Enhancing resilience within global value chains: the implications of COVID-19 for climate change adaptation and mitigation policies

Introduction

This blog is reposted from the Supporting Economic Transformation programme.

The COVID-19 crisis has laid bare the fragility of global supply chains and of the nature of relationships with suppliers in poorer countries. In view of the vulnerabilities exposed, many policy-makers seek to enhance resilience by reducing dependence on external suppliers. As a result, poor countries could be at risk of losing access to markets that provide vital footholds out of poverty. Coupled with the effect of climate change, the post-COVID-19 landscape could become even more challenging for poor countries to navigate.

This blog discusses the implications of the COVID-19 crisis in relation to trade within global value chains (GVCs) given the looming climate change crisis, focusing on the following questions:

• How can resilience within GVCs be enhanced?
• What can we learn from the current disruption, to enhance the climate resilience of GVCs?
• What are the implications of the shortening of GVCs for climate change adaptation and mitigation efforts?

*The key messages from the blog post are provided below. See the full text for more detail.

Building resilience within GVCs: where do you start?

Diversification of supply sources requires deeper and wider production networks, including at the regional and domestic levels. While some developed countries are seeking to reduce their dependecy on a single source country, in view of the implications of COVID-19, developing country suppliers typically struggle with the power dynamics inherent within those GVCs driven by one or a few buyers.

Developed countries taking back control of stages of GVCs in order to enhance resilience may further accentuate these power asymmetries, which could increase the risks for developing country suppliers in view of future shocks, including climatic shocks.

Globally, it is now recognized that these shocks are increasing as temperatures rise. Overnight, productive structures can be, and have been, wiped out. These aspects of persistent economic vulnerability for least developed countries and small vulnerable economies will worsen unless efforts to ramp up Nationally Determined Contributions (NDCs) to emissions reductions are secured at the forthcoming COP26.

Despite the stalemate at the WTO, it is imperative that members charged with the obligation to secure open and resilient value chains consider how best to achieve this in an inclusive and sustainable way.

What are the implications of the shortening of GVCs for climate change policy?

Notwithstanding the economics of the debate, re-shoring of specific GVC activities by countries that are committed to the Paris Agreement must now be undertaken within a carbon budget.

The shortening of GVCs can contribute to emissions reductions, for example through reduced transportation (using subsidised fuel). COVID-19 is surely accelerating trends towards the increased use of digital technology, which can assist in the reduction of carbon emissions.

But until our sources of energy change dramatically towards more renewable forms, these trends could be a lose-lose for development and trade and carbon emissions reductions; more evidence is needed to assess the overall implications of movement towards shorter GVCs.

Concluding remarks

The provision of support to firms adapting to COVID-19 in the developed and developing world must heed the warnings regarding the next environmental crises. Firms will be forced by their shareholders and rating agencies to think about the resilience of their GVCs, as well as by governments and consumers to reduce associated carbon emissions.

Support to firms should now entail provisions to enhance their environmental resilience. The current crisis has provided the global economy community with more opportunity to get the right frameworks in place ahead of COP26 and as we enter this last decade of action for the advancement of the 2030 Agenda.