Before spreading globally, the coronavirus outbreak first emerged in Hubei province.
To contain the spread of the virus, the Chinese government imposed quarantine measures, leading to a slowdown in economic activity. Here, we examine how this slowdown in production, initially confined to Hubei province, is spreading to the global economy via international value chains. Dependence on Chinese inputs has risen dramatically since the early 2000s. As a result, most countries are exposed to the slowdown in Chinese economic activity, both directly through their imports of Chinese intermediate goods and indirectly, due to the Chinese value added incorporated into other production inputs. This note quantifies France’s total exposure compared with that of other countries. Firstly, we calculate the share of Chinese value added in French production. Secondly, we use country- and sector-level data to quantify the impact of lockdown measures on French GDP.
The spread of shocks through international value chains: the case of the coronavirus
This paper examines the fragility of international value chains, using the disruption to Chinese production caused by the coronavirus outbreak as a natural experiment.
Reference IPP Policy Brief No. 53
Presentation
Key Results
- Production processes are increasingly spread across several countries. Production within these ‘international value chains’ enables firms to reduce production costs but makes value chains more vulnerable to localised supply shocks.
- The recent coronavirus pandemic is a striking example that we use to measure the impact of a localised decline in production on the global economy, via value chains.
- In France, on average, 3.2 per cent of firms’ output relies on Chinese inputs. In certain sectors, such as textiles and electronic equipment, this proportion exceeds 10 per cent.
- A 10 per cent decline in Chinese production could reduce French GDP by 0.3 per cent through value chains alone. Such a shock would be sufficient to turn the 0.2 per cent growth in the first quarter of 2020 – as forecast by INSEE in December 2019 – into a contraction in economic activity.
- The shock is transmitted to the French economy via a small number of large firms that use foreign inputs in their production.
- In the short term, providing liquidity to affected firms is an appropriate economic policy response.
- To identify precisely the areas of vulnerability within the French productive structure and to target aid more effectively, more data on value chains at firm level needs to be collected.
Elie Gerschel
Alejandra Martinez
Isabelle Mejean