PART 1

ECONOMIC RISKS AND UNCERTAINTIES

CHAPTER 1.1.

CHALLENGES IN GLOBAL VALUE CHAINS AFTER COVID-19 PANDEMIC: A REVIEW

Nurtaç YILDIRIM*

*Assoc. Prof. PhD., Istanbul University, Faculty of Economics, Department of Economics, Istanbul, Turkeye-mail: nurtacy@istanbul.edu.tr

DOI: 10.26650/B/SS10.2020.016.01

Abstract

In the past decades, dynamics of the global economy has significantly shifted in parallel to the remarkable advances in the technological, political, and institutional environments. One of the most important global changes originated from a shift in global production settings. Production stages are now divided at the international level and each stage is carried out in different countries where they are connected to each other on global value chains (GVCs). However, these settings were hit by the COVID-19 pandemic which led governments and companies to take extraordinary measures to overcome this health crisis. As a result of the direct impacts of the pandemic and indirect effects of some of these measures, global value chains were harshly hit, increasing overall economic disruptions. In this study, the transformation created by GVCs in the international production and trade structure will be discussed along with the advantages of GVCs, and the increasing vulnerability posed by this structure. The impact of crisis processes on this volatile structure, the mechanisms of GVCs to spread the effects of the crisis to the international production and trade structure, and the effects of the COVID-19 pandemic on GVC activities will also be evaluated. It can be pointed out that increasing dependence of countries on a single input supplier is one of the leading factors contributing to the spread of any disruption in the chain to the other parts. Countries should differentiate their supplier base to diversify the risks, along with strengthening their technological infrastructures, governance issues, and bureaucratic structures to prevent risks and capture advantages of participating in GVCs.

Key Terms: Global value chains, fragmentation, COVID-19, pandemics.

THE COVID-19 PANDEMIC: GLOBAL RISKS AND UNCERTAINTIES

CHALLENGES IN GLOBAL VALUE CHAINS AFTER COVID-19 PANDEMIC: A REVIEW4

1. Introduction

The impact of globalization along with market competition has been reflected in the expansion of international trade, foreign direct investments (FDI), the flow of financial resources, and the exchange of human and technological resources. The significant implications of these developments were realized by firms, which turned out to have the expertise to create cross border production networks. The appropriate environment for these networks was triggered by the search in developed countries for low production costs and attractive investment opportunities and for benefiting from the industrial capabilities of local producers. The enlargement of cross-border production networks was triggered by removal of trade barriers, the free movement of development of information and communication technology, and advances in logistics and supportive policies by countries in the 1990s and 2000s. World trade has been marked by the rise of global value chains (GVCs) in which countries can specialize in various aspects of the production process. Global economic activities such as value-added production, investment, and trade are now conducted in GVCs, which can be described as a bilateral interaction between leading firms from developed countries and less developed local producers (Gibbon et. al., 2008). The environment generated by GVCs and the interaction of developed and emerging countries in these chains greatly contributed to the expansion of exports, the manufacturing industry, and technology diffusion in emerging countries while the firms in developed countries benefited from low cost production and profitable opportunities.

This kind of production process is generally conducted by multinational enterprises (MNEs), which have now started to organize their production on a global scale, by sending some stages of their production to foreign and distant countries in order to increase efficiency and reduce costs. The globalization of economic activities has also gone hand in hand with foreign direct investments (FDI), which accounts for the rapid economic growth in less developed countries with limited technological resources (Lall, 2000). Several large trading companies lead GVC trade, supported by FDI, which is the most important indicator of the international fragmentation of production and the realization of production processes over GVCs. The strategies of international companies to spread the production stages to other regions have increased FDI activities, and intermediate goods produced in GVCs have crossed international borders many times and increased vertical trade flow. The firms engaged in export and FDI are also endowed with greater productivity gains when they are integrated into the global economy via GVCs. Likewise, imports also provide opportunities to developing countries for adopting and innovating new technologies, ideas, and knowhow.

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The countries have increasingly realized that participating in GVCs may bring opportunities to their level of employment, technological development, and overall economic prospects. This process also gives developing countries the opportunity to produce in sectors such as automotive, textile, communication, and machinery where they have not before so they have implemented attractive and less restrictive policy frameworks to capture the possible benefits. The fragmented production structure has become a core element of international competitiveness enabling countries to specialize in various stages of final production on a value chain. The raw materials, manufactured goods, and various kinds of inputs from developing countries began to flow to developed countries. The traditional production structure in which all production stages were carried out in a single process has been replaced by a fragmented production structure where each production stage is carried out by a different process in different locations. Thus, the value it produces at one stage along the chain is added to the other and the price of the product at each stage is determined accordingly.

