This chapter outlines some of the ways in which countries and industries were affected by the COVID-19 pandemic via their connections to each other, and how restrictions on mobility and activity propagated the resulting economic shocks through economies across the globe. The chapter begins by describing the ways in which containment measures across the world can affect global value chains (GVCs), and identifies industries and countries that are particularly vulnerable to GVC risks. It then outlines how the types of demand, and destinations of products and services, can influence how different industries are affected by a shock like the COVID-19 crisis over the medium term. This chapter then describes how the restrictions on domestic and international mobility, and the resulting near-standstill of air passenger travel, directly affected two of the industries relying most heavily on mobility: aviation and tourism.
Strengthening Economic Resilience Following the COVID-19 Crisis
6. Industrial and international connectedness
Abstract
Key findings
The COVID-19 pandemic, and the economic shock it induced, spread across the globe through the interconnectedness of economies and societies, and demonstrated more clearly than ever the need to tackle global challenges through collaborative effort. International co-operation is key to building economic resilience in an interconnected world, including for the recovery period and to prepare for future crises. Restrictions on the movement of people and the production and transport of goods triggered changes to demand for products and services, aggravating bottlenecks in supply chains. Differences in containment measures and a lack of co-operation between countries magnified the negative impacts of restrictions. In the future, governments should prepare better and align policy responses, to create a more robust and resilient economy in the face of shocks.
Robust supply chains and risk diversification are key to navigating shocks like the COVID-19 crisis. While the pandemic has refuelled an old debate about the risks associated with global value chains (GVCs) – which are reliant on international connections and transport – the firms and economies that display the highest levels of resilience to shocks through international connectedness are those with agile and diverse links. While it may be tempting for governments to try to reduce certain risks of international connectedness by incentivising the on-shoring of value chains, this would result in a loss of efficiency without improving resilience.
The collapse of air transport had wide-reaching effects, despite the relatively small size of the sector. Not only did tourism rates plummet globally, resulting in huge employment losses in the sector, but numerous other industries were affected because air transport enables other economic activities through the movement of people and goods. One silver lining of the reduction in air transport was a substantial drop in greenhouse gas emissions, although this is not expected to have a permanent influence on climate change unless policies are put in place to capitalise on the behavioural changes of the pandemic.
Introduction
The COVID-19 crisis has affected production, consumption, and mobility in unprecedented ways around the world. Lockdowns prohibiting all but essential economic activity (see Chapter 3 for more details on which industries are considered essential) led to disruptions in the production of intermediate inputs and lowered demand for final products, which in turn reduced supply and demand for inputs produced globally (OECD, 2020[1]). The confinement measures put in place in many countries, and travel restrictions in both origin and destination countries, caused international passenger travel to virtually come to a halt in early 2020. Besides directly affecting the aviation and tourism sectors, the collapse in international travel reduced cargo capacity in passenger flights, creating bottlenecks in the transportation of air freight. The disruptions in transport, combined with lockdowns impacting industrial production and sudden drops and surges in demand, have also led to broader concerns about the resilience of highly complex supply chains to shocks such as a global pandemic, as discussed in other OECD work (OECD, 2020[2]; 2020[1]; 2020[3]; 2020[4]).1
This chapter begins by discussing indirect ways that this connectedness impacts economies. It focuses on connections between firms, through GVCs. The COVID-19 pandemic has demonstrated how a large-scale shock can propagate through economic interconnectedness across the globe (OECD, 2021[5]). How deeply countries are integrated in GVCs will have implications for the degree to which production is impacted by the measures put in place to control the pandemic in other countries. This is true for both backward participation in GVCs (i.e. how industries and the firms within them rely on intermediate inputs produced in other countries) as well as forward participation (i.e. how much of a firm’s or industry’s output goes to other countries, where it is used as an intermediate input before being exported further). While risks due to backward participation are mainly due to lockdowns and disruptions in transport, affecting the availability of inputs from upstream industries, forward participation also depends on a foreign demand component (i.e. the extent to which foreign demand for certain products changes due to shifts in preferences as well as overall recessionary trends). The analysis on GVCs in this chapter aims to help identify industries and countries most exposed to potential disruptions in production through GVCs. It can thereby help governments identify which areas might benefit the most from efforts for increasing resilience through co-operation (both with the private sector and with other countries), diversification, and transparency. These can be effective policy tools to mitigate GVC risks (OECD, 2020[1]; Arriola et al., 2020[6]) without endangering the benefits of GVCs, and help to address demand surges, including in essential medical goods and the production of vaccines (OECD, 2021[5]; 2021[7]; 2020[4]).
