COVID-19 and Global Supply Chains: Disruptions and Restructuring

Two leading experts agree globalization isn't over, but a restructuring of the global supply chains will likely include a rethinking of global strategies for corporations

Panelists Gary Gereffi, Tamim Bayoumi and Giovanni Zanalda
Panelists Gary Gereffi, Tamim Bayoumi and Giovanni Zanalda

Duke Professor Gary Gereffi and IMF’s economist Tamim Bayoumi joined DUCIGS Director Giovanni Zanalda in a webinar conversation on the impact of the Covid-19 crisis on international trade and global supply chains. The speakers presented their analysis of the ongoing disruptions of global supply chains, including an overview of how the hyper specialization of supply chains have led to international shortages in vital medical equipment.

This event is part of a webinar series on the impact of Covid-19 organized by the Duke Center for International and Global Studies (DUCIGS)/Rethinking Diplomacy Program. Bayoumi’s  remarks are his own and do not represent the views of the IMF. 

Here are the excerpts of the initial remarks and responses to questions from the audience:

 

THE IMPACT OF COVID-19 ON GLOBAL SUPPLY CHAINS OF MEDICAL EQUIPMENT

Gary Gereffi, Professor of Sociology/Director Global Value Chains Center

“When we started to look for things like gloves and gowns… imports had closed off, because all of the countries that were making these products began to have export controls. China was supplying both the US and the EU with about 50 percent of all Personal Protective Equipment imports prior to COVID-19. Eventually we found things like gloves from South Korea and gowns from Honduras. But it wasn’t easy to find alternative suppliers.”

 

Tamin Bayoumi, Deputy Director, Strategy, Policy, and Review Department at the IMF

“This is 3 or 4 times the size of the Global Financial Crisis in 2008. This is a massive shock. Many countries lowered constraints on imports on medical equipment. This is what you would expect. More disappointingly, quite a few countries also brought exports restrictions on such medical goods.

“That is unfortunate for two reasons. First, given the supply chains, you are lowering the supply—if I can’t get medical equipment, which is half made from somebody else, I can’t finish making the product. Second, the export restraints did not mean that (medical equipment) went to the places with most need, necessarily.”

 

Gary Gereffi:

Another example is testing materials: “There are two very specific materials, the cotton swabs and the chemical reagents, that we don’t have in sufficient supply. So, testing materials have been halted just because we can’t find those two particular components. This shows the problem of the hyper specialization model. If you need particular components and you can’t find them, the whole chain stops.”

 

FINDING U.S. MANUFACTURERS TO INCREASE DOMESTIC PRODUCTION OF GOODS

Gary Gereffi:

“It was relatively easy to find the big companies that made the N95 masks. Ventilators: We also had big health care companies. But ventilators were more complicated as we began to look for auto companies like Ford and GM, that could try to make those goods quickly. In both cases, scaling up these big companies supply chains was going to take 6 to 8 weeks. So, what began to happen on the supply side was a lot of third-party vendors began to come into play. They were making N95 masks, but they would cost 5 to 10 times. The supply side problem was that it wasn’t easy to have the companies scale up in time.”

 

REGIONALIZATION AND RESHORING SUPPLY CHAINS POST COVID-19

Tamin Bayoumi:

“Regionalization is the risk. The reason that’s a very big risk is that while the costs of getting components from Vietnam instead of China may not be that big, reshoring has really significant effects on costs and productivity. So, the real move towards going back to the earlier model of production pretty much onshore probably would involve significant losses of economic wealth.

“I think there’s going to be a certain amount of that going forward. In a world in which the certainty of the future of general open trade is less certain, you may be more certain if you’re in Europe that you can get stuff from Bulgaria without a tariff than you can get stuff from China without a tariff or without a restriction. The EU will probably hang together in terms of what the restrictions were. A certain amount of regionalization I think is almost inevitable.”

 

Gary Gereffi:

“From a value chain point of view, we’ve been seeing for the last 15 years or more the idea that regional value chains in fact have been more and more important in terms of trade and investment decisions compared to fully global chains. Geography isn’t fully determining in what the regional value chains should be. In some key industries, there are very important global suppliers. Yes, regional blocks or value chains will become more important, but we still need strategic partners depending on the industry that could be anywhere in the world.

 

INTERNATIONAL COOPERATION TO STABILIZE GLOBAL SUPPLY CHAINS

Tamin Bayoumi:

“The basic question here is the degree to which countries are interested in a predictable rules-based trade system. Most countries in the world are interested in this because they see the value of having a win-win, of having efficient trade across countries which can make things more efficient. Unfortunately, not everybody is, and in particular, as we know there is now a significant dispute between the Americans and the Chinese about their respective roles in the crisis in the global supply chains.”

 

HOW INTERNATIONAL COMPANIES WILL RESPOND

Gary Gereffi:

“I think with this COVID-19 crisis there’s a lot more emphasis that’s going to be placed on multiple sources of supply to deal with this kind of risk—diversifying sources of supply. I think that there’s also a bigger concern around strategic components and strategic technologies inside these supply chains that’s much longer term.

“I think that it also kind of plays into the evolving strategy of China. China’s own development strategy is moving very quickly away from being just an export platform for a wide range of manufacturing goods for the rest of the world and focusing much more on moving into the high technologies that are going to dominate the economy going forward. I think a big part of this shift in both China and the US is the rise of the digital economy. Many companies are realizing that their response to this crisis is going to have to incorporate the role of the digital economy and also rethinking innovation in a much larger sense. This is a much more significant rethinking of global strategies for companies than we’ve seen in the more localized natural disasters or financial downturns.”

 

THE EFFECTS OF COVID-19 ON GLOBALIZATION

Tamin Bayoumi:

“I think again there’s going to be a pull-back; there was a massive expansion in global trade in terms of components and I think some of that is inevitably going to come back. The underlying technological forces behind both more financial interactions and more trade interactions are probably pretty powerful. I would call it a pause more than a rollback.”

 

Gary Gereffi:

“I don’t think it’s going to end globalization, but I definitely think it is underlining the risks of globalization and the need to make globalization more responsive to domestic production needs. I think we’re going to get a rebalancing; we’re going to go from the extreme forms of globalization to something that combines both nearshoring and reshoring. And for supply chains, going for making them more fragile to more resilient and redundant. I think that’s the key.”

 

MEET THE EXPERTS

Gary Gereffi is Emeritus Professor of Sociology and Director of the Global Value Chains Center at Duke University. Gereffi has published over a dozen books and numerous articles on globalization, industrial upgrading, and social and economic development, and he is one of the originators of the global value chains framework. Recent books include: Handbook on Global Value Chains (Edward Elgar Publishing, 2019); Global Value Chains and Development: Redefining the Contours of 21st Century Capitalism (Cambridge University Press, 2018); Local Clusters in Global Value Chains: Linking Actors and Territories Through Manufacturing and Innovation (Routledge, 2018).

Tamin Bayoumi is Deputy Director in the Strategy, Policy, and Review Department at the International Monetary Fund. As part of his general responsibilities for IMF surveillance, Bayoumi oversees several strands of the IMF’s multilateral policy and research agenda, including the early warning exercise, country vulnerability assessments, and trade issues. In his recent book Unfinished Business: The Unexplored Causes of the Financial Crisis and the Lessons Yet to be Learned (Yale University Press, 2017) Bayoumi looks at how under-regulated trading between European and U.S. banks led to the 2008 financial crisis. 

Giovanni Zanalda is Director of the Duke University Center for International & Global Studies.