On the other hand, many developing countries increasingly depend on imported goods for local production, that is, an increase in import dependency in their exports. For this reason, the value-added shares of these countries in the global production chains have increased in a limited way. Similarly, every participant in the GVCs has become dependent on intermediate goods suppliers. A problem that occurred in the upstream or downstream part of the chain can create disruption in the entire chain. This kind of disruption created a ripple effect, which made GVCs vulnerable that then became a risk factor for the entire manufacturing industry. The global financial crisis of 2008-2009 not only created such a disruption on GVC activities, but it also exacerbated the negative impact of the crisis on the overall economy. Indeed, the devastating effect of the crisis on world trade, which was even worse than the Great Depression, is closely related to the rapid increase in the share of GVCs in global economic activities since the early 2000s. Similarly, the COVID-19 pandemic emerged as having a disruptive impact on GVCs and this effect acted as a factor that transformed the pandemic into an overall economic crisis.

In this study, the advantages created by an international production fragmentation, increasing vulnerability due to this structure, the transformation created by GVCs in the international production and trade structure will be discussed. The impact of a crisis on this volatile structure, the mechanisms of GVCs to spread the effects of a crisis to the international production and trade structure, and the effects of the COVID-19 pandemic on GVC activities will also be discussed, and the future of GVCs will be evaluated.

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2. The Rise of GVCs

Production and trade networks are not a new phenomenon in the world economy. Since the beginning of trade, companies using parts and components from all over the world have been in search of a new market both to obtain intermediate goods and to sell products. What has recently changed is the size, depth, speed, and extent of such global interactions. Countries in the global economy have struggled to occupy distinct export roles for ages and thus industrial upgrading and international sourcing have always been evaluated as a key strategy. Under these conditions the notion of an increasingly integrated global economy can be effectively understood through the conception of GVCs.

Figure 1: GVC Share of Global TradeSource: World Development Report, 2020

Figure 1 illustrates that the share of GVCs in global trade increased rapidly beginning from the 1990s with a sharp increase in the 2000s until the outbreak of a Global Financial Crisis in 2008. This fact also reflects that from the 1990s to 2008, globalization of the production process has been increasing. GVCs account for about 70% of world trade today (OECD, 2020a).

Figure 2: The factors affecting the rise of GVCsSource: World Development Report, 2020

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Even though the internationalization of the production process is not new, determining the exact date and place of the emergence of GVCs does not seem possible. However, the emergence of the fragmented production process coincides with certain developments in ICT, transportation, and communication. The left panel of the Figure 2 shows the use of ICT between 1960-2017. In the 1990s and 2000s when GVCs had an important place in international production concurs with the acceleration of the global usage of ICT resulting in cheaper and more confidential ways of conducting a firm’s activities via outsourcing. These years were also when the costs of transport and communication fell as shown in the right panel of the Figure 2. These developments enabled MNEs to outsource some of their activities to different countries in a safer and cheaper way.

The rise of GVCs can be traced by examining the changes in other features. From the 1950s to the early 2000s, world commodity trade increased 20 times, while world goods production increased only about 6 times. However, manufacturing and international sourcing were concentrated in a small number of industrial countries. Beginning in the late 1970’s Asian countries began to participate in GVCs and by the late 1990s Asian economies transcended the leading industrial economies. This can be detected by examining the economies’ input-output matrices used for recognizing which industry uses which goods as an input. Summing up these values constitutes a measure for trade in GVCs (Baldwin, 2013).

In this regard, the international trade data presents some insights about the rise of GVCs. Since GVCs are defined by the fragmentation of production, and the value of trade in intermediate goods provides an insight about the expansion of GVCs.

Figure 3: Trends in International ExportSource: World Integrated Trade Solution, Trade stats

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Figure 3 illustrates the value of international trade in intermediate goods. When compared with the trade values of other products, the highest increase in value was observed in trade in intermediate goods. Despite the fact that trade in intermediate goods dropped significantly in the 2008-09 global financial crisis, developing countries continued to have a large share in world manufacturing and trade in intermediate goods. This supports the conclusion that the final product production process was fragmented via GVCs particularly beginning from the early 2000s, parts and components cross the borders of many countries and the final product was produced with the participation of many countries instead of being completed in one country.