Focusing more directly on demand, the subsequent section of this chapter discusses the structure of aggregate demand (i.e. whether demand stems from households, public spending, private investment, or exports of intermediate or final goods). As different components of demand react differently to the crisis, the composition of aggregate demand will matter for how the overall economy is affected, with heterogeneities arising in timing as well as severity of impacts.
Given the important sectoral impact of the pandemic through international connectedness, this chapter continues with an overview of the impact on aviation and tourism, two of the industries that rely most directly on mobility and are therefore most directly affected by the disruptions in international travel. It sheds light on the degree to which these industries were impacted by the COVID-19 crisis, as well as their relative importance by country, and also highlights some positive environmental effects from reduced greenhouse gas emissions related to the large drop in the number of passenger flights.
Global value chain exposure and centrality
The COVID-19 crisis has refuelled an old debate about the risks associated with internationally fragmented production and GVCs, which by their nature are connected to, and reliant on, business and industrial functioning across multiple countries. A shock like the one caused by the COVID-19 pandemic can be a source of additional vulnerability in GVCs, exacerbated by disruptions in international trade due to lockdowns and mobility restrictions.
Fortunately, the impacts of the crisis on GVCs during the first wave seem to have been less severe than initial fears warranted. In the beginning of the pandemic, disruptions specific to the People’s Republic of China (hereafter “China”) – the epicentre of the initial outbreak, and the world’s largest manufacturing hub (see also Figure 6.3), including of some essential medical supplies, such as surgical masks – caused major concerns. However most of these abated after the lockdown in China ended and production was ramped up (OECD, 2020[3]; 2020[4]). Early evidence on global supply chains for food products concludes that they were rather robust during the first wave of the pandemic (OECD, 2020[2]; 2021[8]), and that the disruptions that did arise were of both foreign and domestic origin (OECD, 2021[5]). Further analysis and simulations of different policy options finds that on-shoring and reducing GVC integration would not necessarily lead to more security from supply chain disruptions (OECD, 2020[1]), and in fact international trade and production networks have helped satisfy the demand surges that happened during the first wave of the pandemic. Indeed, GVCs have also helped provide access to essential goods that are key in tackling the health crisis, including vaccines (OECD, 2021[7]).
Both foreign and domestic value chains entail risks, and depending on the reliance on each, countries are exposed to these different risks to varying degrees. Diversified supply chains have helped economies mitigate initial shortages and satisfy increased demand for certain goods. Nevertheless, highly fragmented international production networks, in which the production process is sliced up into many separate steps, can be subject to disruptions due to differential timings of lockdowns between countries, which may be exacerbated by bottlenecks in transportation. Firms can experience disruptions in access to, and purchase of, intermediate inputs from foreign suppliers if the latter are, or were, unable to produce or supply due to lockdowns or transport disruptions. As the health crisis may continue to unfold in further waves, affecting countries with different intensity and at different points in time (with new mutations of the virus representing an additional risk factor), these concerns remain.
Furthermore, production of goods in non-essential industries with long value chains, in which many production stages are involved, may be more vulnerable to GVC risks than are food supply chains, given that food production has been allowed to continue almost everywhere, despite lockdowns. In the short term, lockdowns may have been a concern especially for production in non-essential industries, which were forced to shut down or could continue only with reduced capacity in many countries. Over the medium term, however, most industries – essential or not – are likely to be affected in one way or another. This is partly because firms in essential industries rely on inputs from those classed as non-essential. It is also because the potential for asymmetric timing and intensity of lockdowns and interruptions in production grew larger as the health crisis continued and countries adopted different coping strategies. Longer-term impacts can also differ from initial disruptions because initial demands might have been partly satisfied through existing stocks – as was the case also in food supply chains (OECD, 2021[5]) –, by postponing certain purchases (e.g. of investment goods) or may not have even arisen if the specific downstream industry was under lockdown itself.
Figure 6.1 illustrates the degree of GVC participation in OECD and G20 countries. GVC participation is measured by the foreign content of domestic exports (backward linkages) and domestically produced inputs used in other countries’ exports (forward linkages), as a share of total gross exports. Such measures can be considered as revealing potential vulnerability or resilience to different types of shocks; global or regional economic shocks may propagate through GVCs, but in the case of shocks originating domestically, they may also be a source of resilience. Countries such as Japan, the United States (US), Canada, Argentina, New Zealand or South Africa are relatively less integrated in GVCs and therefore subject to a lower risk of disruption due to the effects of lockdowns elsewhere or international travel restrictions. However, many small open economies such as those of Luxembourg, the Czech Republic, the Slovak Republic, Ireland and Korea are heavily integrated in regional or global value chains, and thus may be more exposed to lockdowns and supply and demand shocks in other countries.
