Not so fast: Why the future of global value chain is still bright
Strongly interconnected major input producers means no quick-fix to dependence on China
28 May 2020 | Daniel Yu

THOSE expecting to restore supply chain resiliency by diversifying them out of China will have to wait. Despite the elevated noise recently, and on the back of the trade skirmish between the world’s two largest economies, there is no quick-fix.

“In the current context, imagining a full relocation of manufacturing processes at the domestic or regional level highlights issues of rising production costs and lack of domestic skills,” believes Coface, the Paris-based provider of trade credit insurance. “Even if these two issues are addressed, any new localized production processes would still depend on raw material supply, which cannot be relocated.”

At first glance, currently it seems possible to find alternatives to China in most sectors, the agency notes. “But since major input producers in an industry are strongly interconnected, dependence on China will not disappear radically, even if input supply to the other major hubs in the sector is more diversified.”

While acknowledging that in the longer term, calls for the relocation of production stages in the same country constitute a risk for world trade, Coface describes shielding production from foreign supply shocks as seemingly “like an impossible quest”. Interestingly, it says that “this means that global value chains still have a bright future”.

The World Trade Organization is forecasting a 13% to 32% decline in world trade, indicating that all regions would suffer a double-digit decline. According to Coface's forecasting model – which uses oil prices, business confidence in the US manufacturing sector, South Korean exports, and the Baltic Dry Index as explanatory variables for global trade – world trade is expected to decline by 7% in the third quarter of 2020 compared to the previous year.

“However, the outcome could be significantly worse as the usual correlation measured through linear models does not necessarily work in times of crisis,” the agency cautions. “During periods of negative economic conditions, a sharp increase in uncertainty is one of the reasons for the overreaction of trade to GDP. Today, however, this overreaction is at an all-time high.”

The agency also worries that protectionism is on the rise, especially in the area relating to ensuring adequate supplies of food and essential medical products. “As of April 22, 56% of the trade measures registered by Global Trade Alert (193) were related to that objective. Most measures (110) concerned export bans on masks and other protective equipment, respirators, and chemicals required in the production of various drugs.”

Coface shares that the case of China is peculiar. “Although [China’s] medical exports decreased by 15% in February in the midst of a local health crisis, its dominant market share (55.3%) of global mask exports meant that China's cooperation has been essential in supplying the world. China's daily production has jumped to 116 million masks, 12 times the amount it produced before the epidemic.”

In the agri-food sector, countries also are looking to stockpile to protect their national food supply. “In India, the world’s main rice exporter, deliveries can no longer be ensured: lockdown measures have disrupted domestic supply chains, reduced labour availability, and made access to exporting ports difficult,” Coface explains. “Although Thailand, India's main competitor, has ample stocks of rice, its exports are hampered by lockdown measures in Cambodia, which are depriving the sector of the much-needed seasonal workers. Consequently, the price of rice reached a 7-year high at the end of March.”

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