Global value chains after COVID-19 and BREXIT: is it the end of the world as we know it?

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The world is experiencing an unprecedented shock as a result of the Covid-19 pandemic and widespread lockdowns. As the world’s major economies are put on hold, millions of jobs and incomes are being lost, making it imperative to take economic policy action to counter falling demand and heightened market uncertainty. Government health responses have so far aimed at containment, intended to slow the rate of infection and limit social and professional interactions, accompanied by fiscal and monetary policies to support businesses and protect people’s incomes.. Despite these far-reaching measures, it has become clear that countries, regions, industries and socio-economic groups will be affected unequally, and the role of policies will need to be carefully assessed.

As Covid-19 is a stark example of an unexpected shock of global significance, Brexit will continue, once this crisis has passed, to shape national and European economies, as a new economic and political relationship is forged between the UK and EU. These two events, in sequence and taken together, undoubtedly imply vast changes in the way countries and businesses will trade in the decades to come, given the globalized reach of the shocks and the possible relaunch of policy measures. protectionists coming into force. Global trade is already expected to fall by up to 32% in 2020, according to the World Trade Organization.

In the next issue of the Review, we explore and illustrate the rise of global value chains (GVCs) in recent decades, where production has undergone a process of increasing fragmentation between international locations. Many observe how growing protectionism and restrictions on global trade can hamper the further development of these global value chains, which account for two-thirds of total trade and are essential for economic growth. These will affect the competitiveness of domestic producers involved in complex international production networks and the growth prospects of many middle- and low-income countries that have arguably benefited most from globalization.

Several articles in this issue draw attention to the measurement of indirect trade which is necessary to fully understand the effects of a major shock such as Covid-19 or Brexit. Value chains create links that cannot be easily identified in traditional import and export trade statistics. For example, an increase in exports may generate only a small change in domestic value added (and therefore GDP) if the exports contain a substantial amount of imported value added. Some of the articles featured in the next issue find that up to a third of the added value of the European economy is generated by indirect trade and that the close inter-European trade links in intermediate products lead to significant job creation. Some of the results presented in this issue demonstrate that the UK is more involved in GVCs, both buying and selling to third countries, than many have so far imagined. In light of Brexit, another of the articles believes that changes in trade costs will have significant implications for the domestic competitiveness of UK businesses. Customs duties on intermediate products can be particularly detrimental to multinational companies, because in their complex production processes, components can cross borders several times and, therefore, the customs duty burden can accumulate heavily.

The labor market and distribution aspects associated with the rise of GVCs are also of primary interest and were analyzed during a workshop held at our premises in June 2019, particularly with regard to the sustainability aspects of global value chains, ecology, corporate social responsibility, and risk management at different stages of production. In today’s economic environment, these questions become even more relevant, with questions about how the processes of adding value along such large and disparate supply chains can be affected by events that lead to sudden closure. international borders. Significant disruption of supply chains can easily compromise countries’ access to essential commodities (e.g. medical supplies) or services and is likely to lead to increased trade costs, through the introduction and expansion tariff and non-tariff measures in the form of new health measures and safety standards and controls of goods and people. Businesses involved in global trade will also face soaring prices for goods shipped across the globe, as handling goods in ports and by air, rail and road has become more expensive.

It is becoming clear that the economic and social consequences of the current crisis will be deep and long-lasting, given the extent to which the economic crisis is transmitted not only through national policies but also through disruptions in global supply chains. To shed light on this point, in the same issue, the NIESR assessed the extent to which international trade links can amplify a common national shock. These estimates indicate that global spillovers through trade linkages could increase the global economic impacts of the Covid-19 shock by around 60% on average. This is a significant impact, and not surprising, as we have seen how countries are connected by deep and extensive trade ties that increase indirect exposure and are prone to international contagion.

While it may be too early to postulate that our current reality is “the end of the world as we know it”, one possible outcome is that long and sophisticated global supply chains are being shortened and reshaped, and other values ​​play a more important role. What seems obvious is that globalization trends can no longer ignore certain risks and vulnerabilities. This will certainly require full and integrated cooperation between business leaders, governments and a broad community of stakeholders, to plan ahead and explore new opportunities to address severe levels of disruption and, as much as possible, mitigate the long-term consequences for businesses, consumers and the economy as a whole.

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