By Désirée van Gorp Professor of International Business at Nyenrode Business University also member of the Advisory Board of the World Trade Organization Chairs Program.
The coronavirus pandemic has not only disrupted lives and businesses, it has illuminated underlying fragilities in the global value chain (GVC) that drives economies around the world.
Company activities that incorporate products and services components spread throughout the world are called “value chains”. The “value” in the chain is added by certain elements of production processes in various countries, and, as a result, country economies are increasingly more connected to and dependent on each other. service. For companies that produce goods, a value chain comprises the steps that involve bringing a product from conception to distribution, and everything in between—such as procuring raw materials, manufacturing functions, and marketing activities.
Value here does not only have a financial and economic dimension, but also, and probably even more so, a social and climatic dimension. These dimensions are important for making value chains sustainable. Joint responsibility and action by stakeholders is absolutely necessary, acknowledging the interdependencies between all those involved.
Value chains require that developed countries and companies originating in them increase their share of responsibility instead of focusing only on their own goals, as is currently happening in the distribution of vaccines against COVID-19. It seems the developed world is not realizing that the unequal distribution of vaccines is not only unfair, but due to economic interdependencies, there will also be significant damage that puts decades of economic progress at risk for developed and least developed countries (LDCs) alike. There is also a growing list of events that are overlooked by risk managers, ranging from natural disasters, to geopolitical, technological, contractual, or demand factors.
The worldwide intertwining caused by value chains has its positives. For example, some of the world’s population has risen above the poverty line, partly due to new connections to global value chains (GVCs), LDCs becoming producers and have expanded roles in the playing field of international trade, versus being only consumers
Due to this geographic reliance, it is not always easy for companies to identify the associated risks and relocate production to other countries as needed.
However, there are drawbacks. LDCs are still at the bottom of the ladder with activities that add the least value to the chain, and they are not benefitting sufficiently from their roles. For example, African countries’ participation in GVCs is largely through supplying inputs (often raw materials) to foreign firms for further processing. Another negative side effect of global interdependency is the fact that many developed countries are outsourcing their problems to LDCs, for example sending plastic waste abroad to achieve national sustainability goals.
Previously, multinationals put too much emphasis on cost savings when setting up value chains, avoiding the responsibility of providing employees with decent, safe working environments and respecting human rights, while demanding such from their suppliers.
This is a major barrier to making sustainable value chains work. Both at the national and company level, there are policies in the developed world aimed at mitigating the risks of vulnerable GVCs. Company responses to overcoming value chain vulnerability include robotization and re-shoring of activities that were previously located in LDCs. For example, there are various initiatives to create local food systems. Although a noble goal, the impact on economies – especially of LDCs – needs to be considered, as those countries may see a decrease in their agricultural exports as a result. It is argued that further domestic support to agriculture in developed countries encourages overproduction, which in turn increases supplies in world markets and depresses prices. Low prices make it harder for producers in developing countries to compete in their home markets as well as international ones, thus reducing incentives for production and retarding the development of the agricultural sector.
The natural reaction of companies in developed countries is to invest more in the preservation and development of knowledge and production lines in their own countries….