Global value chains (GVCs) have driven dramatic expansions in trade, productivity, and economic growth in developing countries over the past three decades.
A new research report, Reshaping Global Value Chains in Light of COVID-19: Implications for Trade and Poverty Reduction in Developing Countries from the World Bank, examined the economic impact of the pandemic on GVCs and explores whether they can continue to be a driver of trade and development.
The analysis shows that well-operating GVCs are a source of resilience more than a source of vulnerability. Moreover, steps to maintain and enhance trade contribute to managing a crisis and recovery, while measures to reshore production make all countries worse off.
This economic crisis offers countries an opportunity to reshape the global economy into a greener, more resilient, and inclusive system that is better equipped for a changing world. Trade is a powerful tool for achieving this aim.
Key messages from the research include:
Globalisation will strengthen the recovery from the COVID-19 (coronavirus) pandemic, whereas localisation will weaken it.
Both high-income and low- and middle-income countries are better off in a globalised world.
Policies that are supportive of, not hostile to, trade could prove critical to strengthening recovery from the pandemic, supporting greater diversification, and reducing extreme poverty.
Low- and middle-income countries stand to gain the most from strengthening trade and global value chains (GVCs).
In a globalised world, the overall increase in real income in low- and middle-income countries between 2019 and 2030 could be 10% higher.
In a globalised world, global trade could grow by 25% between 2019 – 2030, whereas in a world where countries reshore their production, global trade could instead decline by 22% by 2030.
A more hostile environment for trade, with a shift toward global reshoring, could drive an additional 52 million people into extreme poverty.
The hardest hit would be the poor in Sub-Saharan Africa, with 80% of the new poor caused by reshoring.
Measures to enhance trade could boost incomes, spur integration into GVCs, and lift almost 22 million additional people out of poverty by 2030.
Such measures would also improve the incomes of the bottom 40% of the income distribution.
A more supportive environment for trade would boost resilience to future supply shocks, widening access to raw materials, goods, and services.
Low- and middle-income countries can take steps to strengthen their resilience to future shocks by unilaterally reducing tariffs on inputs, implementing trade facilitation measures, and diversifying sources of inputs.
After COVID-19, most countries will need to boost their climate mitigation efforts to reach the Nationally Determined Contributions (NDCs) targets under the Paris Agreement.
Each region and sector will be affected differently, as countries strive to reach their NDC targets, with countries heavily dependent on coal being the hardest hit.
Depending on how policies are implemented, climate mitigation measures in high income economies could reshape GVCs away from carbon-intensive activities.
Climate policies would affect low- and middle-income countries differently, depending on the extent of carbon-intensive sectors in their economies, with countries in Europe and Central Asia potentially the most vulnerable.
The European Union (EU) Green Deal, which would raise the implicit price of carbon by more than the Paris commitments, is also bound to have an impact on trade.
EU countries would likely reduce imports of fossil fuels and other carbon intensive products because of lower EU-wide demand.
The impact of EU climate policies on other countries will depend on the degree of carbon intensity of their exports and links with the EU.
Stylised modelling suggests that a carbon border adjustment mechanism (CBAM), as part of the EU Green Deal, would have relatively little impact on archetypal GVCs such as electronics, motor vehicles, and apparel.
However, computers and electronics, motor vehicles and parts, and other light manufacturing could become even more deeply integrated into GVCs under CBAM.
Low- and middle-income countries can mitigate the potential negative impacts of climate policies on certain sectors through their own policy responses.
Download the full report here.
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Potential effects of the war between the Russian Federation and Ukraine on commodity dependence in Africa.
The Russian Federation invaded Ukraine on 24 February 2022, initiating a war.
The geopolitical tensions in Eastern Europe have shaken the international economy.
Although the two countries do not have strong trade relationships with Africa, our continent is already experiencing the impact of the war through disruptions of international trade and increased financial volatility.
The sudden rise in global commodity prices depicted in the figure below, such as oil and natural gas, tend to increase the export earnings of African fuels and metals exporters.
