Disruptions in global value chains due to COVID-19: stylized facts and policy lessons

Abstract

This paper provides an early assessment of global value chains (GVCs) amid the disruptive effects of COVID-19 on world trade. Using the Asian Development Bank’s updated Multiregional Input-Output Table, key indicators were estimated to identify important stylized facts about the contraction of GVC activities in 2020. Econometric models were also estimated to analyze the disruptive effect of COVID-19 outbreaks and stringent containment measures on GVC trade. The input-output analysis confirms that all major economic sectors suffered large losses, especially services. However, the bulk of the decline in overall GVC trade can still be traced to lower backward transactions in manufacturing. On the aggregate level, stronger backward GVC participation was associated with relatively milder contraction while the opposite was observed for forward participation. The regressions showed that positive growth of GVC trade was less likely in sectors with relatively larger exposure to foreign downstream shocks. Further, the combined effects of stringent containment measures and severe COVID-19 outbreaks also reduced the probability of growth in both backward and forward GVC transactions. These findings indicate that on top of foreign suppliers’ internal disruptions (foreign supply shock), weak global consumption (foreign demand shock) and local producers’ domestic sourcing problems (local supply shock) contributed to the steep contraction of GVCs in 2020. Against this background, the major challenges to robust recovery were also identified. These include the downside risks of a prolonged pandemic, the resurgence of protectionist tendencies, the strength of global demand, the reconfiguration of broken supply chains, and the ability of countries to coordinate their actions especially with respect to vaccination.