Xiaolan Fu (傅晓岚) is the Founding Director of the Technology and Management Centre for Development (TMCD), Professor of Technology and International Development and Fellow of Green Templeton College. She was appointed by the Secretary-General of the United Nations to the Ten-Member High Level Advisory Group of the UN Technology Facilitation Mechanism and to the Governing Council of the UN’s Technology Bank for Least Developed Countries. She is also a member of the UN SDSN Leadership Council led by Jeffrey Sachs and a member of the Council for Global Economic Transformation co-chaired by Joseph Stiglitz and Michael Spence. https://www.qeh.ox.ac.uk/people/xiaolan-fu
The COVID-19 pandemic has exerted a significant negative impact on global trade and foreign direct investment. The cost of world trade could increase by as much as one third and that of global foreign direct investment (FDI) by 30% to 40%, according to WTO and UNCTAD. In early March when the pandemic had not developed globally, UNCTAD reported that the Coronavirus had cost the global value chain $50 billion up to that point. Such a deep drop in global trade and FDI has far reaching implications on the economy and society. We will see a subsequent fall in incomes and job opportunities, and price fluctuations. As the shock varies across industries and countries, inequalities within and between countries and even poverty in some countries are inevitably on the rise. This essay analyses the varying impact of COVID-19 on global trade through a detailed analysis of the transmission mechanisms. Particular attention is paid to the role of digital technology in changing the contact intensity of the industry, enhancing the resilience of the value chains, and in offering solutions to the challenge of social distancing and fostering new drivers of economic growth for post-pandemic economic recovery. It argues that emerging technologies will be a driver of post-Coronavirus global economic recovery, while the challenge of inequality and employment will reach a record high. International technological, financial and policy cooperation and coordination need to come into force now if we are serious in the aim to achieve the 2030 Sustainable Development Goals (SDGs) to which the global society has committed.
How does the pandemic hit the global value chains?
The COVID-19 pandemic hits global value chains (GVCs) by way of three channels. First, it hugely disrupts the transportation systems and almost cuts off the logistics of the supply chains in some cases. In the past several decades, the multinationals have sliced the production process into fine segments and relocated these small parts of the production process in different locations globally, in order to maximise their profits. Intra-industry trade of spare parts and components within GVCs accounts for more than 60% of global trade. In such a production and trade model, stable and on-time logistics is very important to the supply chain. When any part of the chain is blocked, all the subsequent production activity will be affected. For example in Japan, car manufacturing was affected because some outsourced spare parts could not be delivered on time and they had no stock due to the lean production system they adopted. As countries have adopted various social distancing and border control measures, transportation is significantly reduced. In the first quarter of this year, global maritime shipment has reduced by 20%. As a result, the supply chains have been seriously disrupted.
The second channel by which the pandemic affects GVCs is through its disruption to the supply side of production. In addition to the disruption to the supply chain, other measures have been introduced such as the closure of workplaces and the closure of public transportation, which put significant constraints on the labour inputs into production. The third channel through which COVID-19 affects GVCs is through the sharp fall in demand. The fall in demand was not significant in January and February, while only China was the epicentre. However, from March 2020, the virus spread globally, and this has led to a sharp fall in demand. Cancellations of orders were widely reported, for example, cancellation of orders for garment factories in Sri Lanka and Bangladesh, and for electronics factories in South East Asia. Through this channel, the shock of the pandemic has been transmitted to regions such as Africa, where the pandemic has not broken out. Orders from the global north are cancelled, commodity prices fall by 20% and the total amount of trade is predicted to fall by 50%.
Sectoral and national variations
However, the pandemic has different impacts on different sectors and in different countries. In general, there are four factors affecting the degree of the pandemic shock in different sectors and countries. These are contact intensity of the industry, fragmentation degree of the GVC, digitization degree of the company and country, and quarantine measures adopted by a country.
Firstly, if a sector is more contact intensive, it will be hit more heavily than others. For example, hair salons, beauty shops, hotels and tourism industry are heavily affected because of intense contact between customer and service provider. However, for the financial services sector, business consulting and some parts of the retail industry, which can move their business activities online, the impact on them is lower. During the pandemic, new demands also fostered the growth of some new sectors such as e-health, e-learning and online entertainment. Secondly, the degree of fragmentation of the value chains is important. If a value chain is less fragmented, it will be less affected; in GVCs that are highly fragmented such as the electronics and automobile industries, the impact will be significant.
Thirdly, the digitization degree of a company and of a country matters too. Here there are two factors in play. One factor is the digitizability of the production and services. Some business activities are more digitizable and some are less or even not digitizable. For example business services are more digitizable, while beauty services are not; on average, manufacturing is more digitizable than services’ provision. The other factor is the capability of a country or of a company to digitize its business activities. Companies that are more digitized and automatized have fewer workers and use more automated machines or artificial intelligence. They can accomplish more production activities online through online activities or by remote control of production in the factories. These companies, either manufacturing or services, are less likely to be affected. For example, in the City of London, many of the business services and financial companies are still running online during the pandemic and the quarantine time. Of course, digitization levels and digital infrastructure of a country affect significantly the degree that its companies’ digitisation can reach market. Developing countries with weaker digital infrastructure are less able to move their business activities online and hence will be hit harder than their peers in the rich countries.
