COVID-19 could estimulate automation and reverse globalization (reshoring GVCs)
16/05/2020 09:29
The current COVID-19 pandemic has fully exposed the vulnerabilities of global value chains (GVCs) which are characterised by high interdependencies between global lead firms and suppliers located across several continents. Many countries are currently facing supply shortages of critical medical equipment, in particular from China, which has also been labelled ‘supply-side contagion’. Firms and nations are also facing risks associated with protectionist national trade policies: high import tariffs may have caused shortages of critical medical products and equipment from China in the US, while export restrictions on medical supplies may have exacerbated supply shortages
Long before the COVID-19 pandemic, in an effort to mitigate supply chain risks, increase flexibility, and improve product standards, global lead firms have relied on Industry 4.0 technologies, such as robots, 3D printing, and smart factories, and occasionally reshored parts of their production. Even in developing countries like Bangladesh, for instance, contract manufacturers in the apparel industry have started replacing workers with robots to adapt to increasing wages. Confronting this pandemic could accelerate some of the trends of the past few years including technology adoption and the use of new data.
Automation and reshoring mitigate the risks firms face in the event of a pandemic or other shock
Global demand for ventilators and personal protective equipment, such as medical masks, plastic shields, and gloves has increased exponentially as the number of COVID-19 cases has skyrocketed. Countries are consequently facing supply shortages of critical medical equipment and parts and components of such equipment and are looking to Industry 4.0, including 3D printing and artificial intelligence, to fill some of these supply shortages.
From a lead firm perspective, Industry 4.0 unlocks new labour-saving technologies which could potentially reduce reliance on low-skill, low-cost labour in manufacturing. This has implications for the global geography of production, as value chains can be expected to become more regional in nature, moving closer to key final consumer markets (in China, the EU, Japan and the US). Industry 4.0 is also likely to have an impact on the length of value chains, as automation could consolidate various steps of the value chain. And Industry 4.0 could influence the reshoring decisions of lead firms in light of the growing importance of supportive and flexible business ecosystems. A firm-level survey involving a sample of around 2,500 manufacturing firms from eight European countries confirms that flexibility and product quality were the two main drivers for their reshoring activities in 2015
Several factors seem to support the argument that automation and possibly reshoring will accelerate following the COVID-19 pandemic. Automation and reshoring allow for more flexible adjustment to changing demand, mitigating firms’ risks in the event of a pandemic or other shock. The case of automatic testing for COVID-19 in the Republic of Korea – i.e. samples are analysed by a diagnostic machine rather than by humans – exemplifies that automation facilitates supply-side adjustments (e.g. through on-demand ordering), speeds up the testing process, and reduces risk of error and contamination. Industrial policies that aim to strengthen a country’s healthcare sector and reduce its dependence on global supply chains could accelerate the trends towards automation and reshoring, particularly involving goods deemed critical to national security.
There are also, however, reasons to be unconcerned about a full reversal of globalisation
Ensuring the supply of critical goods does not necessarily require reshoring of production. Countries can prepare for a pandemic by stockpiling ventilators and critical medical equipment, even if these have been produced abroad, as well as by implementing health sector reforms that have been long overdue. While firms may rethink their strategies and consider automation or reshoring to mitigate future risks, it is unlikely that entire supply chains will be automated in the short term. The automation of certain sub-components may not be feasible or even desirable, for example, due to a shortage of skilled workers who are able to operate the machines or for products with low value-to-weight ratios.
The global stock of industrial robots is still concentrated in specific countries and manufacturing industries. While China alone used over 260,000 robots in its manufacturing production, the other countries used only 150,000 robots.
Higher robotisation in countries specialised in innovative GVC tasks —which use the bulk of industrial robots—appears to be associated with a weaker decline in GVC participation. Higher robot use is associated with a stronger decline in backward GVC participation. The implications for development depend on types of foreign inputs sourced from a given country (labour-intensive or not) as well as on the relationship between robots and labour in the relevant industries
Other developments—including GVC entry of lower-cost countries and growing demand for mid-range consumer goods in emerging markets—could actually slow down the trend towards automation and reshoring. Ethiopia, for instance, has successfully entered GVCs and created many jobs for apparel workers, especially women, but currently has no regulated minimum wage, making the country an attractive investment location for global apparel lead firms
Moreover, appetite for inexpensive consumer products like electronics and apparel is growing in emerging markets. . Automation and reshoring seem to be less likely in labour-intensive GVCs that target consumers in emerging markets, at least in the short to medium-term.
The coronavirus pandemic has already taught us several lessons. From a trade perspective, free flows of crucial goods and services ranging from masks and ventilator components exported from China to doctors being flown in to Italy from Cuba, the automation of critical tasks such as testing, and the absence of trade protectionism a all jointly play a role in overcoming this pandemic and to improve preparedness. These lessons will hopefully be remembered when we shape the post-COVID-19 world.