Alvaro Espitia, Aaditya Mattoo, Nadia Rocha, Michele Ruta, Deborah Winkler 18 January 2021 The Covid-19 pandemic has inflicted both a supply and demand shock across many countries. Production, consumption, and trade patterns have been affected, both directly and as a result of the lockdowns and social distancing measures introduced to contain the virus. Factory closures have led to a drop in the supply of exportable goods in affected countries. These supply shocks have been compounded by demand shocks, as consumers and firms have had to modify their spending decisions in the new environment. As the crisis unfolded, a recurrent question has been the relationship between Covid-19 and global value chains (GVCs), and particularly whether GVCs mitigate or
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Alvaro Espitia, Aaditya Mattoo, Nadia Rocha, Michele Ruta, Deborah Winkler 18 January 2021
The Covid-19 pandemic has inflicted both a supply and demand shock across many countries. Production, consumption, and trade patterns have been affected, both directly and as a result of the lockdowns and social distancing measures introduced to contain the virus. Factory closures have led to a drop in the supply of exportable goods in affected countries. These supply shocks have been compounded by demand shocks, as consumers and firms have had to modify their spending decisions in the new environment.
As the crisis unfolded, a recurrent question has been the relationship between Covid-19 and global value chains (GVCs), and particularly whether GVCs mitigate or magnify Covid-19 shocks (Baldwin and Tomiura 2020, Freund et al. 2020, Javorcik 2020, Miroudot 2020, Eppinger et al. 2020, Gerschel et al. 2020). In a recent paper (Espitia et al. 2021), we revisit this question using bilateral monthly export data for 28 exporting countries (most EU members, the US, and Japan) and multiple trading partners at a detailed sector level in the first six months of 2020. We find that participation in global value chains did increase exporters’ vulnerability to foreign shocks, but it also reduced vulnerability to domestic shocks.
Trade over the first wave of the Covid-19 pandemic
Global trade declined by approximately 13% during the first months of Covid-19 (February to June 2020). A closer look at the first three months, where lockdown policies were implemented in most of the countries in our sample, illustrates how decreases in worker and retail mobility — a proxy for the Covid-19 shock — are correlated with lower growth in exports and imports, respectively (Panels A and C of Figure 1). The shift over time of the country sample towards the bottom left suggests that both mobility and trade growth declined as the virus advanced. Between the peak of the first wave of Covid-19 in April until June 2020, both mobility and trade improved gradually, as shown by the shift over time of the country sample towards the top right in Panels B and D in Figure 1.
Figure 1 Trade over the first wave of the pandemic, February to June 2020
We also find that the negative trade effects varied widely across sectors. On the export side, sectors more amenable to remote work have, as expected, suffered less throughout the pandemic. On the import side, product characteristics matter – for example, durable goods such as computers can be affected more or less than other goods depending on whether consumers postpone purchases at uncertain times or increase demand to adjust to remote work and schooling. We find that the contemporaneous trade effect of a demand shock in destination countries is smaller for those sectors with larger shares of durable goods, but the lagged effect is larger, reflecting a drop in orders of durables.
Covid-19 shocks and global value chains
How did Covid-19 shocks affect trade via global value chains? We rely on a simple conceptual framework (Figure 2). Covid-19 shocks can hit the exporting economy, the destination economy, or input source economies. Participation in global value chains can mitigate or augment the negative trade effects of Covid-19 related shocks.
Figure 2 Global value chain participation and the impact of different shocks on trade
When the exporting country is hit by a supply shock, exports of sectors that rely on imported inputs are more resilient than those that rely on domestic inputs. The opposite is true when a supply shock hits countries that are the source of the exporter’s inputs. Finally, a shock in the partner country more strongly affects the sectors that export intermediates to that destination. From an exporter’s perspective, the first channel captures the benefit of diversification through GVCs in the presence of a domestic shock, while the second and third channels relate to foreign shocks either upstream or downstream that can disrupt supply chains.