Some African metals exporters with floating exchange rate regimes have observed an appreciation of the exchange rate since February 2022 due to higher commodity prices.
The rise in commodity prices can be an opportunity for African countries to reduce their debt burden and improve their overall financial outlook, especially after being hit by the adverse effects of the COVID-19 pandemic.
Nevertheless, the risks of falling into a resource-curse trajectory should also be a primary concern.
A major risk is that commodity-dependent countries may increase expenditures during booms, contracting more debts.
The evidence shows that the overall economy in commodity-dependent countries is destabilized when prices drop sharply.
Tax revenues fall, Governments discontinue public expenditures on selected public goods, domestic economic activity shrinks, credit dries up and debt increases, along with the number of firms’ non-performing loans and bankruptcies.
Another concern is the excessive volatility of commodity prices that affects domestic commodity-dependent economies.
Volatility exerts an adverse impact on economic growth because it leads to a lower accumulation of physical and human capital.
Further, the negative growth effects of volatility from commodity prices can even offset the positive impact of commodity booms.
By contrast, the hike in wheat, edible oil, corn, and fertilizer prices worsens food insecurity in Africa.
Rising food and fuel prices tend to accelerate inflation, having negative distributional effects because the poorest segments of the population tend to spend a disproportionately high share of their income on food.
Source: Economic Development Report in Africa, 2022.
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The dominant corporate buzzwords in the US
US company executives have been using the buzzwords onshoring, reshoring or nearshoring at a greater clip this year than they did in the first six months of the pandemic.
More importantly, there are concrete signs that many of them are going beyond just talk and acting on these plans.
The construction of new manufacturing facilities in the US has soared 116% over the past year, dwarfing the 10% gain on all building projects combined.
There are massive chip factories going up in Phoenix. Intel is building two.
And aluminium and steel plants that are being erected across the south.
Near Buffalo in New York, all this new semiconductor and steel output is fuelling orders for air compressors that will be cranked out at an Ingersoll Rand plant that had been shuttered for years.
Scores of smaller companies are making similar moves.
Not all are examples of reshoring. Some are designed to expand capacity.
But they all point to the same thing — a major re-assessment of supply chains in the wake of port bottlenecks, parts shortages and skyrocketing shipping costs that have wreaked havoc on corporate budgets in the US and across the globe.
Source: Bloomberg
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Global value chains (GVCs) have driven dramatic expansions in trade, productivity, and economic growth in developing countries over the past three decades.
A new global research report, Reshaping Global Value Chains in Light of COVID-19: Implications for Trade and Poverty Reduction in Developing Countries from the World Bank, examined the economic impact of the pandemic on GVCs and explores whether they can continue to be a driver of trade and development.
Some of key messages from the new research include:
Globalisation will strengthen the recovery from the COVID-19 (coronavirus) pandemic, whereas localisation will weaken it. Both high-income and low- and middle-income countries are better off in a globalised world.
Policies that are supportive of, not hostile to, trade could prove critical to strengthening recovery from the pandemic, supporting greater diversification, and reducing extreme poverty.
Low- and middle-income countries stand to gain the most from strengthening trade and global value chains (GVCs). In a globalised world, the overall increase in real income in low- and middle-income countries between 2019 and 2030 could be 10% higher.
In a globalised world, global trade could grow by 25% between 2019 – 2030, whereas in a world where countries reshore their production, global trade could instead decline by 22% by 2030.
A more hostile environment for trade, with a shift toward global reshoring, could drive an additional 52 million people into extreme poverty. The hardest hit would be the poor in Sub-Saharan Africa, with 80% of the new poor caused by reshoring.
Measures to enhance trade could boost incomes, spur integration into GVCs, and lift almost 22 million additional people out of poverty by 2030. Such measures would also improve the incomes of the bottom 40% of the income distribution. A more supportive environment for trade would boost resilience to future supply shocks, widening access to raw materials, goods, and services.
