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IMF - Global Trade Needs More Supply Diversity, Not Less

Countries with trade partners that implemented more stringent lockdowns had a sharper drop in imports. Though trade flows have adjusted, more diversified global value chains could help lessen the impact of future shocks.

The demand and supply shocks unleashed by the pandemic were expected to lead to a dramatic collapse in trade, but international commerce has proven more resilient than during previous global crises.

While goods trade fell sharply in the second quarter of 2020, it bounced back to pre-pandemic levels later in the year. The decline for services in 2020 (such as tourism) was worse, and has recovered more slowly, given persistent restrictions to contain infection in some countries.

International spillovers

Factors specific to the pandemic help explain these trade patterns.

First, goods imports were larger in 2020 than would be predicted by demand (and relative prices) alone, more so in countries with stringent lockdowns or severe outbreaks.

Second, lockdowns had significant—if unintended—international spillovers. Countries with trade partners that implemented more stringent lockdowns experienced larger declines in imports of goods. Trade partner lockdowns accounted, on average, for up to 60 percent of the decline in imports in the first half of 2020. These impacts were larger in industries that rely heavily on global value chains, and are further downstream in the production process (such as electronics).

The effects were short-lived, however, suggesting that global supply chains were resilient. And remote work also lessened the trade spillovers from lockdowns.

Even so, disruptions wrought by the pandemic led to calls for more domestic production of goods (reshoring). Our latest World Economic Outlook shows that dismantling global value chains is not the answer—more diversification, not less, improves resilience.

Global value chains adapted

Trade data affirm this. By mid-2020, Asian countries, which were hit early by COVID-19 but then managed to contain it (just when many European countries imposed severe mobility restrictions) saw an increase in their market share of GVC-related products of 4.6 percentage points in Europe, and 2.3 percentage points in North America. These gains were large and quick by historical standards but as countries adjusted to the pandemic, they’ve partially unwound, suggesting that the changes were likely temporary.

Though global value chains have adjusted, some industries such as automobiles have faced large supply disruptions, pointing to the need to enhance resilience. We analyze two options for building supply chain resilience: diversifying inputs across countries, and greater substitutability of inputs.

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