Cling Together, Swing Together: The Contagious Effects of COVID‐19 on Developing Countries Through Global Value Chains

Abstract

This paper aims to estimate the economic vulnerability of developing countries to the collapse in global value chains (GVCs) due to the COVID‐19 pandemic. It uses trade in value added data for a sample of 12 developing countries in sub‐Saharan Africa, Asia and Latin America to elicit on their dependence on demand and supply from the three main hubs China, Europe, and North America. Using first estimates on COVID‐19‐induced changes in final demand and production we obtain an early projection of the GDP effect that runs through trade in GVCs. Our estimates reveal that adverse demand‐side effects reduce GDP up to 3.1 percent, and collapsing foreign supply is responsible for a drop in GDP of a similar magnitude. Overall, we confirm conjecture that the countries most affected are those highly integrated in GVCs (South‐East Asian countries). We argue, however, that these countries also benefit from a well‐diversified portfolio of foreign suppliers, leading to a cushioning of economic downswing from adverse supply‐side spillovers, because COVID‐19 stroke major hubs at different times. Moreover, despite expected hazardous home market effects, sub‐Saharan Africa’s GDP appears to be comparatively less affected though GVCs due to a lack of intensive supply‐ and demand‐side dependencies.