The COVID-19 pandemic
has heightened
concerns about the
future of
globalization and the
viability of MNEs
organizing activities
in global value chains
(GVCs). The pandemic’s
short-term effects are
now well recognized
and involve a
combination of supply-
and demand-side
effects due to changed
consumption patterns
and disruptions to
GVCs following
restrictions to
cross-border movements
of many products and
people.
[1]
However, globalization
was already under
threat before the
pandemic, and many
commentators have
referred to
“slowbalization” or
“deglobalization”.
Four new realities are
particularly relevant:
the growth of populism
and economic
nationalism; greater
awareness of climate
change and sustainable
development; the
deployment of new
digital technologies;
and changing power
relationships between
MNEs and host
governments.
[2]
These new realities
pre-date the pandemic,
are ongoing and are
likely to outlast it.
The pandemic has
exacerbated the
effects of these new
realities. The key
issues are thus
whether and how firms
should reconfigure
their GVCs, and what
policy responses
should governments
adopt.
The new landscape has
called into question
MNEs’ cost-efficiency
business model
underlying the
offshoring and/or
outsourcing key GVC
activities. Should
firms reconfigure
their GVCs and put
more emphasis on
robustness and
resilience
[3]
and hence re-shore
and/or back-source
(internalize) GVC
activities?
The arguments for
reshoring are that
supply chains are
shortened and less
vulnerable to
restrictions on
cross-border movements
of products and
people. But such a
strategy foregoes the
cost advantages from
offshoring and the
risk-reduction
benefits from the
international
diversification of
supplies, whilst
re-shored activities
may still require
essential raw
materials and inputs
that can only be
sourced from overseas
[4].
The arguments for
greater
internalization are
that supplies are more
assured, coordination
is improved, and
opportunistic
re-contracting is
reduced. But
back-sourcing foregoes
the benefits of
externalization,
including firms
economizing on their
scarce financial and
managerial resources,
greater flexibility in
response to volatile
output demand and
access to cheaper
and/or better-quality
inputs from outside
suppliers, and the
potential to leverage
power asymmetries over
GVC partners.
[5]
In short, it is not
obvious that reshoring
and/or back-sourcing
are necessarily
appropriate strategic
responses for MNEs,
and their advisability
may well vary across
sectors. GVC
configurations are
often product-specific
and, therefore,
over-generalization is
risky. For instance,
re-shoring and
back-sourcing may be
feasible strategic
responses for some
basic products, but
less so for
sophisticated products
with more extensive
networks of specialist
suppliers.
What policy measures
should governments
adopt? In the
short-term, many
governments have
responded to the
pandemic by
reassessing their
reliance on
international trade
and investment,
tightening their
vetting of inward FDI
on grounds of national
security and fostering
indigenous production
capacity. Such
introspective
beggar-thy-neighbor
policies are mistaken,
as it is as vital to
maintain export
markets for outputs,
as it is to secure
supplies of necessary
inputs. This is best
achieved if all
governments work
together to preserve
an open international
system.
[6]
In the longer-term,
all governments will
need to learn
appropriate lessons
from COVID-19, notably
that firms cannot
build GVC resilience
alone, given the
global and contagious
(in both the public
health and economic
senses) nature of the
pandemic. Governments
should engage in
concerted public
health initiatives to
deter and mitigate
future pandemics. At
the same time,
governments clearly
have a major role both
in promoting the
global sustainable
development agenda and
encouraging the
necessary changes to
firm (and individual)
behavior through a
judicious combination
of regulation,
taxes/subsidies,
information provision,
and the supply of
suitable
infrastructure.
Comparable policy
tools may also be used
to encourage firms to
deploy new digital
technologies insofar
as they are expected
to bring widespread
social benefits. But
these policies—both
individually and
collectively—will have
dramatic and
far-reaching
distributional
impacts.
Some firms will grow
ever more powerful,
and this will
exacerbate tensions
that are already
apparent between MNEs
and national
governments.
Furthermore, some
firms (and
individuals) will
inevitably lose out,
even if there are
aggregate societal
benefits. These
distributional
asymmetries are the
root cause of the
contemporary growth of
populism and economic
nationalism. Perhaps
the most crucial
policy imperative for
governments will be to
manage effectively
these distributional
tensions and allow the
losers to participate
in the wider societal
benefits.