3. Participation in GVCs and The Path for Developing Countries

One of the most important factors in the emergence and development of GVCs is that developing countries in the 1980s abandoned the import substitution growth models and turned to export-oriented growth strategies. Since then, their success in exports has been remarkable. As a result of these policy changes, developing countries have become dependent on exports to grow. This process also went along with the expansion of GVCs in which almost every country participates. Particularly, East and Southeast Asian countries quickly joined GVCs in parallel with their export led growth strategies. In this way, they were able to shift their exports to products that created more value added and reached a better position in terms of technology, employment, and living standards. However, each country is included differently in this formation. While developed countries participate in GVCs by producing high-tech and innovative products, developing countries are included in GVCs by producing products with low innovative content that need to be further processed.

The trade pattern observed in GVCs is based on the traditional trade theories such as the Ricardian model and factor endowment theses of the Heckscher-Ohlin model. In this trade structure, countries with an abundant qualified labor force obtain a comparative advantage in high skill-intensive products and import products over those produced by low skill labor abundant country. Likewise, the country, which is abundant in terms of land and natural resources, specializes in primary products and exports them. As the specialization and trade structure in GVCs is similar to this model, the factors which determine the position of a country in global trade also determine the position of the country in GVCs. The production stage of the country in the GVCs depends on which resources it has in abundance. Where physical capital and high skill labor abundant countries or natural resources and low skill labor abundant countries will be located in the chain, upstream or downstream production stage, is determined in accordance with these relative factor endowments (Antras et al., 2012).

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The fragmented world production structure and its realization in GVCs caused the international division of labor to become more effective. Being in a certain stage of GVCs allows a country to specialize in a specific value adding activity in accordance with its specific endowments, instead of completing the whole industrial process. GVCs are expected to generate more income as countries can benefit from the comparative advantages of other countries both on a sectoral basis and within different stages of the same sector. In terms of companies, GVCs cause the input costs to decrease and the companies to benefit from the economies of scale, resulting in more profits. Countries with a larger market tend to attract larger stages than countries with a small market. Their use of imported inputs in their exports is less, and therefore the GVC backward integration levels are low. On the other hand, these countries are geographically close to consumer demand for the final product and therefore their central location leads them to downstream specialization. Thus, their central location increases backward through GVC integrations (Antras and Gortari, 2020).

Although the fragmented production system has an inference that explains trade and parallels to the possible gains of traditional trade theories, it is difficult to put forward the same argument about income distribution. Contrary to Stolper Samuelson’s income equality theorem, which is extracted from the factor endowments model, international fragmentation creates income inequality (Goldberg and Pavcnik, 2007). One of the most important reasons is that production that requires low-skilled labor in the developed country requires high-skilled labor in the developing country where it is offshored. Thus, the demand for high skilled labor increases in the developing country and the distorted income distribution in their favor deteriorates even more than before (Feenstra and Hanson, 1996, 1997).

In this structure, it turns out that the long-term implications of participation in GVCs are not as straightforward as short-term consequences. Economic development is increasingly dependent on industrial upgrading, which requires companies to move up in the chain by constantly engaging in activities that provide higher added value in GVCs. This type of upgrading in the chain requires increased productivity, efficiency and skills by adopting new technologies. While technology diffusion and spillover can be obtained from leading companies that produce the highest value added in the chain, institutional governance is also an important strategy to be adapted by developing countries.

As one of the core aspects of globalization is based upon the increased transfer of technology among countries, a country well positioned in GVC is expected to benefit from the technology diffusion reflecting in economic growth rates of that country. It is clear that in order for a country to transform the change provided by GVC into net income, it must continue with the structural change process so that the gains from participation in GVCs can be spread to the whole economy.

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4. Crisis and GVCs

The recent global financial crisis in 2008-09 created an unprecedented collapse of trade in history, and in almost all OECD countries caused a severe and simultaneous drop in trade volumes, bringing world trade to almost a halt in the last quarter of 2008. A distinctive characteristic of this period, where the decline in trade was so unique, was the rise of GVCs in the last decades. In the fragmented production structure, when final demand is reduced, not only trade in final goods and services decline but also reduced trade in intermediate goods and services. That is, a decline in income is not only as much as the value of the final product, the value of the intermediate goods used to produce it should also be added to the decline in income. (Yi, 2009).

