Economic research and trade policy analysis

The health and economic crisis caused by the COVID-19 pandemic has highlighted both the vulnerabilities and the strengths of the interconnected global economy which has at its core the multilateral trading system. This report has examined the resilience of the global economy to crises how trade plays a pivotal role in developing resilience and in what ways the global trade system can be improved to allow countries to prepare for cope with and recover from crises.

WTO members are frequently referred to as “countries” although some members are not countries in the usual sense of the word but are officially “customs territories”. The definition of geographical and other groupings in this report does not imply an expression of opinion by the WTO Secretariat concerning the status of any country or territory the delimitation of its frontiers nor the rights and obligations of any WTO member in respect of WTO agreements. The colours boundaries denominations and classifications in the maps of the publication do not imply on the part of the WTO any judgement on the legal or other status of any territory or any endorsement or acceptance of any boundary.

The last few years have been challenging for globalization. While the world has benefited from the fragmented networks of production-sharing known as global value chains (GVCs) concerns are being raised over their risks. Chapter 1 of the Global Value Chain Development Report 2019 pointed to a rise in protectionism in general and a brewing trade conflict between the United States (US) and the People’s Republic of China (PRC) in particular. More obstacles have since emerged from the sudden and simultaneous closure of borders due to the COVID-19 pandemic that exposed vulnerabilities in some supply chains rattling policymakers (Chapter 5). Despite these challenges GVCs—for supporters and detractors alike—remain a reality that cannot be ignored. Indeed the very vaccines crucial to ending the COVID-19 pandemic rely on multinational partnerships for the over 200 components that go into them (Irwin 2021).

The COVID-19 pandemic has severely disrupted the world economy. Mobility restrictions imposed by governments anxious to contain the virus have profoundly impacted the networks of complex production-sharing known as global value chains. However these networks were under pressure even before the pandemic. A general stagnation in the pace of globalization has persisted since the 2008–2009 global financial crisis punctuated at times by trade disputes.

The expansion of global value chains (GVCs) has plateaued since the global financial crisis of 2008–2009 due to the slowdown in hyperglobalization (Chapter 1; Antràs 2020a; World Bank 2020). Old and new risks to GVCs as well as shocks threaten the continued viability of these chains. The risks and shocks include extreme weather events trade and technology wars increased protectionism geopolitical tensions and COVID-19. IMF (2021a) defines risk as the effect of uncertainty on objectives—and by inducing uncertainty shocks constitute an underlying source of risks along with limited information and an imprecise understanding of the sources and mechanisms triggering shocks which contributes to uncertainty. Given all this the first three sections of this chapter are taken up by an overview of the sources mechanisms and effects of the three main types of meta-risks: geopolitical environmental and those stemming from the COVID-19 pandemic.1 While addressing primarily the implications of the three risks for GVCs these sections also take note of reverse causal effects where GVCs exacerbate those risks.2 The chapter then examines the relative resilience of GVCs to shocks depending on the nature and magnitude of the shock as well as on GVC features industry and firm topographies availability of substitutions degree of transactional stickiness and type of shock (geopolitical environmental COVID-19). The subsequent section examines mutual interactions across all three risks and their compounded effects. The chapter concludes with policy recommendations and a discussion on future directions in the burgeoning analysis of risks to GVCs.

Greater exposure to international trade improves productivity by increasing competition expanding product markets and improving access to production inputs. Productivity increases at the industry level because competitive pressure leads to a reallocation of resources to more productive firms while the least productive ones are forced to exit the market (Melitz 2003; Melitz and Ottaviano 2008; Eslava et al. 2013). The productivity of firms can also increase because heightened competition from imported products pushes them to invest in new processes technologies and skills to survive (Shu and Steinwender 2019). The possibility to expand into larger export markets also incentivizes firms to improve the production efficiency and the quality of their products (Bustos 2011). And access to a larger range of intermediate production inputs potentially lowers the input costs of firms improves product quality and expands product variety (Fieler Eslava and Xu 2018; Goldberg et al. 2010; Amiti and Konings 2007). Indeed a positive and significant causal effect of trade—measured as the sum of exports plus imports to a country’s gross domestic product—on aggregate productivity has long been established in the economic literature (Alcalá and Ciccone 2004; Alesina Spolaore and Wacziarg 2000; Frankel and Romer 1999).

As responses to the 2008-09 global financial crisis and the COVID-19 pandemic have shown lack of cooperation among governments can create significant tensions and lead to suboptimal outcomes. In contrast governments benefit from acting cooperatively to enhance their resilience whether they are preparing for future disruptions coping with shocks or stimulating the recovery. International cooperation in the trade area can play an important role in building economic resilience to shocks by leveraging synergies and supporting a more open diversified inclusive and predictable trade environment.