Figure 6.1. GVC participation
Note: GVC participation index for 2015 based on OECD’s Inter-Country Input-Output (ICIO) matrices (OECD, 2018[9]). The index combines the foreign content of exports (backward participation) and domestically produced inputs used in third countries’ exports (forward participation), as a percentage of gross exports.
Source: OECD (2018[10]), Trade in Value Added (TiVA) Database, http://oe.cd/tiva (accessed in January 2021).
The vulnerability of GVCs through backward participation may be more immediate due to the asymmetric imposition of lockdowns across countries. Domestic restrictions on production affect domestic firms simultaneously, because most firms in the same country will be impacted by the same set of rules at the same time. For instance, the restriction-induced shutdown of a firm that produces intermediate inputs may simply coincide with the concurrent shutdown of a downstream domestic firm that uses those inputs, causing fewer issues in the value chain. Foreign linkages, however, may create difficulties when downstream firms are able to continue operating, but inputs from other countries are unavailable due to interruptions in production among suppliers. The Czech Republic, Hungary, Mexico and the Slovak Republic have particularly high degrees of backward participation related to manufacturing or processing industries, both in absolute and relative terms, and may face more difficulties in receiving inputs from foreign suppliers facing lockdowns over the short term.
Countries integrated in GVCs through forward participation, on the other hand, may face longer-term risks. Contractual obligations of downstream firms facing lockdowns may also lead to stockpiling, with postponement of new orders later on. That said, foreign demand can also offset drops in domestic demand; indeed, evidence on GVC disruptions during further waves of the pandemic points towards more, rather than less, longer-term resilience through forward GVC integration (Giglioli et al., 2021[11]). Norway, Saudi Arabia and the Russian Federation display the highest degrees of forward participation as major exporters of oil or gas.
Figure 6.2. Foreign value added content of gross exports, by region of value-added origin, 2015
Source: OECD (2018[10]), Trade in Value Added (TiVA) Database, http://oe.cd/tiva (accessed in February 2021).
In addition to the overall degree of integration into GVCs, it is also relevant whether this integration is primarily regional (which is the case for most countries) or more spread across the globe. This is partly because transport disruptions are a bigger concern if few alternative modes of transport are available, which is more likely to be the case for extra-regional trade. However, more specific to the COVID-19 crisis, it is also because differential timings in infection waves and lockdowns, as well as the type of policy measures taken (e.g. full lockdowns, track-and-trace, zero-COVID strategies) are more similar within regions than across, and extra-regional trade is therefore more likely to be affected by lockdown measures and by tighter restrictions and controls. Lastly, switching suppliers within regions will be easier if there is a higher degree of harmonisation in standards and regulations in place, which is particularly relevant for countries with existing regional trade agreements or common markets, such as the European Union.
Figure 6.2 above shows the regional composition of backward linkages (i.e. the foreign value added content of gross exports, by the region of value added origin). As expected, most countries primarily source imports from within their region, but there are a few countries that stand out. Within Europe, Ireland and Luxembourg are highly integrated in GVCs and source relatively more from outside of the European Union (particularly from North America) compared to other European countries; this partly reflects the relatively large presence of non-European multinationals and their related trading activities in these two countries. In the case of Luxembourg, this also reflects significant dealings in business and financial services (Cadestin et al., 2019[12]). For Greece, less than half of its foreign value added in exports comes from Europe, and the Netherlands also has a relatively more diverse backward linkages outside of Europe. While highly dependent on its North American neighbours for inputs, a high share of Mexico’s foreign value added in its exports comes from East and Southeast Asia, reflecting close linkages with US multinational enterprises, and their value chains (Guilhoto et al., 2019[13]). Among Asian countries, Korea displays a relatively diversified input portfolio across regions, with notable shares also originating from regions outside of East and Southeast Asia.
Figure 6.3. Foreign centrality index, 2015 vs. 2005
Note: Foreign centrality is calculated as the output-weighted average of industry-country centrality indices, and is the average of forward and backward participation centrality measures. See Criscuolo and Timmis (2018[14]) for the methodology. Business sector services refer to sections G to N of ISIC Rev.4.