The change in trade was also more rapid than before due to specific transmission mechanisms. One channel through which the expansion of GVCs strengthens the adverse effects of an economic or financial shock in any country on the export volume is income elasticity of the country’s exports. If the product that is heavily exported has a high income elasticity, a decrease in foreign income will cause a higher decrease in foreign demand. The products that are the subject of international fragmentation are mostly durable products with high income elasticity and high demand volatility that can quickly adapt to market preferences and therefore have a high share in the exports of countries in the chain (Engel and Wang, 2011). In this regard, trade is harshly affected by a development that negatively affects foreign demand.

As another channel, the factor known as the bullwhip effect comes into play, indicating that when demand for a final product decreases, firms in the upstream part of the GVCs reduce their stocks more than the decrease in demand for the final product (Freund, 2009). The bullwhip effect, which is interpreted as the increase of order volatility from the downstream to the upstream stages against a demand shock, is also associated with the disruption of the information structure between countries connected to the chain and therefore the formation of inventory mismatch (Dai et.al, 2016). The Bullwhip effect is also associated with some significant costs such as employment volatility, excess inventory, and inefficient utilization of resources. This is an issue that is specific to the fragmented structure of GVCs and is overly sensitive to systemic disruptions seen within the structure itself. Since intermediate goods traded within the GVCs cross the border many times, a systemic shock somewhere in the chain risks spreading to the entire chain (Yi, 2003).

As well as economic shocks, financial ones are transmitted to the whole chain as a participant in the chain experiences a financial problem such as a credit crunch. This was the case in the 2008-09 crisis, when the trade collapse emerged simultaneously across countries.

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The reason this was credited to the GVCs which functioned as an effective transmission mechanism of both economic and financial crisis (Baldwin, 2009). As a result, in the global landscape where GVCs are so involved, the change in trade volume and value led by an economic crisis is much more than in the 1960s.

5. Effects of COVID-19 Pandemic on GVCs

Temporary disturbances of GVCs are known to arise for various reasons such as legal issues and natural disasters. Disruptions caused by a pandemic, on the other hand, have several different contributing factors. Specifically, the effects of a pandemic are not limited to a specific time or region. Different components of a GVC such as production, distribution centers, logistics, and marketing can be affected simultaneously or successively by a pandemic and cause the activities to stop (Ivanov& Das, 2020). These effects spread simultaneously in the chain and simultaneous disruptions are seen in the supply, demand, and logistics infrastructure. Moreover, the adverse effects arising from a pandemic are long-lasting and unpredictable (Ivanov, 2020).

The outbreak of the COVID-19 pandemic in the Chinese province of Hubei, a hub for GVCs particularly in the automotive and electronic industries, became an international problem with the most devastating effects both in terms of health and economic activities. The health problem spread widely to almost every part of the world and turned into a global epidemic that caused partial or total lockdowns for a number of global populations. While border restrictions, travel suspensions, and unavoidable lockdown measures have a negative impact on consumption expenditures, investment, and international trade in the short term, it seems that we cannot predict what damage it will cause in the long term without preventing the pandemic completely.

Figure 4 . Global import intensity of production, 2005-2016Source: OECD, 2020b

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Before the COVID-19 crisis, as observed in Figure 3, GVC activities began to decline with a decrease in imported input, which means a decrease in production fragmentation. Trade in intermediate goods, which recovered again after the disruption in the 2008-2009 crisis, entered a downward trend beginning in 2011 and this trend continued until COVID-19. As the rise of GVCs in the beginning of the 2000s was perceived as an indicator of globalization, the decline in the use of foreign input by companies is interpreted as a signal of deglobalization. Another source of this argument comes from an analysis on the geographic length of supply chains. It has been observed that since 2012 this length has been shortened, with GVCs becoming more domestic rather than more regional (Miroudot and Nordström, 2019). It should be noted that the economic and political uncertainties created by trade tensions between the US and other countries, rising trade costs, and protectionism have also had an impact on this phenomenon.

The extent of the sudden shock brought by COVID-19 to the international mobility of goods, services, and people has brought GVCs into the agenda just like the 2008-09 crisis. One-third of global production is conducted by MNEs which also undertake half of the world trade and these companies decide how products are produced and delivered to consumers. This production is mostly carried out in chains and domestic suppliers in other countries are required for the production to be conducted.

There are several reasons why GVC activities were interrupted by COVID-19. First of all, the fact that the pandemic caused working people to get sick and the transition to working practices in line with the social distance rules directly reduced production, which led to supply shock. Another effect arises when transport restrictions due to the pandemic cease business activities in the chain. A similar consequence occurs when one or more countries affected by the pandemic, stop production activity in chain companies that depend on the importing input from the affected country. As with the 2008-09 financial crisis, the demand shock that emerged with COVID-19 also disrupts the activity of GVCs, increasing the effect of the supply shock. The decrease in the demand for final goods also reduces the demand for intermediate goods produced in other countries. The demand problem arising in one country spreads to other countries through GVCs. As the crisis becomes global, this effect occurs simultaneously in many countries, as in the case of the 2008-09 crisis. COVID-19 led to a decrease in demand in almost all manufacturing sectors except healthcare and food sectors. This accounts for a significant loss of activity for GVCs.

