufacturing exports.11 These sectors contribute hugely to overall UK competitiveness, which
will face unprecedented challenges post Brexit while disengaging from the EU. The value position
of the UK is clearly set to be reassessed.
Covid-19 brings significant medium term challenges to businesses and governments. However,
one also has to think beyond the Covid-19 crisis, and to focus on the long-term challenges brought
by Brexit.
References:
Douch, M., Du, J. and Vanino, E., 2020. Defying Gravity? Policy Uncertainty, Trade Destruction
and Diversion, Lloyds Banking Group Centre for Business Prosperity Research Paper No. 3
IJtsma, P., Levell, P., Los, B. and Timmer, M.P., 2018. The UK's Participation in Global Value
Chains and Its Implications for Post‐Brexit Trade Policy. Fiscal Studies, 39(4), pp.651-683.
Roach, Stephen S, 2020, A Global Economy Without a Cushion, Project Syndicate,
https://www.project-syndicate.org/commentary/global-growth-losing-its-trade-cushion-by-
stephen-s-roach-2020-01?barrier=accesspaylog.
11 See http://www.oecd.org/sti/ind/GVCs%20-%20UNITED%20KINGDOM.pdf.
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Aston University, Aston St, Birmingham B4 7ET
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