Responses of firms and governments to supply chain shocks

Although firms have made significant investments in new data-driven methods of supply chain management (Supply Chain 4.0), these methods were not fully diffused at the beginning of 2020, even among large firms. Many firms were caught off guard when COVID-19 struck. For example, firms did not always know whether they had suppliers in Hubei Province, China, particularly tier 2 and tier 3 suppliers.1 The key principle of Supply Chain 4.0 is end-to-end visibility of the supply chain, which can allow firms to identify and address vulnerabilities along their supply chains and hence increase resilience to future shocks. Analysis of an entire supply chain with big data analytics can lead to superior optimization of everything, including inventories, production, which product varieties to offer at a particular retail location, and whether marketing ought to be done by store displays, advertisements, or e-commerce platforms.

The COVID-19 shock took place against a background of preexisting trends associated with a reshaping of trade. These trends included an outbreak of trade conflicts among major trading partners beginning in 2018, an increase in automation that caused some production to return to high-income countries, and an increase in production costs in China. The pandemic accelerated preexisting mega trends, including e-commerce and working from home. In the face of the COVID-19 shock and ongoing trends, firms responded by reducing the variety of products, increasing the flexibility in factory procedures and labor scheduling, and seeking alternate suppliers.

Support from the top can have positive spillover effects: support of parent firms for affiliates and affiliates for suppliers was widespread, but not universal, during the crisis. The most common types of support provided were new technology or managerial guidance to help with operations, followed by financial support, managerial guidance to help with product differentiation, and new technology for supply chain mapping and management. Large GVC firms were more likely to provide support than medium and small firms.

Some producers experienced sudden cutoffs in payments for goods already produced, highlighting the importance of strong network relationships. In the face of sudden declines in demand, some importers refused to take possession of goods already in transit, forcing losses on exporters. These firms were then compelled to rely on the leniency of banks or on government support programs. Buyers with stronger network relationships, by contrast, often were more generous in dealing with suppliers.

Although widely discussed, near-shoring, reshoring, or international decoupling were apparently limited. Interviews with private sector stakeholders indicate that most foreign investors that had been considering relocating from China before 2020 because of labor costs or trade tensions have already done so. Business surveys of European and US firms with investments in China indicate that relatively few firms plan to reduce their presence in China going forward.

Government trade policy responses to COVID-19 proliferated worldwide, including both restrictive and liberalizing measures. Export controls on medical goods and food dominated the restrictive measures. As of January 25, 2021, 140 of 142 export measures announced to the International Trade Centre were restrictive, whereas 163 of the 264 import measures announced were liberalizing.