4 trends in the Global Value Chains

The coronavirus outbreak and skyrocketed media reaction to it have just highlighted the emerging dynamics in the global economy and in international trade.

The resonance effect is an impact of a complex interplay of economical, geopolitical and technological changes. 

This time is a testing time- when some actors will strengthen the position and some will lose what they have.

"When the Covid-19 pandemic is over, many countries’ institutions will be perceived as having failed." Henry A. Kissinger, WSJ

Either you are a policymaker, a governer, the top manager of the corporation or the investor, you need to realize the geopolitical issues and adjust the strategy.

To develop a strategy, it is necessary to understand the structure of product formation in the global value chain.

What is the Global Value Chain (GVC)?

Value Chain is defined as the series of inputs- raw materials, capital, information, technologies, services- that result in a particular output- either a finished product, subcomponent, or a service. In the context of globalisation, Products cross several national borders in GVCs in different stages of production before they are turned into final goods.in GVCs, the operations are spread across national borders. At each stage, the value is added and it has kind of an accumulative effect. 

Why does the Global Value Chain concept matter?

The Global Value Chain concept is a useful tool to observe the state of international trade and the creation of products within it.

According to OECD, 70% of international trade is for production in global value chains (GVCs), where services, raw materials, parts and components are exchanged across countries before being incorporated into final products that are shipped to consumers all over the world. [OECD, 2019]

As per 2009 from the same source, the median of GVCs participation across 40 countries was less than 50%. This indicates a high degree of acceleration of world integration over the past decade.

What was the state of GVC just before COVID-19?

 The current state of the economy is about the interconnectedness of all information, production cycles, technologies.  Thus, the first significant characteristic of GVCs is globalisation, where “the various value-adding activities comprising a finished product are dispersed geographically in a number of countries”. The second important point is the optimisation within those value chains. The concept is known as “ lean manufacturing”, pioneered by Toyota, that encompass such goals as JIT delivery, low inventory. The questions are:

Are these 2 goals are compatible? Or will they collide?

There were some publications 1 where the writers â€œ have challenged the benefits available from international sourcing and have raised strategic concerns, such as the potential for “hollowing out” the corporation.5” Nevertheless, many writers optimistically presume that technological advances in communication and transportation are quickly scaling the barriers of distance.6”

The course on globalisation prevailed under the model’s assumption of free borders. All these resulted in a deep contradiction of globalisation with an open market without the borders vs. state interests.

This issue was raised by President of France Macron at the beginning of April 2020.

I believe that the shock that we are experiencing, after many others, will force us to reconsider globalisation. It will force us to rethink the terms of sovereignty. We saw that we need to keep control over certain things, that we sometimes thought had no value. We thought that a mask an overcoat had no value. In globalisation, from a business standpoint. It has value when it comes to protect medical personnel. We discovered it in this crisis. It’s worth 40 cents, if at all. But it has tremendous value when we run out and can’t produce them.

Another example is the U.S. Pharma. Health officials in the US were issuing warnings on a possible shortage of drugs due to COVID19 time. Only 28 percent of the drugs used in the U.S. are produced in the country, and 80 percent of those the components used in production, known as Active Pharmaceutical Ingredients are imported. Thus, it brings up to 97% dependency (for the antibiotics) on other countries for its drug supply. Such a high percentage of exports for the pharma sector make this sector politically sensitive and dependent on foreign relationships with China. It could be logical to expect to oblige to set up an alternative production site for pharma components in the U.S.

Let's summarize

The era of hyper-globalisation came to the end. Covid-19 can only accelerate that process. Here are the 4 current trends in the Global Value Chain impacted by a coronavirus.

1. The strategic and political factors are taken into account, their impact on the decision making became more significant.

2. Value chain remains mostly regional. The trend to further intra-regional integration. There are 3 large regional supply chain hubs: Asian with the centre in China, European with the centre in Germany and the U.S.

3. There will be introductions of elements of centrally planned economies in some countries.

4. There will be the introductions of policies that increase barries to import in order to defend local and regional markets. The corporations will be pushed by governments to bring back productions from overseas. these 2 goals are compatible? Or will they collide?

Other articles:

Структура и тренды развития мировых рынков. (Structure and trend of world markets)

The future of STO

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