Low- and middle-income countries can take steps to strengthen their resilience to future shocks by unilaterally reducing tariffs on inputs, implementing trade facilitation measures, and diversifying sources of inputs.
After COVID-19, most countries will need to boost their climate mitigation efforts to reach the Nationally Determined Contributions (NDCs) targets under the Paris Agreement. Each region and sector will be affected differently, as countries strive to reach their NDC targets, with countries heavily dependent on coal being the hardest hit.
Depending on how policies are implemented, climate mitigation measures in high income economies could reshape GVCs away from carbon-intensive activities. Climate policies would affect low- and middle-income countries differently, depending on the extent of carbon-intensive sectors in their economies, with countries in Europe and Central Asia potentially the most vulnerable.
The European Union (EU) Green Deal, which would raise the implicit price of carbon by more than the Paris commitments, is also bound to have an impact on trade. EU countries would likely reduce imports of fossil fuels and other carbon intensive products because of lower EU-wide demand. The impact of EU climate policies on other countries will depend on the degree of carbon intensity of their exports and links with the EU.
Stylised modelling suggests that a carbon border adjustment mechanism (CBAM), as part of the EU Green Deal, would have relatively little impact on archetypal GVCs such as electronics, motor vehicles, and apparel. However, computers and electronics, motor vehicles and parts, and other light manufacturing could become even more deeply integrated into GVCs under CBAM.
Low- and middle-income countries can mitigate the potential negative impacts of climate policies on certain sectors through their own policy responses.
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Russia’s revenues surges from its energy and commodity exports
Russia’s current-account surplus hit a record of $70 billion in Q2 2022, as surging revenues from energy and commodity exports helped offset the impact of US and European sanctions imposed over President Vladimir Putin’s invasion of Ukraine.
The positive balance on the current account, the broadest measure of trade in goods and services, was the widest since at least 1994, according to data released by the central bank Monday.
A collapse in imports driven by the sanctions contributed to the surplus, which has emerged as a key economic lifeline for the Kremlin as the US and its allies try to isolate it.
Russia may have more funds to finance Putin’s war, but supermarket shelves are empty as its economy struggles to produce what it can no longer import due to sanctions.
Such a current account surplus can only be described as an unintended consequence.
In Russia’s favour this time. They may not be so lucky the next time around…
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China continues to be the world’s trade powerhouse
People keep prophesising about how China will suffer in a new era of retreating globalization and supply-chain reshoring, but the latest official numbers show no weakening of its standing as a trade powerhouse.
China’s shipments abroad in June continued to defy gravity, rising at the fastest pace since January and swelling the nation’s trade surplus to a record $98 billion.
The second-highest monthly export haul in at least three decades came after Shanghai began reopening from a lockdown that had shuttered the city and partly closed the world’s largest port in April.
Big questions now: Were the latest trade numbers a one-off as the country works through a shipping backlog, and will slower growth and bloated inventories in developed economies means China’s trade will downshift for the rest of the year?
Shanghai’s reopening looks to be easing supply-chain snarls for both China and the world. Domestic production and delivery times looks to be improving.
Cooling US domestic goods spending is easing transportation strains and China’s strict Covid policy also continued to lower stress on logistic networks.
Covid cases in the Shanghai appeared to level off over the last few days. Uncertainty is whether any large new outbreak which led to major cities being locked down would both cut into domestic demand, and damage industrial output and exports.
The growth in exports last month doesn’t seem to be stressing global supply chains as it did in 2021, with Drewry’s spot rates for shipping from China to the US or Europe continuing to fall.
The price of sending a 40-foot container from Shanghai to Los Angeles was $7,566 last week, about 39% lower than the peak of more than $12,000 last September.
Those costs rose a little during the lockdowns in Shanghai and elsewhere but then resumed their declines again as port capacity rebounded. China’s top 10 ports processed a record 17.8 million containers in May.
Source: Bloomberg