Finally, policy measures, especially the quarantine measures adopted by governments, will also determine the degree of the shocks felt by the economy in different countries. Quarantine measures range from very strict measures, such as the ones adopted in China, to much more flexible measures such as used in the US and the UK. As a result, the impact on the services and the manufacturing sectors is different in different countries.
Because different countries have different industrial structures, the overall impact of COVID-19 will be different because of the reasons discussed earlier. Most of the countries in the global north are basically service economies. In the US and the UK, 70 -80% of the GDP and employment come from the services sector, most of which are knowledge-intensive services. In comparison to other countries mainly based on manufacturing, their economies will be less affected should the contagion ratio of the pandemic be the same in all countries. The low-income countries are dominated by the informal sector and contact-intensive service sectors such as small retailers, restaurants, family run micro businesses. as well as agriculture or resource extraction, for which global demand and commodity prices will drop considerably. Moreover, the level of digitization is also low in these countries. They do not have the digital infrastructure and digital competencies to enable a rapid transition to online business. As a result, these low-income countries will be heavily affected.
In addition to these factors, this pandemic will deepen the earlier trend. These macroeconomic factors will interact, reinforce and form an aggregate shock to the developing countries. Firstly, the Fourth Industrialization and technical progress made in automation and digitization have made economically viable the reshoring of some manufacturing activities back to industrialised countries. Secondly, the rising economic nationalism and the wave of de-globalisation have spurred this reshoring tendency with political support. As a result, regionalisation or localisation of value chains as well as diversification of GVCs are being considered by the MNEs. Thirdly, in the last two years, this tendency has been further reinforced by the trade war. The pandemic has deepened instead of reversed these trends. Economic self-sufficiency or even state economies are often discussed in the policy and academic arena, despite the fact that they are not economically efficient. Business leaders are now thinking about changing the way business is organised. Regionalisation and diversification of GVCs through digitization are popular choices.
Automation and digitization to be the stars in post-coronavirus economic recovery
Looking forward to the post-Coronavirus economic recovery, automation and digitization are likely to be the star features. Firstly, there is an important role that digital technology and automation have played in global community’s fight against COVID-19. Not only remote temporary detecting, robot cleaner in hospitals, drone delivery of medicine, living materials and notice, and infectious person tracking, but also tele-health, e-business, online education, online entertainment, and the online conference and online office systems all have grown rapidly and contributing to the global response to COVID-19 and to the society and economy.
Secondly, some sectors – and even some ‘new’ sectors such as various online services’ provision – have already grown rapidly during the pandemic due to the increasing demand. It will not be surprising to see new star industries in the reshuffle and relocation of the GVCs. Some countries will fill the gap of relocated GVCs by investing heavily in the star ‘future’ sectors in the digital economy, innovation in digital applications in the traditional industries, and the development of digital infrastructure. These sectors will be new engines of economic growth.
Thirdly, lessons from the pandemic and the trade war will push business to build up more resilient production systems and supply chains. Digital transformation of existing industries and production systems will be a popular choice for companies in both the manufacturing and service industries. Digitization often means greater capital and technology intensity, and less use of labour. Engineers can even manage the production process by remote control. This makes the production process become less contact-intensive, and hence less affected by social distancing and restrictions on human mobility. Therefore, digital transformation including smart manufacturing, smart services, e-government and digitized green transformation supported by 5G, big data, cloud, internet of things and blockchain will transform or even revolutionise manufacturing and private and public services provision.
However, increasing inequality becomes a challenge at the same time.
Because of the differences in digital skills, capabilities and infrastructure as well as differences in ability to invest in new technology and digital infrastructure between countries, we are bound to see increasing inequalities within and between countries. The opportunity window for the low-income countries to catch up will be narrowed. This will be further exacerbated by the increasing protectionism in the world economy. Although the relocation and regionalisation of GVCs may benefit a few countries, most of the developing countries – especially Africa and South Asia – will not be better off because they are not geographically close to the rich markets. Neither are their current industrial capabilities and infrastructure conditions close to the level that would enable them to fill the gap left by China in a short time. On the contrary, they may be affected by the uncertainties and volatilities in the market due to the trade war.
In sum, emerging technologies especially automation and digitization will be an effective driver of the post-coronavirus global economic recovery. However, at the same time, the mission to reduce inequality and promote decent jobs for all will be more challenging than we face now. International technological, financial cooperation and policy coordination are urgently needed to prepare the developing countries not only to combat the shock of the pandemic but also to develop their digital competencies and infrastructure so that they will not fall behind again in the post-pandemic economic recovery. If we fail to do this, we will not achieve the Sustainable Development Goals (SDGs) by 2030.
This essay will feature in Transnational Corporations Volume 27, 2020, Number 2 later in the year.