Shock infections through global value chains

We examine how the Covid-19 shock was transmitted from the foreign, upstream parts of value chains to domestic (downstream) production. After categorizing global value chains based on their home-producer industry and country, we quantify the multiplier effect of the transmitted shock on the entire value chain by considering changes in home production. The upstream shock was measured using world input-output data, and our analysis relies on the upstream dependence on the early shock in China during 1-4/2020, employing a differences-in-differences research setup. Our findings reveal that the impact was large: For every percentage point of dependence on the Chinese value chain, there was a 1.3 percent larger contraction in domestic production. In essence, the multiplier effect of the manufacturing contraction amplified the direct foreign shock by an order of magnitude. These effects varied across industries and regions, with the most substantial multiplier effects observed in highly digitalized, high-R&D industries, particularly in the EU and North America. Furthermore, we provide evidence on the dynamics of adjustment.