Our empirical strategy is based on estimating a gravity model of bilateral trade at the sector level (e.g. Dai et al. 2014). We rely on a comprehensive set of fixed effects to identify the role of sector characteristics in mitigating or magnifying Covid-19 related shocks in the exporting, destination, and source countries. Specifically, we focus on interaction terms between a selected time-varying measure at the country-level (i.e. the Covid-19 shocks) and a time-invariant sector intensity reflecting the sector’s dependence on that factor (e.g. GVC participation).
GVCs transmitted foreign shocks and mitigated domestic shocks
Baseline results show that while GVC participation increases an exporter’s vulnerability to foreign shocks, it reduces its vulnerability to domestic shocks (Figure 3). The disruption of production in an exporter’s source countries more adversely affected its export growth in sectors that rely more strongly on imported inputs from these source countries. Similarly, a disruption of production in an exporter’s destination countries more adversely affected its export growth in sectors with high shares of imported inputs. But the negative impact of a disruption in domestic production in exporting countries themselves was mitigated by a sector’s higher reliance on imported inputs used in their exports. These results are confirmed when we include China in the sample of exporters and when we use mirror export data to expand the set of exporters to 64 developed and developing countries.
Figure 3 The impact of Covid-19 shocks on bilateral exports through GVC channels
Note: The figure plots the coefficients for the interaction between the home, destination, and upstream-supply shocks and GVC variables obtained using a standard difference-in-differences method.
To interpret the econometric results in Figure 3, consider how lockdowns in the home economy affected exports of sectors with different levels of participation in global value chains. The coefficient for the February-June period in Figure 3 implies that the negative impact of a home shock for country-sectors with low GVC participation (i.e. in the first quartile of the distribution) has been on average 20 percentage points higher than for country-sectors with high GVC participation (i.e. in the third quartile of the distribution). The 20 percentage point difference is the cost in terms of forgone exports of high dependance on domestic inputs during a lockdown.
Consistent with the insights in Figure 1 on the two phases of the first wave of Covid-19, we perform regressions for the sub-periods February to April 2020 and April to June 2020 separately. We find that in the early months, exports were most sensitive to shocks in upstream countries. This effect subsided in the later months perhaps because production picked up in China which plays a central role in the network of GVCs. For the same reason, the role of import dependence in mitigating domestic supply shocks was stronger in the latter period (Figure 3). It is possible that the initial disruptive effect of upstream supply shocks obscured the later mitigating impact of outsourced inputs and may have contributed to the erroneous view that GVCs were primarily a shock transmitter during the Covid-19 crisis.
Nationalisation of production does not improve resilience
Have GVCs acted as Covid-19 shock absorbers or trasnimitters? Econometric results for the first six months of the health crisis confirm a nuanced view of the role of GVCs during a pandemic. GVCs have certainly acted as a transmitter of shocks. Exports of firms relying on upstream suppliers from countries in lockdown suffered more. So did exports of firms supplying inputs to countries severly hit by Covid-19. But exports of domestic producers participating in GVCs fared better during the pandemic, as diversification through trade turned out to be an asset. These findings suggest that thinking of better ways to improve GVC resilence in the face of a pandemic or other shocks is crucial. Nationalisation of production is not a solution – it would result in lower exposure to foreign shocks at the cost of higher exposure to domestic shocks.
Authors' note: The views expressed in this column are those of the authors and they do not necessarily represent the views of the World Bank Group.
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Dai, M, Y Yotov and T Zylkin (2014), “On the trade-diversion effects of free trade agreements”, Economics Letters 122: 321-25.
Eppinger, P, G Felbermayr, O Krebs and B Kukharskyy (2020), “COVID-19 Shocking Global Value Chains”, CESifo Working Paper Series 8572, CESifo.
Espitia, A, A Mattoo, N Rocha, M Ruta and D Winkler (2021), “Pandemic trade: COVID-19, Remote Work and Global Value Chains”, Policy Research working paper no. WPS 9508, World Bank.
Freund, C, A Mattoo, A Mulabdic and M Ruta (2020), “The supply chain shock from COVID-19: Risks and opportunities”, In S Djankov and U Panizza (eds), COVID-19 in Developing Economies, CEPR Press.
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