Yves here. It is useful to have Joseph Joyce summarize and draw some conclusions from recent reports from the McKinsey Global Institute and the United Nations Conference on Trade and Development on the future for supply chains and foreign direct investment given increased nationalism and Covid. One thing to note in particular with McKinesy is that while it regularly marshals useful data, one needs to look carefully at how it reaches its conclusions. Its taxonomy for types of shocks, for instance, seems pretty dodgy. Since when did anyone foresee the 2008 crisis? Even those like your humble blogger and economists like Steve Keen and Michael Hudson saw that there would be financial crises in many countries, I cannot recall anyone anticipating the global financial system having a near death experience.
By Joseph Joyce, a Professor of Economics at Wellesley College, where he holds the M. Margaret Ball Chair of International Relations. He served as the first Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs. Originally published at Angry Bear
The pandemic has shown that global supply chains are vulnerable to shocks. Output contracted as factories were closed in China and the impact was transmitted to firms further along the chains and the distributors of the final goods. Foreign direct investment had already slowed in the aftermath of the global financial crisis of 2008-09, and there were questions about its future (see here). How will multinational firms respond to the new shock?
The McKinsey Global Institute seeks to answer this question in a new report, Risk, Resilience and Rebalancing In Global Value Chains. The authors point out that the pandemic is only one of a range of shocks that can disrupt production. They distinguish between catastrophes that are foreseeable (such as financial crises) and those unanticipated (acts of terrorism), as well as disruptions that take place on a smaller scale. The latter can also be divided between those that are foreseeable (climate change) and those that are unanticipated (cyberattacks).
The report then measures the exposure of different business sectors to the various shocks. Those that are heavily traded are more vulnerable. These include communication equipment, computers and electronics, and semiconductors and components, all industries that are seen as promoting growth. Apparel is another sector that is vulnerable to risks, such as the pandemic and climate change.
These risks will motivate firms to reconfigure their supply chains. The political fissure between China and the U.S., as well as government policies to ensure self-sufficiency in some sectors, will also induce firms to reorganize production. The report’s authors estimated that 16% to 26% of current exports could be shifted. They find that “ . . . the value chains with the largest potential to move production to new geographies are petroleum, apparel, and pharmaceuticals.” In some cases governments may need to provide financial support to induce firms to relocate to domestic economies where the governments seek domestic self-sufficiency.
Re prognosticators of 2008 crisis, you left out Dr Doom aka Nouriel Roubini who claimed in 2006 that a deep recession was coming. I can not remember whether he claimed that it would be a ‘near death experience’, though.
+1
(this is not a reply. I notice when I don’t reply to an existing comment it almost always bounces to moderation)
Not much meat here in terms of conclusions but well, that’s McKinsey for you. Define the burning platform in a few high level bullets, and then propose the engagement (seven figures) to study whether 16-26% of YOUR supply chain can be ‘shifted’….
This was the interesting bit in the UNCTAD precis:
Multinational firms will hold back on new expenditures until they see a consistent recovery and learn how governments will seek to influence their foreign operation.
In my patch of the world, ASEAN (on track to become the world’s 4th biggest economy), intraregion trade to date has never really succeeded in getting out from under economic nationalism. So it’s a good case study in what may lie ahead for the, lol, ‘developed world’ as everyone scrambles to put their own voters first.
ASEAN has been one big Prisoner’s Dilemma, even in the good times:
1. with the sole exception of Singapore, every country wants their neighbors to drop their barriers and open their markets, but…
2. nobody can accept foreign imports competing with their own domestic producers (and oligarchs).
3. So beyond grand summits in plush hotels and press ceremonies around high level ‘agreements to agree on something concrete in the future’, it’s all been zero sum and beggar-thy-neighbor.
4. Meanwhile, except in a few chaotic warlord states like PNG or its Indonesian-occupied western half, dependensia has all been turned on its head. Now it’s white guilt countries and multinats paying off local oligarchs for the privilege of building solar and wind farms, so they can add glossy pages to their Corporate Responsibility Reports. I love the smell of free carry equity in the morning… and fossil fuels, which are what’s really keeping the lights on in spite of the green window dressing.
5. Meanwhile, the Chinese keep their supersized heavy manufacturing sector / society at work by begging/ borrowing/ stealing every bit of infra and fixed plant work that can possibly be done at well below cost. The locals larger bet is that Team USA will shield them when they repudiate the debts and seize the assets later on.
6. On top of that, you have utter lunacy like high speed rail in Laos or Mindanao (can you just imagine)? or a new Indonesian capital carved out of what used to be jungle (coal mines now) in Borneo. Or a 3000km undersea HVDC line (read: copper mine, and if one deep water link fails you’re hosed) to feed Australian solar to Singapore. White elephants on parade!
And sorry to be still more jaded, but the only consistent application of Ricardian comparative advantage I’ve seen to date intra-region has been migrant servants: Filipina maids (and hostesses) or Bangladeshi hard hats working cheap and cheerful, at the margins of the social contract, now in MICs like Thailand and even Vietnam (!). Doing the dirty jobs even the local peasants won’t do now. A form of progress, I suppose.
Please don’t try gaming our mod rules. The effort generally makes things worse for you.
Multinational firms will hold back on new expenditures until they see a consistent recovery and learn how governments will seek to influence their foreign operation.
In other words whomsoever wins the election needs to keep the fed spigot on full blast,…or else there’ll be a tantrum.
A retreat of international production will hamper the prospects of lower-income countries where the global supply chains have been a driver of growth.
If these countries are sovereign or could be in their currency, what’s the need for foreign investment? Wouldn’t it be more sustainable to be less dependent on other countries and more self sufficient, or is a certain level of foreign investment needed to get to that point?
A retreat of international production will hamper the prospects of lower-income countries where the global supply chains have exploited low labor, regulatory and environmental costs.
FIFY