Source: OECD calculations based on OECD (2018[9]), Inter-Country Input-Output (ICIO) Database, http://oe.cd/icio (accessed in February 2021).
Capturing a different aspect of international connectedness, the centrality index (shown in Figure 6.3) is an indicator of whether a country serves as a hub in value chains – that is, importing inputs from many countries that are themselves well connected to other countries, and also supplying these inputs to a large network downstream. It complements traditional GVC indicators – such as the participation index – by adding information on the complexity of networks and the connectivity and position of countries (Criscuolo and Timmis, 2018[14]). Countries that score high on the centrality index are connected (directly or indirectly) with many other countries, and are influential in the value chain. Centrality is a relative concept and can be measured backward (with suppliers) or forward (with customers), with total centrality being the average of the two. A high centrality indicates that a country is a hub in the value chain, whereas a low value means that a country is at the periphery, and not well connected to GVCs. Hubs generally arise – and grow – due to efficiency gains that result from geographical or technical advantages, and thus, they become channels of propagation.
Disruptions in high centrality countries might therefore have more far-reaching consequences than those in countries on the periphery. Notably, China stands out as the world’s major manufacturing hub, followed by Germany and the United States. Again, this explains why the initial lockdowns in China caused concerns about the vulnerability of GVCs more generally. The centrality index can also be indicative of the ease at which a country might be able to diversify across several trading partners, relying on pre-existing trade relationships. Indeed, as discussed in more detail in the last section of this chapter, diversification and the identification of back-up options and alternative supply channels are among the main strategies suggested for improving resilience (OECD, 2021[5]), and exchanging best practices with hub countries might entail significant knowledge spillovers and learning opportunities.
Centrality in business services appear overall less concentrated, except for in the United States, which is clearly the leading hub. This may reflect the strong position of the United States in digital business services. The business services sectors, with some exceptions (e.g. Wholesale and retail and Transport services), were more resilient to the COVID crisis, due to their greater ability to engage in telework. In addition, digital, IT and telecommunication services were clearly among the sectors that benefitted from the COVID-19 crisis, and may have strengthened the US position as a hub.
Industry composition and the structure of demand
As countries move beyond the immediate health crisis and into intermittent or definitive recovery periods, disruptions associated with lockdowns and travel bans can be expected to give way to longer-term demand impacts. While fiscal stimulus programs can help support domestic demand during the immediate recovery, fiscal space can become a limiting factor for some economies over the medium term, and broad fiscal policy support may have to be adjusted to more targeted measures (OECD, 2021[15]). In this regard, countries whose production and industry structure is more heavily weighted towards domestic consumption (both government and household consumption) and the production of final goods are likely to experience impacts that differ from those in countries that are more active in the production of investment goods (where final demand may remain low for some time) or exported intermediates.
Exploiting information from global input-output tables on countries’ integration into GVCs, a scenario analysis models possible impacts on different components of the economy. The estimated effects on output, value added, final consumption, gross fixed capital formation and international trade are shown in Figure 6.4 below. The figure also illustrates the large impact of the COVID-19 crisis on domestic and overseas supply chains. Combining the latest OECD Inter-Country Input-Output (ICIO) tables (2018 edition) with recent monthly (or quarterly) statistics on final expenditures, simple scenario analyses can provide estimates of 2020 industry value added compared to “business-as-usual” (BAU). This helps demonstrate the large impact of COVID-19, taking into account international connectedness through GVCs. While the analysis presented below suggests that global total value added was 12% below BAU in the middle of 2020,2 impacts across sectors vary, with Hotels and food services most affected with a drop of 27%, while Information services fell only 5%. Impacts also vary across OECD countries, from -16% (Korea) to -10% (Israel and the United States), reflecting countries’ industrial structure as well as GVC linkages.3
Figure 6.4. Value added change from business-as-usual, Q2-Q3 2020
Note: Panel A shows the average impact on the 64 ICIO target countries, by sector. Panel B shows, for each country, the contribution of sectors to the total impact on the economy. Estimates of annual “business-as-usual” (BAU) were based on the 2020 projections of GDP in IMF’s World Economic Outlook published in October 2019 (IMF, 2019[16]). For the global input-output structure for 2020, the input structures from the 2015 ICIO table (2018 edition) were projected under 2018 SNA constraints (output, value added, final consumption, gross fixed capital formation and international trade) and preliminary estimates of industry value added and output from the forthcoming update of the ICIO tables. Maintaining annual average production input structures, the simulation used recent monthly (or quarterly) final expenditure structures (not seasonally adjusted).
