The shock resistance of global value chains
With the rise of globalisation, the production and manufacturing of goods has become increasingly fragmented along what are called global value chains, or GVCs. These GVCs create networks of firms located in different countries that are part of the same production process. While trade within GVCs now represents half of the aggregate volume of products exchanged in international markets, remarkably little is known about how they are structured – let alone their impact on economies and society. Enter the EU-funded TRADENET project. Using highly disaggregated firm-to-firm trade data, combined with models of endogenous trade networks, the project set out to study both the structure of these networks and the impact they have on the international diffusion of shocks. “I argue that the microeconomic structure surrounding GVCs has consequences for their resilience to shocks,” says Isabelle Mejean, a professor of Economics at the Paris Institute of Political Studies (Sciences Po) and the project’s lead researcher.
Studying shock in real time
In economics, a shock is defined as an unexpected or unpredictable event that affects an economy, either positively or negatively. An example is the COVID-19 pandemic. “An unfortunate example of this transmission of shocks is the massive disruption in the functioning of GVCs in the aftermath of the pandemic,” adds Mejean. On the bright side, this disruption served as a natural experiment for the project. “I was able to show how firms sourcing inputs from China suffered a reduction in sales even before COVID spread worldwide because of the early lockdown happening there in January 2020,” explains Mejean. Mejean was also able to test the resilience of different firms to this type of shock, thus providing important insights into the inner workings of GVCs. “While we tend to think about production networks as rigid structures, a firm’s ability to redirect sourcing across countries is an important dimension that can help dampen the economic impact of these shocks,” she says.
Sending shocks across countries
Based on this research, the project, which received support from the European Research Council (ERC), was able to reach some important conclusions. One of those conclusions was how in a GVC network, any perturbation that affects one node of the network will travel along the chain and affect all the firms involved in the same value chain. “The way these international production relationships are set up makes them a channel for the propagation of shocks across countries – which is exactly what we saw during and after the pandemic,” remarks Mejean.
A big impact
The project has already delivered seven publications in peer-reviewed journals, including two in some of the world’s leading economic publications. The project also generated substantial policy-oriented work and has received substantial coverage in the media. Mejean herself has participated in 130 scientific and public events. With the TRADENET project concluded, Mejean is now digging into the causes behind the recent surge in inflation. “I hope to submit a project to the ERC once these new research ideas are better structured,” she concludes.
Keywords
TRADENET, global value chains, economic, chains, COVID-19 pandemic, globalisation, manufacturing, trade, economies, economy
