Global value chains: Efficiency and risks in the context of COVID-19

The policy debate on whether the gains from international specialisation in global value chains (GVCs) outweigh the associated risks of transmission of shocks has intensified in the aftermath of the COVID-19 outbreak and the resulting disruptions in supply chains of some manufacturing and medical products. Questions are even being asked whether governments should use policy tools to “re-localis” GVCs. This policy brief first identifies key potential sources of exposure to shocks in GVCs. Second, it uses the OECD’s global trade model to shed light on the consequences of a stylised re-localisation policy scenario, in terms of both economic efficiency and stability. In this scenario, countries are less exposed to foreign shocks, but they are also less efficient and less able to cushion shocks through trade. Quantitatively, the latter effect tends to dominate. The economic case for policy-induced reshoring of GVCs is therefore weak. There is nevertheless scope for international co-operation and governments to join efforts with businesses to improve risk preparedness.