Source: OECD calculations based on OECD (2018[9]), Inter-Country Input-Output (ICIO) Database, http://oe.cd/icio (accessed in February 2021).
G20 countries such as China and, to a lesser extent, Turkey and Saudi Arabia – which have a particularly high degree of employment directed towards investment goods – may see a more protracted drop in demand than other countries (Figure 6.5). However, this can be cushioned through high levels of government spending (as in in Saudi Arabia) or a large share of private consumption (as in Turkey). Meanwhile, some countries may experience lower demand in the medium term due to a large share of employment in the production of exported intermediates, which can also be mitigated through higher levels of government spending or private consumption, as mentioned. However, the effectiveness of the mitigating effects of private consumption rests on the assumption that industries that are typically more resilient in “normal” recessions, such as domestic services, are operational. These include some industries that have been particularly hard hit by the COVID-19 crisis due to high levels of customer contact, as shown in Chapter 3. Whether domestic household consumption can cushion the possible reduction in investment demand over the longer term will therefore strongly depend on the evolution of the pandemic and the strategies of governments to control the health crisis. Generally, most governments have announced very generous public support packages to strengthen demand and counteract the recessionary effects of the crisis (OECD, 2021[15]). For example, the United States has traditionally low levels of government spending, yet announced one of the single largest fiscal packages in economic history with the aim of boosting household consumption and supporting employment through the recovery phase.
Figure 6.5. Composition of demand in terms of employment, by country
Note: Share of household consumption, exports of final and intermediate products, gross fixed capital formation (“investment”) and government consumption in the final destination of employment for 2015.
Source: OECD calculations based on OECD (2018[9]), Inter-Country Input-Output (ICIO) Database, http://oe.cd/icio (accessed in February 2021).
Air transport
Though aviation and air transport alone are relatively small pieces of most OECD countries’ economies, they are heavily intertwined with several other sectors that depend highly on them both upstream and downstream. The restrictions on mobility, and the decrease in consolidated air freight due to a drop in passenger travel, therefore affected business in many other industries. According to the International Air Transport Association (IATA), passenger air transport – measured as revenue from passenger kilometres travelled – was down 90% year-on-year in April 2020, and was still down 75% in August. The collapse in economic activity and trade affected freight, which was almost 30% lower year-on-year in April, and still about 12% lower in August. Commercial air traffic has been slow to recover; in September 2020, the number of flights globally remained more than 40% lower than before the crisis (OECD, 2020[17]).
This massive reduction in air travel has affected not only people, but also the planet, through effects on associated carbon emissions. According to the International Energy Agency (IEA), global energy-related CO2 emissions fell by 5.8% in 2020, compared to 2019 (IEA, 2021[18]), part of which is explained by the large reductions in greenhouse gas emissions from transportation. While many of these short-term effects are expected to revert after the recovery period, permanent behavioural changes could create longer-lasting positive environmental outcomes. For example, as businesses realise that they can improve profitability and productivity by cutting down on business travel, this could translate into permanent emissions reductions from air transportation. Changes to international tourism could have the same effect (see below). It is important to keep in mind, however, that these behavioural changes, even if permanent, are unlikely to be large enough to significantly alter the climate problem. For example, air transportation, although growing fast before the crisis, accounted only for 2.5% of global greenhouse gas emissions in early 2020. To ensure that the recovery from the crisis is harnessed to speed up the low-carbon transition, additional policies will need to be put in place to encourage the development and rapid diffusion of low-carbon technologies (and digital technologies that enable them – see Chapter 5).
As discussed, the air transport sector (passenger and freight) represents only a small share of OECD countries’ value added (around 0.3% on average, see Figure 6.6), but strong inter-industry linkages make it an important part of the economy, as demonstrated also by targeted government intervention in the sector (see Box A D.2 in Annex D). Air transport relies on several upstream sectors: support activities to air transportation (including the operation of airports); aircraft manufacturing; rental and leasing services; and refined petroleum manufacturing.
The air transport sector and airports are inherently intertwined, and aircraft manufacturers are highly dependent on demand from the air transport sector, directly or through leasing companies.4 Air transport is also a key input for downstream sectors, as it enables several economic activities by way of trade in goods and especially in services through the movement of people. Beyond inter-industry linkages, air transport is characterised by both complementarity (e.g. through connecting transport routes) and substitutability (e.g. of passenger transport) with other modes of transport, such as high-speed rail, especially on short- and medium-haul routes.
