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

Abstract

This paper aims at estimating the economic vulnerability of developing countries to disruptions 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 assess 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 during the lockdowns that runs through trade in GVCs. Our estimates reveal that adverse demand-side effects reduce GDP up to 5.4 per cent, and that collapsing foreign supply puts an even larger share of countries' GDP at risk. 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 and demand destinations, possibly leading to a cushioning of economic downswing because COVID-19 stroke major hubs at different times.