08/25/2020
There were only 18 days between the first reported COVID-19 case in China and the first reported case in the United States, even though the two countries are more than 7,000 miles apart.
The COVID-19 pandemic has shown that the world is more connected than ever before. Just as the virus uses the body’s own genomic defenses to proliferate, COVID-19 has turned one of our greatest strengths into a weakness: globalization.
Globalization was a strategy originally meant to elevate everyone—through the globalization of trade, consumers in the U.S. and Europe have access to inexpensive items made in developing countries with lower labor cost. In turn, developing countries have access to global markets and industry knowledge that can be used to rapidly achieve economies of scale.
Over the past four decades, the globalization of trade has led to the development of global assembly lines known collectively as Global Value Chains (GVCs). GVCs are the division of labor on a global scale; raw materials sourced in one country are sent around the globe to be processed and assembled, before being shipped to the end consumer. GVCs are an attractive selling point for developing countries as they no longer need to produce complete products to participate in the global market. Instead, they can partner with a transnational corporation to produce intermediate goods and insert themselves into one stage of the global assembly line. GVCs have become so entrenched in the global economy that 80% of world trade is now driven by transnational corporations, and the value of trade in intermediate goods is nearly double that of the trade of final goods.
Despite their many benefits, GVCs are not perfect. Participating in a GVC can lock a country’s economy into that particular role in the global production line, which leads to imbalances in global production roles. For example, Africa and Oceania mainly export raw materials which are converted into more specialized intermediates by advanced economies, and then finally assembled in Asia. Due to this status quo, Asia, mainly China, is the beating heart of the Global Value Chain as a whole.
A tremor of disruption in Chinese production can reverberate shockwaves up and down the global supply chain. Like a game of economic Jenga, one crucial block disturbed from its place and the tower comes tumbling down. During the COVID-19 crisis, China, producer of more than 50% of the world’s imports of personal protective equipment (PPE), went into lockdown. Paired with an increase in domestic demand, China’s net exports of protective masks dropped by 24% in January and February 2020 relative to a year earlier. This shock in global supply, paired with increased global demand, led to a 182% increase in Chinese-made respirator and mask prices in just one month. As U.S. federal and state governments outbid one another for Chinese-made PPE, the marketplace for masks became the new “Wild West.” Economically advantaged governments clambered over each other to reach the life-saving resource, while healthcare systems in poorer regions with limited buying power strained to balance the cost of the climb with necessity in a race to the top that had become 182% taller overnight.
This is just one example of many industries that experienced incredible supply shortages and cost increases due to the impact COVID-19 had on our global supply chain.
