Latin American and African countries must rethink its insertion into Global Value Chains (GVC) in the after-covid 19 period


Master Degree Student at Sorbonne Paris Nord

During the present time, multilateral institutions, State Governments, private companies, and civil society are all thinking round the clock about measures to overcome the multiple consequences of the covid-19 pandemic1. In the economic dimension, the debate deals with aspects usually found in discussions that follow major crises, such as the extent and types of economic stimuli aimed at alleviating the impacts of the pandemic. While some governments, especially in the developed world, are strongly stepping in, literally paying companies to prevent mass layoffs, in many developing countries governments are being more discrete, many of them even with operational difficulties like making the money reach the targeted beneficiaries1. The present harsh times, however, have also brought rather frequent debates concerning the structural features of the current capitalism system, such as the increasing income inequality and the qualitative disparity of economic structure between countries.

This crisis unevenly affects regions with different levels of development. The effects of the pandemic on developing countries are often more pronounced, considering their need to climb the ladder of economic development. In Latin America and Africa, for example, the weak attention from the public sector towards a diversification of the productive structure over the last decades, towards one capable of producing complex goods, has limited the ability of these regions to deal with the pandemic3,4. In Brazil, for example, there has been strong share declines of high-tech industries in the country over the last decades, as is the case of those belonging to the health sector5.

Several proposals aimed at restructuring the industrial basis are now emerging in developed countries, especially in the health industry front, through public investment in R&D, mission-oriented policies and the build of national infrastructure projects, enabling the production of vaccines and medical equipment worldwide6. In the current context, many global leaders think that even from the point of view of national security, there is the need of producing certain goods within the borders of their countries, such as pharmaceutical goods and personal protective equipment, for example. Several trade disputes between countries to gain access over these goods and other productive inputs were recurrent in the most severe period of the Covid-19 pandemic7. These disputes become even more critical in times where several production chains are fragmented through Global Value Chains (GVC)8, definition of the manufacturing model where one single product has components made in different countries. This production model, intensified in the 1980s, was made possible due to lower logistics and ICT costs, higher number of trade agreements and better trade legal environment9. Studies point out to improvements in productivity, job creation and poverty reduction stemming from GVCs9, but as we saw, there is also several shortcomings associated to it, especially in times of major crisis caused by a pandemic, where global trade is strongly harmed.

Experts now understand that although the phenomenon of globalization is very consolidated in several aspects (capital, information, and population flows, for instance), the global trade of certain product families through the existing GVC model may undergo several changes10. China, a country that since the beginning of this production model has been at the center of several productive networks, is the country where the pandemic started and, consequently, the first country to adopt isolation policies. As a result, the country's accumulated industrial production in January and February of 2020 fell 13.5% compared to the same period of 2019, along with sharp falls in investment levels and international sales volumes11. During this period of intensified productive globalization, the giant Asian country assumed the position of being one of the main dynamic hubs of world industry, productively connected with virtually all the countries of the globe. Therefore, any obstacle faced in its productive structure (such as a pandemic) ends up strongly affecting the functional core of many production chains, some of them essential to combat the pandemic.

Going back to Africa’s and Latin America’s realities, these are two regions that need to face complex challenges in order to insert themselves into the global context in a more prolific fashion, being capable of competing in high-tech markets, such as those associated to medical equipment and other essential goods that can help alleviating situations of public distress, such a one like the Covid-19 pandemic. In GVC terms, this means engaging in higher value-adding stages of the different industries they already participate and those they will join in the future. Africa’s and Latin America’s connection to the world trade heavily dependents on the exports of simple goods (and on the imports of sophisticated ones), especially mineral and agricultural commodities. To grasp this picture, in 2018, 95,9% of all pharmaceutical products imported by African countries originated from outside the continent12, for example. The opposite pattern is observed in the most economically dynamic regions of the world, such as East Asia, region filled with factories that produce components of personal protective materials, medical equipment, and medicines, what gives them higher chances of curbing difficult situations such as the current one. Moreover, several economists understand that countries connected to world markets mainly through simple commodities exports and services such as tourism, as is the case of many Latin American and African countries, will face tougher challenges to overcome the current pandemic, due to the intensification of risk aversion and the worsening of global financial conditions, lower demand for tourism services and a reduction in remittances13.

Given the need for Latin America and Africa to rethink their global productive insertion, there is a need to think of a situation in which the countries of these regions integrate productively with other countries so that they can produce parts and components of high added value, generating income and quality jobs and, above all, maintaining a certain degree of productive autonomy over goods of prime importance. Some economic policy measures are already being directed toward these objectives. South Africa, Nigeria, and Senegal, for example, through public and private investments, trade agreements deals, and partnerships with local universities, have strengthened their internal capacity of producing several useful equipment in the fight against the pandemic, such as masks, ventilators, and covid tests14.