Figure 6.6. Importance of the aviation industry, by country
Note: Industry share in total value added. Data for 2018, except for Australia, Canada, Ireland, Japan, Poland, Spain and the United Kingdom (2017). Air transport services corresponds to ISIC Rev.4 Division 51; Manufacture of air and spacecraft and related machinery refers to ISIC Rev. 4 Group 303. Group 303 does not include Manufacture of aircraft instrumentation and aeronautical instruments and manufacture of air navigation systems. Support activities to air transportation, including the operation of airports (Class 5223) not shown here because of limited data availability – for more details, see OECD (2020[17]). Data for Group 303 are not available for Iceland.
Source: OECD (2020[19]), Structural Analysis (STAN) Database, http://oe.cd/stan (accessed in January 2021).
Tourism
As a direct consequence of the restrictions on movement and the resulting drops in passenger travel, tourism declined by around 60% to 80% in most countries in 2020 (OECD, 2020[3]). The decline is especially worrying because the sector is an important source of employment and job creation in many countries, providing a high volume of jobs for low skilled workers, but also a sizeable amount of higher skilled jobs. Importantly, tourism provides jobs not only in major cities but also in remote, rural and coastal areas, as well as other – often economically fragile – locations where alternative employment opportunities are limited over the short term. What is more, most firms in the tourism sector are small and medium-sized enterprises, which are at higher risk of short-term solvency problems (OECD, 2020[20]), as also outlined in Chapter 4.
Figure 6.7 displays the share of tourism in total employment across OECD countries in 2017, along with the share of domestic tourism in overall tourism expenditure. Spain and Iceland stand out as the most vulnerable countries in terms of their dependence on tourism, which accounts for 13% to 15% of total employment. Both countries also rely relatively heavily on international tourism, which is likely to recover more slowly than domestic tourism.
Figure 6.7. Share of tourism in total employment and share of domestic tourism expenditure
Note: Share of tourism in total employment: data for 2017, except for Portugal, the Slovak Republic and the United Kingdom (2016), Italy (2015), Argentina, India and Indonesia (2012). The share of domestic tourism expenditure on the right scale is the ratio between domestic and total internal tourism expenditure. Data for 2018, except for Australia, Austria, the Czech Republic, Denmark, Hungary, Iceland, Indonesia, Japan, Lithuania, Norway, Portugal, Slovenia, South Africa, the United Kingdom (2017), Finland (2016), Colombia, Germany, Italy, Poland, Spain (2015), and Estonia and Switzerland (2014).
Sources: OECD (2020[21]), “Key tourism indicators”, OECD Tourism Statistics (database), https://doi.org/10.1787/e5d0c450-en (accessed on 1 July 2020) and OECD (2020[22]), “Internal tourism consumption”, OECD Tourism Statistics (database), https://doi.org/10.1787/e1b30ded-en (accessed on 3 December 2020).
As evidenced above, the effects of the crisis had a direct disruptive impact on a number of sectors dependent on international connections, through restrictions on activity, changes in demand and behaviour, and reductions in mobility. Box 6.1 details the automotive industry as another example of a sector that faced challenges to its existing business model, and underwent transformation as a result of the pandemic.
Box 6.1. Impacts of the pandemic on the automotive sector
The automotive sector represents a very high share of some OECD countries’ value added (and employment), whether generated directly by the production of motor vehicles or by other domestic industries supplying the necessary inputs (Figure 6.8). For the Czech Republic, Hungary and the Slovak Republic, with their links to German automotive manufacturers, the value added generated to meet demand represented over 10% of their total value added in 2015.
Figure 6.8. Share of domestic value added related to motor vehicles
Note: VA = value added; MV = motor vehicles. Data show the percentage share of domestic value added in total economy value added for the year 2015.
Source: OECD (2018[10]), Trade in Value Added (TiVA) Database, http://oe.cd/tiva (accessed in February 2021).
