4.2 COVID-19 and Potential Disruptions to Global Value Chains

BOX 4.2

COVID-19 (Coronavirus) and Potential Disruptions to Global Value Chains

The impact of COVID-19 (coronavirus) on the manufacturing sector is expected to be significant in the short run, given that the share of trade in the national income of most economies in the region is relatively large. The impact of disruptions in global value chains (GVCs) driven by the global demand slump would predominantly occur in countries with strong forward GVC links—mainly exporting raw materials used in other countries for production for export. Raw material exports account for the largest share of the region’s trade and GVC integration. In addition, supply shocks introduce direct supply disruptions in African countries that are increasingly becoming more integrated into GVCs. Non-resource-rich Sub-Saharan African countries that have been centers of robust growth in the region over the past two decades will be the most affected by these supply shocks. The largest declines in trade are likely to be in sectors with highly integrated GVCs. African economies that have recently been integrating or are well integrated into manufacturing GVCs, including Eswatini, Ethiopia, Kenya, Lesotho, and South Africa, will be affected the most in the immediate short run. For example, the garment industry, a budding manufacturing subsector in the region accounting for a large share of the sector’s employment and exports, is hard hit by worldwide retail closures and furloughs coupled with the collapse in consumer confidence.

In the long run, the combination of trade-policy shocksa and the enduring public health concerns from COVID-19 have created uncertainty about the future of international trade, resulting in a rethinking of GVCs in manufacturing. Because of COVID-19 and emerging geopolitical trends in advanced economies, there is a growing preference for resilience or a “de-risking” strategy. COVID-19 is expected to reinforce an already ongoing change in GVCs with respect to geographic rebalancing (Kassa 2020). It has been estimated that between 16 and 26 percent of global exports would move to different countries between 2020 and 2025 (McKinsey Global Institute 2020). The change in heavily traded labor-intensive manufacturing GVCs, where many African countries’ comparative advantages lie, is expected to be significant. Textiles and apparel GVCs are expected to feature the highest share of trade that shifts to other countries.b This shift in GVCs is expected to create opportunities for developing economies. For example, Bangladesh and Vietnam have been, and are expected to continue to be, the main beneficiaries of the most recent shift. With the right policy mix and active industrial policies, African countries could present a viable alternative for some of these investments, based on their comparative advantages. African countries with relatively higher backward links in manufacturing GVCs may need to reposition themselves to reap any gains that may arise from fundamental changes in GVCs caused by global shocks, including the COVID-19 pandemic.

a. These shocks include rising protectionism in advanced economies, China-US trade tensions, and Brexit. b. McKinsey Global Institute (2020) estimates that, relative to all other value chains, textiles and apparel features the highest share of trade that could most likely shift (36 to 57 percent in apparel and 23 to 45 percent in textiles), representing a range of $67 billion to $393 billion in value.