Take measures to mitigate risks from changing GVCs-UNCTAD to developing economies

Developing countries like the Philippines should put in place targeted policies and measures to cushion the impact of relocation and reshoring of production as a result of the COVID-19 crisis, according to the United Nations Conference on Trade and Development (UNCTAD).

UNCTAD said the COVID-19 crisis has amplified the weaknesses in the global value chains (GVCs) and exposed the fragility of offshoring, which features high interdependencies between leading firms and suppliers located across several continents.

This has led to the rise in relocation and reshoring trends, which will see production moving back to the companies’ home countries or locations near them, said Piergiuseppe Fortunato, economic affairs officer at UNCTAD.

Contributing factors to these developments include the persistent uncertainty as the epicenter of the pandemic shifts from region to region, which affects production costs and leads many firms to reduce or stall their production activities.

Another is industry 4.0, especially automation, which unlocks new labor-saving technologies and could potentially reduce reliance on low-skill labor in manufacturing, thus reducing the benefits of offshoring.

Automation also has important implications for the global geography of production, as value chains will become more regional in nature, moving closer to consumer markets where ecosystems are more supportive to business, said UNCTAD.

Furthermore, supply chain and travel disruptions caused by COVID-19 could undermine economic integration and encourage self-sufficient economic systems. This tendency is reflected in the growing number of temporary export bans and restrictions on critical goods enacted by numerous countries after the outbreak.

For firms, both automation and reshoring could allow them to adjust better to changing demand, mitigating their risks in the event of a pandemic or other external shocks, said UNCTAD.

For developing economies, reshoring and automation present a number of challenges. They can cause significant economic and social costs that go beyond immediate job and business losses. They can affect the local supply chain, local services offered, and the quality of infrastructure, unless targeted strategies are put in place.

But, for now, it is unlikely that entire supply chains will be automated or relocated, said UNCTAD.

Some of the obstacles include shortages of skilled workers, and lack of information on the suppliers involved, often linked to hidden subcontracting as in the case of the garment industry.

Furthermore, the growing demand for mid-range consumer goods like electronics and apparel in emerging markets could slow down the reshoring trend.

And in labor-intensive GVCs, multinational companies or MNCs might find it economically more profitable to maintain their production facilities close to the final markets, where labor costs are low and there are not enough workers who can operate complex machines to make automation viable.

UNCTAD said that in such a complicated and rapidly changing environment, developing countries need to concentrate their efforts around three strategic areas of policy action.

  • They should focus on diversification away from traditional tasks and activities, which can be affected by automation.
  • The narrow focus on manufacturing must give way to more emphasis on new sectors like the creative and digital economy sectors.
  • Some of the sectors that have benefited the most from the COVID-19 crisis are those that can deliver online and on-demand services.

UNCTAD also urged developing economies to strengthen regional value chains to diversify risk, reduce vulnerability, increase resilience and foster industrial development.

By identifying and maintaining horizontal and vertical linkages, regional pacts can ensure that small firms cooperate to reduce transaction costs and benefit from economies of scale. They can also help favor connectivity among different specialized providers whose inputs are directly integrated in the supply chain.

Furthermore, a South-South cooperation initiative on health, health research and related areas is needed.

Governments should also introduce regulatory and governance frameworks that will make firms address the various impacts their investment and innovation decisions produce for the communities and societies where they operate. This is all the more important in sectors put at risk by trends of reshoring and automation.

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