The crisis has caused both supply and demand drops, and created severe output loss in the automotive sector, despite agile demand-side policies by governments. According to the Association des Constructeurs Automobiles Européens (ACEA – European Automobile Manufacturers Association), new passenger car registrations in the EU market fell by 23.7% in 2020, compared to 2019. They started to show signs of recovery in March and April 2021, but not to pre-crisis levels. As a result, the COVID-19 crisis caused not only temporary factory closures in many countries, but also permanent layoffs for several firms, including Original Equipment Manufacturers (OEMs). In contrast, labour shortages are a major issue in some countries (e.g. Central and Eastern European countries) (Klein, Høj and Machlica, 2021[23])
The automotive sector has been experiencing a dramatic transformation, specifically through green and digital technologies (such as connected, autonomous, shared/smart and electric vehicles) and changes to its business model (Mobility as a Service), even before the COVID-19 crisis. However, the crisis has negatively affected the sector’s capability to continue transforming its technology and business model. The latest OECD Main Science and Technology Indicators (OECD, 2021[24]) show a sharp drop in research and development (R&D) expenses of selected top R&D companies in the automotive manufacturing sector in 2020. Yet, the sector requires heavy investment in R&D, innovation and restructuring, despite reduced financial capacities and the increasing presence of competitors from other industries (e.g. electric mobility start-ups and large IT firms).
In this regard, OEMs in particular are competing with start-ups for the development of electric vehicles (EVs) (e.g. almost 500 EV manufacturers were registered in China in 2019), and with IT giants to develop technologically integrated mobility solutions, to be part of broader smart city platforms (e.g. Toyota, Alphabet [Google]). OEMs do not necessarily have the relevant skills, know-how or critical mass to drive this software-based innovation. Despite multiple alliances across industries to mutualise costs, the investment capacity of OEMs may fall short of that of the IT giants, which are much bigger in terms of market capitalisation (Figure 6.9). The COVID-19 crisis has widened this size gap, as it detrimentally affected the automotive sector while the IT sector in general has benefitted.
Figure 6.9. Market capitalisation of the top five automotive and IT firms involved in autonomous vehicle development
Note: Market capitalisation of firms in all OECD member countries as of 30 September 2020, year-on-year, in USD billion. Tesla, an electric vehicle and clean energy company, overtook Toyota as the world’s most valuable automotive firm in June 2020. For currency conversion, this figure used EUR 1 = USD 1.10899 (30 September 2019) and EUR 1 = USD 1.1724 (30 September 2020).
Source: Yahoo! Finance (2020[25]), https://finance.yahoo.com.
The COVID-19 crisis has accelerated aspects of structural change in many sectors. The automotive sector is no exception. Indeed, permanent layoffs in OEMs and suppliers may also be driven by expectations of a long-term drop in the demand for labour-intensive traditional internal combustion engine vehicles, as opposed to the expected long-term increase in the demand for less labour-intensive EVs. Further, the demand for EVs has surged during the crisis, partly due to government support.
Governments fear that investments, in particular in green technologies, will slow down as a result of the COVID-19 crisis. This arises from two different mechanisms: direct effects from the pressure on firms’ liquidity buffers, and indirect effects – notably through the low price of oil – that might discourage the demand for EVs. As a consequence, some governments’ COVID-19 support instruments are integrated with their green strategies (e.g. through support for green innovation in the automotive sector or more generous scrappage schemes when buying an electric vehicle) and innovation strategies (e.g. developing autonomous, shared and connected vehicles).
Source: OECD (forthcoming[26]), “COVID-19 and the automotive sector”, OECD Policy Responses to Coronavirus (COVID-19).
Conclusions and policy implications
The overall image arising from the analysis of the connectedness of economies and industries through three main aspects – indirect effects through GVCs, direct sectoral effects (most notably through aviation and tourism), and longer-term impacts through the structure of demand – is that, perhaps unsurprisingly, it is mainly the small, open economies that are exposed the most to these channels.
Overall, countries in Europe are the most regionally integrated in terms of their GVC relationships. There are however a few European countries that are more connected with extra-regional trading partners, which might make them more susceptible to global disruptions in the sourcing of foreign inputs. The same holds true for Mexico and Korea, both of which are also heavily integrated through GVCs and rely – more than other countries – on extra-regional supply chains.
There are also some less obvious insights on countries that may be affected over the longer term, through investment demand and forward participation in GVCs. Noteworthy cases include G20 countries Indonesia, Turkey, and to a lesser extent also China. These countries may be more vulnerable because they have traditionally low levels of government spending, whereas high levels of government spending can dampen drops in demand over the longer term. Iceland stands out as particularly vulnerable due to its large tourism sector as well as being a major transport hub; both factors that rely heavily on international travel.
International collaboration and co-ordination are key to addressing the vulnerabilities, consequences and risks associated with the international nature of a pandemic, and other shocks like it. Policy co-operation, as well as cross-border strategies and agreements, can greatly reduce risks and mitigate damage to firms and industry caused by containment measures. The virus itself does not stop at borders, and so neither should policy responses to it. Governments now have the opportunity to form collaborative relationships and ensure careful planning for co-ordination systems, both with other countries and with the business sector. This will help with a strong recovery from the COVID-19 shock and for better preparedness for future crises.
