Feature Articles - Asian Infrastructure Finance 2021

Trade Shocks, Resilience and Infrastructure Outlook

The COVID-19 pandemic has shocked global trade with production disruptions, border closures, record-high uncertainty and hugely volatile consumer demand. Trade and trade infrastructure came under severe strain but ultimately proved resilient in the pandemic’s aftermath. The implications for the post-pandemic configuration of value chains and connectivity infrastructure are still being played out.

Participation in Global Value Chains and Infrastructure Development

While advanced economies have traditionally dominated GVC exports, developing countries, led by China, have been capturing a bigger share over the last two decades. Greater participation in GVCs has the potential to play a pivotal role in the development paradigm of countries by providing them access to better skills, improved technology and a bigger market. The extent to which a country can benefit from participation in GVCs depends critically on its ability to move to higher value-added tasks within the value chain.

A Changing China Economy and Global Value Chains

China has been increasing its share of GVC trade, particularly for intermediate goods, and is now a key manufacturing and trade node in the global economy (Figure 23). This chapter shows that the rise of China’s GVC participation is enabled by infrastructure development and foreign direct investment (FDI). China’s economy is in a stage of fundamental transformation with moving up the value-added ladder in many industries and a shift out of labor-intensive activities.

Raising India’s Global Value Chain Participation

Together with economic growth, India has steadily expanded its share in global value added, exports and foreign direct investment since 1991 (Gupta and Blum, 2018). Growth has been stable, diversified and largely resilient to domestic and external shocks. Strong growth helped India pull millions out of poverty, with the poverty rate declining from 47.6 percent in the mid-1990s to below 11 percent in 2017 (World Bank, 2020b). While domestic demand remains large, exports have emerged as an important contributor to growth, accounting for nearly a quarter of India’s growth from 2000 to 2020.

A Policy Framework for Infrastructure Development and Global Value Chains

Infrastructure is the material underpinning of integration into global trade and global value chain (GVC) participation. This chapter reassesses infrastructure investment in an analytical and policy framework that considers the nature and evolution of GVC participation. With proper GVC mapping and well-coordinated GVC-sensitive policy interventions, policy makers can ensure that infrastructure investments support GVC participation, positioning and, ultimately, upgrading.

Sustaining Global Value Chains into the Future

The pandemic and its aftermath have compelled policy makers and investors to ask fundamental questions about GVCs. In the near-medium term, the key challenges are to make supply chains more resilient not only to shocks, including changes in trade policies, but also to extreme weather events and other consequences of climate change. Over the long term, the fundamental challenges are to ensure that GVC trade and related infrastructure are climate and environment friendly and to make GVC trade more inclusive for more countries.