IPP Policy Brief n°53 - March 2020

Propagation of shocks in global value chains: the coronavirus case

IPP Policy Brief n°53

March 2020

Authors: Elie Gerschel, Alejandra Martinez, Isabelle Mejean*

Contact: isabelle.mejean@polytechnique.edu

* Author of the initial work

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logo-pdf-minPropagation of shocks in global value chains: the coronavirus case

 

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Summary:

Before spreading globally, the Covid-19 epidemic was concentrated in the Hubei province. To contain the spread of the virus, the Chinese government has imposed quarantine measures and travel restrictions, entailing the slowdown of economic activity. We study the propagation of this geographically concentrated productivity slowdown to the global economy, through global value chains. Reliance on Chinese inputs has dramatically increased since the early 2000s. As a consequence, most countries are exposed to the Chinese productivity slowdown, both directly through their imports of Chinese inputs and indirectly, through other inputs themselves produced with some Chinese value added. This note aims at quantifying the total exposure of France compared to other countries. First, we compute the share of Chinese value added in French production. Then, we use data at the country and sector levels to quantify the impact of travel restrictions on French GDP.

Key points:

  • Production processes are increasingly spread across borders. Production within “Global Value Chains” allows firms to save on costs but renders value chains vulnerable to local supply shocks.
  • The recent outbreak of CV-19 is a dramatic example that we use to measure the impact of a local production drop on the global economy through trade links.
  • In France, 3.2% of firms’ output pays Chinese inputs, on average. In some sectors like textile or electrical equipment, the proportion is above 10%.
  • A 10% drop in Chinese productivity could reduce French GDP by 0.3% through trade links only. Such a shock would be enough to turn the December 2019 INSEE forecast of a 0.2% growth for the first quarter of 2020 into a reduction of economic activity.
  • The shock is transmitted to the French economy through few large firms which produce out of foreign inputs.
  • Optimal policy responses to supply chain disruptions include providing liquidity to distressed firms in the short-run.
  • More data on value chains at firm-level is needed to identify weaknesses in the French productive structure and better target subsidies in case of a future shock.

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