There are different policy options to address the specific vulnerabilities arising through international connectedness. Certainly, enabling travel corridors and ensuring the transport of goods and services across borders are preconditions for maintaining the functioning of globalised production networks and the movement of goods and services. Cross-border mobility will be a large determining factor in the speed and strength of the recovery, particularly for the services and tourism sectors (OECD, 2021[27]), but such mobility will require co-ordinated health protocols, such as systems to recognise inter-country vaccine records. Further, international co-operation to establish common and coherent rules and regulations will be crucial to allow the travel and tourism industries to recover, and for consumers to plan travel and activities with certainty.
When it comes to GVCs, on-shoring of essential activities is not a solution to ensure the supply of critical goods, including because they can also be a source of resilience to domestic shocks. There are a number of more robust, sustainable, and efficient options. Most prominently, these options should include fostering increased diversification and international co-ordination.5 The perceived gains of on-shoring are not likely to play out over the longer term, and many of the observed shortages during the initial stages of the COVID-19 pandemic were caused by increases in demand rather than disruptions in supply. Demand surges for certain items, such as surgical face masks or diagnostic tests, were indeed met through globalised production networks (OECD, 2020[3]). Additionally, differences in the timing of lockdowns will be less relevant over longer time horizons, as domestic essential activities will rely on inputs from other, non-essential, industries – which are likely also subject to domestic restrictions on production – over the medium term.
Very few countries can meet their own needs alone for different types of products, especially those which are essential in a crisis (OECD, 2021[5]). Reliance on only domestic markets entails risks, just as reliance on international markets does; and different types of shocks can entail vulnerabilities to domestic or international supply chains. Risk mitigation in supply chains of any type is therefore underpinned by policy co-operation to ensure supply chains are not broken and to manage bottlenecks. Resilient economies are underpinned by resilient international supply networks.
Examples of collaborative steps governments can take include promoting transparency and predictability through clear regulations and the decision making, and the lowering of trade barriers by harmonising standards and norms and reducing red tape – striking a balance with consumer and environmental safety concerns – as outlined for example in OECD (2020[28]). More generally, resilience can be improved by facilitating cross-border trade. Other suggested areas for government action to help make GVCs more robust include regular stress tests (e.g. trial runs of scenarios in which parts of supply chains become untenable), and international co-ordination to avoid unilateral actions such as export restrictions, which may trigger harmful effects on other countries through GVCs (OECD, 2020[3]). At the firm level, fostering diversification of suppliers, and supporting co-ordination and information networks to increase transparency and the provision of back-up options, can help increase resilience. More detailed policy recommendations to build more resilient supply chains can be found in OECD (2020[1]).
Governments must work together to achieve development and climate goals alongside building resilience to crises, and the COVID-19 crisis represents a window of opportunity for heightened co-operation to address multiple goals and challenges at once. The recovery period from COVID-19 is a rare opportunity to foster intensive collaboration.
References
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Notes
← 1. Some of these effects may be mitigated by regional policies for certain supply chains, such as within the European Union. Examples include “green lanes” for quicker checks of freight vehicles crossing country borders within the European Union during the pandemic, and leniency for airlines to fly planes outside of assigned slots. See more at https://ec.europa.eu/info/live-work-travel-eu/coronavirus-response/transportation-during-pandemic_en.
← 2. The analysis focuses on the immediate impact of the pandemic, Q2-Q3 2020, and does not capture any subsequent v-shaped recoveries or surges in exports experienced by some countries, such as those documented in OECD (2021[29]).
← 3. Fixed input-output coefficients do not necessarily capture the substitution effects of alternative sources of inputs, whether these be imports from different countries, or domestic sources replacing imports. Further, some of the COVID-19 shifts in demand (e.g. IT goods at home versus IT equipment used in the office) are likely to be too granular to be accounted for by the industry levels in the input-output framework used for this analysis.
← 4. Air transport, airports and aircraft manufacturing are sometimes jointly referred to as the “aviation industry”; see for example OECD (2020[17]).
← 5. It should be noted that not all measures are in the domain of governments, as most decisions are taken at the micro level, by individual firms. Governments can, however, play a role in promoting more diverse supply chains by easing regulations and fostering trade more generally. In addition to these broad measures, they can establish direct co-operation networks with and among firms, as laid out in OECD (2020[1]).