In addition to these measures, analysts understand that trade policies aimed at strengthening the regional integration of Africa and Latin America can be crucial for productive improvements. In this sense, the implementation of the African Continental Free Trade Area (AfCTA) is of paramount importance. This is the largest trade bloc in the world, comprising 54 member states on the African continent, and presents as a central feature the gradual reduction of 90% of trade tariffs within 5 years, thus strengthening the regional integration of the continent through regional production chains. Studies indicate that the implementation of this agreement has the power to increase, by 2035, the trade of manufactured goods by 110% and 46% in the case of intra-regional trade and trade with non-African countries, respectively15.

In Latin America, there are also growing discussions about the need to increase the productive capacities of countries in the region, making them less technologically dependent on other regions of the globe such as East Asia, Europe, and North America. The Pan American Health Organization (PAHO), for example, understands that the region already has several "building blocks", such as relevant academic and research institutions, productive capacity, adequate regulatory systems, and effective public procurement programs16, giving the region the necessary capabilities to move forward in initiatives to diversify the production matrix. In addition to national measures, similar to some proposals observed in the African continent, there are several possibilities that the strengthening of regional integration may contribute to initiatives of this nature. South America, for example, presents relevant regional value chains in terms of manufactured goods. Within the region, important trade agreements, such as the MERCOSUR, sustain the existence of relevant chains in terms of higher complexity and diversity, such as the automobile value chain between Argentina and Brazil, with this latter country playing a major role in the region, being the main export destination for six other South American countries and the main regional exporter for the region 17. Trade agreements like the MERCOSUR should be used and strengthened, aiming, through a greater regional productive deepening, to increase the productive complexity of their countries and to lose technological dependence on developed countries.

Policy makers of these two regions must take the opportunity given by this pandemic to reflect and discuss what are the most adequate policies in order to relocate themselves in a better global productive position in the aftermath of the pandemic. Acquiring the capacity of producing high-tech products in a context of a highly fragmented production system might be a huge challenge, especially when multinationals from developed countries have enormous political and economic influence over countries in the Global South. Countries in Europe and North America are talking about reshoring manufacturing production, as we have seen. It is time for this debate reach Latin America and Africa as well.

1 How to avoid a W shaped recession”, Jeffrey Frankel, Project Syndicate, April 21, 2020
2 “Saiba como resolver os principais erros para ganhar o auxílio emergencial de R$ 600”, Laísa Dallagnol, Folha de São Paulo, April 23, 2020
3 https://www.paho.org/en/news/19-5-2021-paho-director-calls-closing-glaring-vaccine-gap-expanding-vaccine-production-latin
4 https://www.afro.who.int/news/what-africas-vaccine-production-capacity
5 “Desindustrialização e soberania no enfrentamento da crise de saúde pública da COVID-19”, Eliane Araújo and Samuel Pires, A terceira margem, April 24, 2020
6 How to develop Covid-19 vaccine for all”, Mariana Mazzuccato, Social Europe, April 24, 2020
7 https://voxeu.org/article/trade-conflict-age-covid-19
8 “Globalization Will Look Very Different After the Coronavirus Pandemic”, Richard Fontaine, Foreign Policy, April 21, 2020
9 https://www.cgdev.org/blog/value-chains-vehicles-development-gloomy-global-trends-optimism-africa-and-some-ideas-action
10 “Here’s how global supply chains will change after COVID-19”, Jesse Lin and Christian Lanng, World Economic Forum, April 23, 2020
11 “China Jan-Feb industrial output shrinks 13.5%; investment plunges 24.5%” Market News, Reuters, April 25, 2020
12 https://trade4devnews.enhancedif.org/en/op-ed/boosting-african-regional-value-chain-development-response-covid-19-catalysing-role-afcfta
13 https://www.cepal.org/en/publications/45477-measuring-impact-covid-19-view-reactivation
14 https://trade4devnews.enhancedif.org/en/op-ed/boosting-african-regional-value-chain-development-response-covid-19-catalysing-role-afcfta
15 https://market-insights.upply.com/en/afcfta-a-more-integrated-africa-in-the-global-supply-chain
16 https://www.paho.org/en/news/19-5-2021-paho-director-calls-closing-glaring-vaccine-gap-expanding-vaccine-production-latin
17 https://www.cepal.org/es/publicaciones/45002-cadenas-regionales-valor-america-sur