Uncertainty is at its highest since the end of the Second World War. The disruptions and shocks observed over the last few years have brought about high levels of uncertainty, leading to changing patterns in global trade flows and to some u-turns in trade diplomacy [1]. The World Uncertainty Index (WUI) which measures uncertainty across 143 countries worldwide shows that uncertainty has been higher in the last decade than in the last 60 years [2]. With uncertainty comes a change in behaviour from all stakeholders in the economy – from households that postpone non-essential consumption, governments that divert resources from investment to short term survival, and firms and investors that also postpone investment decisions.
This uncertainty is also leading to a change in supply and demand dynamics. One of the biggest changes observed since the beginning of the Ukraine-Russia conflict is regarding commodities. Russia and Ukraine are large exporters of energy (oil and gas); fertilisers; grains and certain metals [3]. However, given the conflict, major western governments and companies have either exited or suspended trade with Russia.
While it is certainly too early to tell how the conflict will impact global trade relations over the long term, there is certainly a noticeable shift in immediate global demand and supply activity as far as commodities are concerned. The World Bank suggests that the shock from the conflict as well as pandemic-related impacts could alter global production and consumption patterns till 2024 and possibly beyond.
Global Value Chains and Trade Shocks
The impact of the pandemic on Global Value Chains was of historic proportions not only because of the double-sided demand and supply shock but also because GVCs had matured so much and become very intricate by then. Every country that was a part of a global value chain was impacted by pandemic related lockdowns, border closures and supply chain disruptions.
Figure 1: Global Value Chain participation rates, World, 1995-2020
Source: Global Value Chain Development Report; World Trade Organisation, 2021
Notes: Trade-based GVC participation is based on the total GVC participation rate of A. Borin and M. Mancini. 2019. Measuring What Matters in Global Value Chains and Value-Added Trade. Policy Research Working Paper. No. 8804, Washington DC: World Bank.
Production-based GVC participation is based on the forward GVC participation rate of Z. Wang, S. Wei, X. Yu, and K. Zhu. 2017. Measures of Participation in Global Value Chains and Global Business Cycles. NBER Working Paper. No 23222. Cambridge, MA: National Bureau of Economic Research.
Evidence suggests that those countries that had more mature integration into value chains as well as high-income countries with mature management systems and infrastructure, were able to recover relatively faster. For lower and middle-income countries, recovery has been slower with a much more significant impact. Research by the World Bank shows the changes in GVC participation by countries and regions in 2020 relative to the pre-covid baseline as per the figure below [4].
The uncertain future of GVCs in a world with rising tension and uncertainty
Prior to the pandemic, there was already evidence of rising protectionism. The US pulled out of the CPTPP, renegotiated NAFTA into the USMCA, and fuelled tensions with China. Since then, and more pronounced after the pandemic, there have been talks of countries looking to procure inputs closer to home through ‘near-shoring’ or ‘reshoring’ [5]. The Ukraine/Russia conflict has once again highlighted the risks associated with reliance on global value chains.
Should countries start looking inwards and impose export protection measures?
While export protection helped certain countries face the immediate shocks of the pandemic, reducing trade or ‘reshoring’ could have more devastating effects on global economies. World Bank research shows that implementing these practices could lead to increased poverty and unemployment. [6] Global income would drop by 1.5% with losses in all regions. This amount is higher if low and middle-income countries pursue the same route. A shift to reshoring could drive 52 million people into poverty with more than 80% of this group living in Sub-Saharan Africa [7].
Nonetheless, it has been consistently shown that GVCs, especially well-integrated and mature ones, are resilient in the face of shock. The IMF concludes that trade between countries and regions with significant participation in GVCs was able to weather the shock better. [7] If anything, countries, regions, and value chains have been able to adjust to the changes demanded and have shown that building resilience into GVCs is the best solution to ensure continued global economic growth and prosperity.
Against this backdrop, the priority for policymakers should be to build more flexibility and resilience in value chains. In the case of low income and developing countries, who are harder hit by shocks and take longer to recover, investment in the multiskilling of their labour force and diversification of their exports can help them better withstand shocks and fasten recovery. Digitalisatoin and improving information on the supply chains will trigger faster responses to shocks. GVCs strengthen a country’s ability to compete and specialise in what they can do best and therefore remain an important source of global growth and prosperity.
Paul Baker is the founder and CEO of IEC. He is a consultant for various governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s TradeTech Working Group on trade technologies for trade, and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s Trade Select Committee, and UNESCAP and UNCTAD panels and events regarding trade impact analysis.
References
[1] Much has been written about the impact of the Russia/Ukrainian conflict and how this has impacted our lives with an increase in fuel, coal, food and other precious commodities – all part of our daily consumables. Also, refer to our CEO Insights ‘Russian Invasion of Ukraine creates collateral damage in Africa’. As this article is being written, Russia has stepped up its military engagement in Ukraine and has warned the West and other (specifically NATO) countries against continued supplying arms to Ukraine. Russia has accused the West of fighting a proxy war in Ukraine and history has shown us that rhetoric of this nature generally leads to increased global political tensions. Disruptions to trade and investment are just some of the bi-products of these escalations.
[3] Oil Market and Russian Supply – Russian supplies to global energy markets – Analysis | IEA
[4] Pandemic, Climate Mitigation, and Reshoring : Impacts of a Changing Global Economy on Trade, Incomes, and Poverty | worldbank.org
[5] Is a wave of supply-chain reshoring around the corner? | The Economist
[6] Stronger value chains, not reshoring, are needed after the COVID-19 shock | worldbank.org
[7] Trading for development in the age of global value chains | worldbank.org
