Regional value chains hold key to future

Covid-19 has pulled the brakes on economic globalization and has disrupted global production. But technology and policy forces were challenging these systems even before the pandemic. The changing reality could steer the world economy towards more regional, shorter value chains in the new decade, argues a UN paper.

In the World Investment Report 2020, the United Nations Conference on Trade and Development (UNCTAD) says trade based on global value chains (GVC) and cross-border investment in physical assets had begun to slow down in the 2010s. The pandemic is a tipping point that will transform international production further.

Writing in a VoxEU article, the authors of the report say three major trends have been shaping the disruption: technological advances such as artificial intelligence, robotics and digitization, protectionist policies in trade and investment, and sustainability measures.

The report provides a framework for possible trajectories for the 2020s. The restructured systems could be in the form of shorter, less fragmented value chains that are regional rather than global. Large-scale investment could give way to small-scale manufacturing. Foreign direct investments (FDI) could seek regional markets rather than global efficiency, the authors say.

The challenges of this upheaval include divestment, relocation and tougher competition for FDI. Existing industrial infrastructure built to facilitate GVCs will face losses and prove costly for developing countries that were hubs of mass production because of cheap labour and resources, the authors say.

However, this scenario opens opportunities as well. Regional value chains will boost distributed manufacturing and final-goods production, say the authors.

To survive this disruption, countries will need to adopt broader export strategies by creating regional industrial clusters, diversify investments for resilience, and build small-scale and distributed manufacturing facilities rather than large production units.

Developing countries, especially, should focus on reorienting themselves towards resilience, sustainability and regional demands, the authors say.

Also read: Global value chain transformation to 2030: Overall direction and policy implications

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