UN evaluation – The effects of the COVID-19 on global production networks

THE EFFECTS OF THE COVID-19 ON GLOBAL PRODUCTION NETWORKS: UN EVALUATION

Today, UNCTAD published a technical note entitled Global trade impact of the Coronavirus (COVID-19) Epidemic to evaluate the economic impacts

Over the last two decades the People’s Republic of China become the world’s largest exporter and an integral part of global production networks. China has established itself as a key provider of inputs and components for many products, such as automobiles, cellphones, medical equipment, and more.

Over the last month, China has seen a dramatic reduction in its manufacturing Purchasing Manager’s Index (PMI) to 37.5, its lowest reading since 2004. This drop implies a 2% reduction in output on an annual basis. This has come as a direct consequence of the spread of corona virus (COVID-19).

The 2% contraction in China’s output has ripple effects through the global economy and thus far has caused an estimated drop of about US$50 billion across countries. The most affected sectors include precision instruments, machinery, automotive and communication equipment.

Among the most affected economies are the European Union, USA, Japan, Republic of Korea and Vietnam (See Table I).

Even if the outbreak of COVID-19 is contained mostly within China, the fact that Chinese suppliers are critical for many companies around the world implies that any disruption in China will be also felt outside the country’s borders, impacting European, American and East Asian regional value chains.

The estimated global effects are subject to change depending on the containment of the virus and or changes in the sources of supply.

OVERVIEW

“It is unavoidable that the novel coronavirus epidemic will have a considerable impact on the economy and society” – China’s president Xi Jinping, televised address, February 23, 2020.

“The spread of the new coronavirus is a public health crisis that could pose a serious risk to the macro economy through the halt in production activities, interruptions of people’s movement and cut-off of supply chains” – Japanese Finance Minister Taro Aso. G20 gathering in Riyadh, Saudi Arabia, February 24, 2020.

“Honda Motor Co. will reduce vehicle output at two of its domestic plants in Saitama Prefecture for a week or so in March due to concerns about parts supply from China where a new coronavirus outbreak continues to disrupt economic activities” – Honda spokesperson, March 3, 2020.

Besides its worrying effects on human life, the novel strain of coronavirus (COVID-19) has the potential to significantly slowdown not only the Chinese economy but also the global economy. China has become the central manufacturing hub of many global business operations. Any disruption of China’s output is expected to have repercussions elsewhere through regional and global value chains.

Indeed, most recent data from China indicate a substantial decline in output. China Manufacturing Purchasing Manager’s Index (PMI), a critical production index, fell by about 22 points in February (Figure 1a). This index is highly correlated with exports and such a decline implies a reduction in exports of about 2 percent on an annualized basis. In other words, the drop observed in February spread over the year is equivalent to -2 percent of the supply of intermediate goods.

Indicators on shipping also suggest a reduction in Chinese exports for the month of February (Figure 1b). Container vessel departures from Shanghai were substantially lower in the first half of February with an increase in the second half. However, the Shanghai Containerized Freight Index continues its decline thus indicating excess shipping capacity and lower demand for container vessels.

Source: National Bureau of Statistics of China

Source: MarineTraffic global ship tracking intelligence provider and Shanghai Shipping Exchange.

IMPACTED COUNTRIES

A reduction in Chinese supply of intermediate inputs can affect the productive capacity and therefore the exports of any given country depending on how reliant its industries are on Chinese suppliers. For example, some European auto manufacturers may face the shortage of critical components for their operations, companies in Japan may find difficult to obtain parts necessary for the assembly of digital cameras, and so on.

For many companies, the limited use of inventories brought by a lean and just-in-time manufacturing process would result in shortages that will impact their production capabilities and overall exports. Table 1 reports by sector the potential effect of COVID-19 on exports in the most exposed countries to Chinese supply disruptions. Overall, the most impacted economies will be the European Union (machinery, automotive, and chemicals), the United States (machinery, automotive, and precision instruments), Japan (machinery and automotive), the Republic of Korea (machinery and communication equipment), Taiwan Province of China (communication equipment and office machinery) and Viet Nam (communication equipment).

KEY POINTS

While there is still uncertainty about the impact of the COVID-19 on China’s productive capacity, the most recent statistics point to a significant downturn. The full effect of COVID-19 on global value chains will become clearer in the coming months. However, one question of importance is how a disruption in Chinese supply of intermediate inputs will affect the rest of the world. Based on the analysis of this note, two key points can be made. First, even if the outbreak of COVID-19 is contained mostly within China the fact that Chinese suppliers are critical for many companies around the world implies that any disruption in China will be also felt outside China’s borders.

European, American and East Asian regional value chains will be disrupted. The estimated global effects are subject to change depending on the containment of the virus and or changes in the sources of supply. Second, it is expected that the spillover effects of a disruption in Chinese supply will be diverse across economic sectors and dependent on the geographic localization of the COVID-19 outbreak and of the containment measures within China.

For example, automotive industry’s intermediate exports may fall relatively more as the industry is geographically localized in the region where the outbreak of COVID-19 occurred. Importantly, because of lack of information this note does not consider this second aspect. Once sectoral data on Chinese output is available the likely effect on the various global value chains will become clearer.

Table 1: Global effects of China’s slowdown through global value chains, 20 most affected economies

(US$ million from a 2 percent reduction of China exports in intermediate inputs)

UNCTAD- also photos

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