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Figure 5: China’s rising importance in global economySource: Baker & McKenzie, 2020

One of the most significant factors propagating the effects of COVID-19 to the other regions of the world is the rising significance of China in global manufacturing and trade. As one of the domestic suppliers, China, “world’s factory”, has become increasingly important in chains as a major intermediate goods supplier to the world market as seen in Figure 5 and Figure 6.

Figure 6: China Integration in Global Value Chains, by sectorSource: UNCTAD, 2020.

China’s current integration into GVCs measured by the Grubel Llyod Index (GLI) is illustrated in Figure 6. China is mainly participating in GVCs through precision instruments, machinery, automotive, and communication sectors. Any problem that restricts China’s production in these sectors will put manufacturers all over the world in a difficult position. The closure of factories in China in January once again demonstrated how dependent world manufacturing production is on inputs from China.

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Figure 7: Chinese Exports of Intermediate Goods (US$ Thousand)Source: World Integrated Trade Solution, Trade stats

Figure 8: Intermediate Goods Exports to China (US$ Thousand)Source: World Integrated Trade Solution, Trade stats

Figure 7 and Figure 8 also demonstrate the rising importance of China as a hub for global manufacturing and trade. The exports of intermediate goods to almost every region of the world increased greatly from 1992 to 2018. On the other hand, the East and South Asia’s exports of intermediate goods to China increased as well as shown in Figure 8. This may present an insight about further fragmentation as other countries of the region participate in GVCs as suppliers of parts and components, exporting them to China for assembly operations.

In this regard, the shrinkage in the Chinese manufacturing industry has the power to create a supply shock in almost all countries’ manufacturing industries, especially those with the strongest ties to China. The supply shocks experienced in China and developed

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countries, which have a significant place in the GVCs, exporting a large part of the industrial products, may interrupt the industrial input trade and transfer the supply shock to other countries on the chain.

Figure 9: The effect of COVID-19 on Automotive Sector (US$ million from a 2% drop of China exports in intermediate goods)

Source: UNCTAD, 2020

Figure 9 shows the expected financial loss as of February 2020 in the automotive industry of the EU, Japan, the USA, England, South Korea and Mexico, due to a 2% contraction in the Chinese manufacturing industry. These countries are dependent on inputs produced in the Chinese manufacturing industry. Therefore, any breakdown in GVCs, especially by the Chinese, has significant effects on this sector. It is estimated that a similar situation in countries most susceptible to the production shrinkage in China will apply for many products whose production is made in GVCs. Accordingly, it is predicted that: the EU will be affected mostly by machinery, automotive and chemicals; the US by the machinery, automotive and precision instrument sectors; Japan by machinery and automotive; Korea by machinery and communication devices; and Taiwan by communication devices and office machinery sectors. These are all expected to shrink due to the breakdown of GVCs on the part of China.

As Figure 9 clearly shows, China’s increasing importance in the global economy and the fact that countries are integrated with each other indicate that trade has an important share in spreading the effects of COVID-19. Other countries that are most affected by the pandemic are also important centers of global trade and GVCs and being the most important supplier of industrial intermediate goods to each other and to other countries is an important factor that will determine the impact of the crisis on trade.

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The last three decades witnessed a significant increase in the economic activities of MNEs. Foreign direct investment inward stock which was 8.2% of the world’s GDP in 1988 rose to 38% in 2018 (UNCTAD, 2019). To become a significant participant of international trade today requires developing countries to attract more and more FDI to their economies. As the activities of GVCs are conducted by MNEs through FDI, participation in GVCs also depends on FDI (Kacani, 2020). FDI not only affects a country’s participation in the GVCs, but also determines the country’s positioning within the GVC. In this regard, the policies to attract FDIs have a positive impact on both participation and positioning in GVCs.

Figure 10: Global FDI infows, 2015–2019 and 2020–2022 forecastSource: World Investment Report, 2020

The FDI through which GVCs are conducted and supported is expected to drop in all regions of the world up to 40% in 2020 from $1.5 trillion in 2019 as seen in Figure 10. The declining trend in FDI inflows is predicted to continue up to 2021.

