Enhancing resiliency in global value chains

Danial Norjidi

While the Asia-Pacific Economic Cooperation (APEC) economy has developed a strong foundation to deal with the COVID-19 crisis, more needs to be done to enhance resiliency in global value chains, the APEC Policy Unit highlighted in its new policy brief.

According to its press release, the policy brief titled ‘Managing Risks in Global Value Chains’ analyses the ability of the APEC region and its peer international groupings to respond to disruptions and to quickly return to normal operations.

Using a value chain strength index, the policy brief measures the strength of economies and groupings against the following risks: logistics and infrastructure risk; natural disaster risk; market risk; political risk; and regulatory and policy risk.

The policy brief finds that while APEC economies perform moderately well, the region falls slightly behind its peer international groupings in terms of value chain strength.

A senior analyst with the APEC Policy Support Unit and co-author of the study Dr Akhmad Bayhaqi said, “Building and strengthening resiliency is the top priority for firms involved in global value chains.

“The economy-wide and global implications brought on by disruptions to supply chains resulting from the COVID-19 pandemic suggest that governments need to support firms in managing such risks.

“We found that there is a significant disparity within the region with almost half of the economies registering a rather weak performance in terms of value chain strength,” Dr Bayhaqi said. “The uneven level of development across economies in APEC affects the region’s ability to rebound quickly in times of systemic supply chain disruptions.”

It was shared that more could be done by the APEC region to ensure concerted development in the area of logistics and infrastructure. The region could also strengthen their resiliency against natural disasters and health-related calamities by, for example, improving the numbers of physicians and bolstering health expenditure.

The policy brief notes that firms often depend on the market to deal with potential disruptions, in particular for financial markets. As such, ensuring that markets remain resilient during periods of crisis is very important for efficient value chain operations.

Lowering business uncertainties through consistent and predictable regulatory regimes also play a vital role in building resiliency as it gives assurances to firms and investors that they would have access to an efficient legal framework should disputes arise.

With a combined nominal gross domestic product (GDP) of USD53 trillion, the APEC region is home to several key global business hubs and accounted for almost half of the global trade of goods and commercial services in 2019.

Trade has been the driver of growth for the past three decades, however, the COVID-19 pandemic has exposed firms and businesses around the region to unprecedented disruptions.

Dr Bayhaqi highlighted that every international grouping, including APEC, “still has much room for improvement in terms of building and developing their supply chain resiliency”.

The study shares a number of key messages, the first of which is that while businesses may be able to mitigate against some risks through measures like diversification and hedging, they are likely to struggle when faced with systemic, economy-wide risks to global value chains, particularly those resulting from unexpected events like the COVID-19 pandemic and natural disasters.

“Resilience, or as conceptualised in this study, the strength of an economy or a regional grouping against systemic risks, must therefore be a priority for businesses and government,” it stated.

The policy brief also notes that the quantitative analysis suggests that the APEC region has performed relatively better compared with a number of major regional or economic groupings in terms of: (1) market risk and (2) regulatory and policy risk.

“Even where the APEC region compares relatively well to the other regional or economic groupings covered by this analysis, a deeper look shows a wide gap between the highest performing economy and the lowest.”

COVID-19 was largely an unanticipated systemic event that has affected global trade and value chains significantly, notes the report. APEC economies have developed a strong foundation to deal with the crisis but more needs to be done.

All in all, the policy brief reinforces the message that, while it is not always possible to anticipate all risks, economies should aim to be more resilient should unexpected shocks occur. It adds that the APEC region should thus redouble its commitment to strengthening the institutions, structures and facilities that are key to stronger economic resilience in the face of systemic risks.

APEC Secretariat Executive Director Dr Rebecca Sta Maria said, “Global value chains have increasingly become more prevalent, more integrated and more connected, increasing businesses’ exposure to certain risks. This is why incorporating risk management in supply chains is crucial, especially when dealing with disruption the scale of this pandemic.”

Dr Sta Maria said a risk management framework should take a holistic approach, covering each part and every player in the supply chain network including firms, small businesses, governments and consumers.

“We cannot afford to think of risk management as a ‘what if’ component in supply chains or in our trade deals,” she said. “Looking ahead, we have to put in place measures where we ensure the smooth flow of supply chains in times of crisis, especially for medical goods, essentials products and services.”

“It is important to emphasise that a supply chain is only as strong as its weakest link. Cooperation is an essential strategy to improve the regional resiliency of supply chains,” Dr Sta Maria added.