The world was used to carrying out business the way it had been handed over by generations before. Building one’s trust base was the usual way a country depended largely on a single supplier to guarantee unhindered flow in the global value chain.
Unfortunately, since the COVID-19 pandemic hit, the International Monetary Fund (IMF) after careful observation and months of thorough research has suggested a better way to do business.
Its recommendation comes as a useful way to protect the global economy from supply shocks caused by the ongoing war in Ukraine. A war that has driven global food and crude oil prices to an unbelievable point, with countries struggling to cope with the severe shock.
The international financial organisation recommended that countries put enough energy into “diversifying” their source of semi-finished goods as this will not only help prevent but slow the impact of disruptions or supply shocks on the global value chain when another health scare needs a lockdown.
“Countries could diversify their suppliers of intermediate inputs internationally, sourcing them in more equal amounts across countries,” the report said.
Stating the importance of diversification, the monetary organisation believes that diversification can help protect global supply chains from any kind of shock. According to the IMF, “Instead, supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing of inputs,”
Covid-19 impact on global trade
The virus had two impacts. One was its impact on the global value supply chain on goods while the other was on services. Both suffered greatly due to lockdowns used to stop the spread of the virus as countries worst affected did everything to limit human movement.
According to the lender, “with the onset of the COVID-19 pandemic, trade collapsed dramatically. At its trough in the second quarter of 2020, the volume of global trade in goods fell 12.2 percent, and trade in services fell even more sharply, by 21.4 percent, compared with the last quarter of 2019.”
During the first quarter of 2020, the coronavirus pandemic forced exports of goods that rely heavily on its production and sourced materials from outside the borders of a country to fall by 30 percent.
This was made visible following the containment policies most of the countries worst hit by the virus took to limit the spread of the virus.
“Between January and April 2020, exports of GVC-intensive goods fell by 30 percent, while exports of other goods fell by about 18 percent.” The IMF researchers said.
Countries with more severe COVID-19 outbreaks resulted in importing more than normal the goods they needed to survive the lockdown while services were almost non-existent because of the restrictions placed to contain the virus.
The researchers stated that international spillovers from the “lockdown were larger in GVC-intensive industries than in non-GVC-intensive industries, and they were larger in downstream (close to final user) industries than in upstream (input) industries.”
Recommendation
According to the lender, countries are advised to make policies and laws that will ensure that the supply of both raw materials and semi-finished goods needed for final production is not sourced only locally i.e. within the country but outside the country during periods of pandemic-induced lockdowns.
The IMF believes that the impact on trade would be less painful during periods of lockdown or any significant disruption in global supply if governments through policies can encourage the private sector to sort for semi-finished outside the local markets.
Countries are encouraged to get involved in the production of semi-finished goods. For example, countries can get involved in the production of semiconductors, which are used as a very important component in the manufacture of electric cars.
With China being a very important producer of semiconductors, other countries that believe they have some of the natural ingredients and can attract or develop skilled individuals can get involved in the production of the same.
This will encourage electric car companies such as Tesla and others to source semiconductors elsewhere, especially after the Chinese government placed another COVID-19 lockdown on Shanghai, China.
Another recommendation made was that countries should make it easy through policies and laws for companies to change suppliers in one country to similar suppliers in another country. A term it referred to as “substitutability”.
The Washington-based lender said, “This refers to how easy it is in the production process for a producer to switch inputs from a supplier in one country with those from another country.”
Following this advice will make it easy for firms to have unhindered production especially when pandemic-induced lockdown has made it almost impossible for suppliers in one country to supply much-needed raw material or semi-finished goods. Companies are allowed to adjust in such a way that they can get slightly different semi-finished goods than the initial semi-finished goods.
This ensures that companies are more flexible, so that when another pandemic happens, instead of production stopping because they can’t get needed input, they can substitute for a slightly different one.
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“Substitutability can be interpreted either as making firms’ production technologies more flexible in the sense that they can accommodate slightly different inputs of the same type from different suppliers or as standardising intermediate inputs internationally,” the IMF stated.
The lender cited Tesla as an example. When faced with semiconductor shortages, Tesla rewrote its software so that it could accommodate alternative semiconductors that were available at the time.
The agency believes that both “Diversification and substitutability” will protect the global economies from shocks when another period of pandemic happens.
“Diversification substantially reduces global GDP losses in response to shocks in key upstream suppliers. It also reduces GDP volatility following productivity shocks to multiple countries that are correlated,” it concluded.
Meanwhile, the lender appreciated the impact remote-working and investment in the healthcare sector had during the lockdowns of the first half of 2020.
It encouraged more governments and multinational companies to increase their investment in telecommunication infrastructures so that more people could work freely from home without the need to get to the office. Tools that can promote more virtual meetings will make it possible for workers to work from anywhere in the world while still being in the same place.
The IMF insisted that health ministries and pharmaceutical companies increase their investment in viruses, bacteria, and other microorganism investigation, vaccines, facilities, and infrastructure within the healthcare centres as a needed solution to protect us from a future pandemic.
The lender believes that “diversification substantially reduces global GDP losses in response to shocks in key upstream suppliers. It also reduces GDP volatility following productivity shocks to multiple countries that are correlated, in line with what is observed in historical productivity data over the past 25 years.”