Table 1: Projections of Decline in FDI Inflows (%)World 30 - 45Developed economies 25 - 40Europe 30 - 45North America 20 - 35Developing economies 30 - 45Africa 25 - 40Asia 30 - 45Latin America and the Caribbean 40 - 55Transition economies 30 - 45Source: UNCTAD, 2020

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Table 1 also demonstrates that world FDI inflows are expected to decrease between 30% and 45% compared to its value in 2019. As shown in the Table, FDI inflows will show negative growth in 2020 in all country groups regardless of developed or developing countries. These similar rates of decline in FDI inflows reflect that an economic problem seen anywhere in the world can easily spread to other regions due to improved integration.

The spread of the pandemic in GVCs is so wide that 94% of fortune 1000 companies are reported to experience GVC disruptions caused by the pandemic (Fortune, 2020). The top MNEs in the GVCs were among the first to be affected by the GVCs breakdown and falling global demand.

Figure 11: Average Earnings Revision of MNEs as of May 11 (%)Source: World Investment Report, 2020

The Top 5000 MNEs, which make up most of the FDI, have revised their expected earnings in 2020, on average, by 40%. As shown in Figure 11, the biggest revision in earnings was made in the service sector due to the direct effect of lockdown, with a 94% drop in accommodation and food service earnings and 63% reduction in transportation and storage earnings. The effect of a falling global demand on oil prices led to another major revision of a 70% decrease in the earnings of mining industries. The automotive and textile sectors suffered greatly due to GVC breakdowns created by both demand and supply shocks caused by the pandemic. An estimated loss of earnings in motor vehicle and other transport equipment sectors is 50%, followed by the textile sector by 49%. Overall, industries which are forecasted to lose 30% or more of their earnings together account for almost 70% of FDI projects. Declining profitability will also hurt reinvested earnings, which will account for 50% of the FDI. Similarly, new investment project announcements and cross-border mergers and

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acquisitions in the first quarter of 2020 recorded a 50% decrease compared to last year. New deals have decreased by more than 40% in global project finance, which is an important resource for infrastructure projects (World Investment Report, 2020).

Figure 12: Forecast: Global manufacturing value-added outputSource: Baker & McKenzie, 2020.

Figure 12 points out that global manufacturing value-added output is forecasted to rise by 6% in 2021. Having a shape of a steeper V, China is expected to have the sharpest rebound reaching higher value than before COVID-19 in 2021. Whether this prediction is an indicator of the type of the recovery from the economic crisis brought by COVID-19 seems to depend partly on the success of the coronavirus vaccine studies. Although the pandemic may be brought under control in the near future, the demand crisis it created, income losses caused by the deteriorating economic conjuncture, decrease in purchasing power, and the continuing fear and anxiety due to the pandemic may prevent the rapid recovery in private consumption expenditures leading to the continuation of the existing supply crisis.

6. Concluding Remarks

An important consequence of both the 2008-09 Global Financial Crisis and the crisis that emerged with COVID-19 in terms of global outsourcing and trade is the increasing dependence of countries on a single input supplier. This causes the disruption seen in one part of the chain to easily spread to other parts, breaking the GVCs and reinforcing the impact of the crises on production and trade. Developments in China therefore have become extremely important for production in many global industries. While disruptions in the chains where necessary health materials are produced increased the risk in terms of health, the break in the chains in other sectors deepened the economic bottleneck. Therefore, it is important for countries to differentiate their supplier base to diversify the risks. The speed and ease of this kind of strategic change will be determined by how dependent each country is on China in production processes as the

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extent of dependency changes from country to country. In this regard, developing countries with efficient production capacity and the necessary talent in different sectors could compete with China within the GVCs. For this purpose, countries can re-create an incentive structure in the sectors they have chosen and reduce the proliferation of global economic risk factors.

On the other hand, in order to be integrated in the global production system, it is no longer enough for developing countries to engage in production with low labor costs. Today, GVCs depend on the flow of goods, services, and information made in more sophisticated and competitive networks. It is therefore highly essential for countries to establish a sound business environment with institutional reforms rather than their production capabilities. Moreover, the restructuring of GVCs seems inevitable as with COVID-19, global production and trade processes are predicted to change significantly. Countries should also adapt to the changing process in the context of their technological infrastructures, governance issues, and bureaucratic structures. In this regard, governments should implement policies to regulate competition, reduce trade costs, and integrate practices that will facilitate domestic firms’ integration into the system.

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