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KNOWLEDGE HUB

The economic effect of COVID-19 is already proving severe, with many countries reporting dire quarterly results for the first three months of 2020 due to national lockdowns. Consequently, as the peak of cases begins to pass, governments are turning their attention to designing and implementing exit strategies capable of kickstarting economies and protecting jobs, businesses and growth.

An important part of economic restoration following the pandemic is ensuring trade flows as freely as possible – between both countries and supply chain proponents. One of the main factors affecting the fluidity of trade flow is cost – high costs prohibit less developed countries and their businesses from participating in supply chains – therefore, keeping trade costs low is a critical part of international development.

The emergence of Global Value Chains (GVCs) – the practice of international production sharing, where production is broken into activities and tasks carried out in different countries – is based on the need to remove barriers to trade to allow a wider network of businesses to participate, driving inclusive trade. Indeed, they are often considered the lead story of trade in the modern world, with an estimated 70 per cent of global trade taking place through GVCs. However, as the coronavirus hit, many of the businesses in these chains were forced to close down, causing supply issues across most industries.

The extent of the impact of the shutdown was, in part, due to a relatively low level of digitisation along many GVCs despite clear demonstration of the potential of digitisation from experts as the most efficient way of reducing trade cost. For example, research shows that if every country could improve digitalisation in trade, global GDP would increase by nearly 5% and global exports by nearly 15%. Therefore, as the world seeks to get trade moving, improving and enhancing digital capabilities should be included as a key element of recovery plans.

Digitalisation allows businesses to operate more efficiently as part of a GVC, improving resilience against shocks and allowing more streamlined production. By integrating digital technology along GVCs, inventory levels can be optimised, demands responded to faster and business can show greater agility. Indeed, as a result of these benefits, according to a 2018 Bain survey, 70 percent of executives expect digital innovation to have a significant impact on their supply chains during the next five years, yet a McKinsey study found that the average supply chain has a digitisation level of 43 percent, the lowest of five business areas that were examined. Further, only 2 percent said the supply chain is the focus of their digital strategies.

Such low levels of up take must be urgently corrected as the lack of digital strategy in GVCs and supply chains is directly at odds with reports that ‘digitisation could be the single most efficient approach to reducing trade cost…benefitting all economies impacted by COVID-19.’ It is therefore critical that all businesses connected to GVCs consider their digital capabilities and design a strategy for the future.

This includes the many SMEs that make up GVCs.

While large international organisations often have teams of people looking at ways to integrate innovative technology into production, digitalisation tends to drop in correlation with organisational size.

Research has found several factors contribute to this disparity. For instance, SMEs typically having a lack of specialist IT skills, they have issues relating to data security and data protection, problems in adapting their corporate structure and workflow management and the unsatisfactory quality of internet connection.

On the other hand, a critical marker of successful digitalisation among SMEs is the level of government support for digital transformation. For example, Germany is the third largest exporter in the world (1.2 trillion EUR in goods and services) and a key participant in many GVCs yet 99 per cent of German companies are medium-sized. Over the past five years, the government has placed huge emphasis on the importance of digitisation – in particular of the manufacturing industries – through its Industrie 4.0 strategy creating a significant level of investment and support for digitisation that has enabled many German SMEs to execute digital strategies. As a result of this effort, the 2018 Digital Economy Index ranks Germany 6th in terms of digital-readiness, behind USA, South Korea, UK, Finland and Japan.

During normal circumstances, SMEs with low level digital integration are losing competitive advantage, but in a world rocked by the coronavirus, it is the difference between survival and demise. Yet there is not even the opportunity to swiftly rectify digital insufficiencies as without the ability to generate revenue, SMEs cannot afford the resources to strengthen their digital footprint.

To help ease the strain on individual businesses and to build resilience of SMEs and the GVCs they contribute to, it may be necessary to consider structural transformation of GVCs on a macro level. For example, if global trade was driven by a collaborative network instead of siloed, linear chains, the onus of building resilience would shift. Or if industry were able to reimagine GVCs as interconnected ecosystems that flatten traditional supply hierarchies and allow flexibility when seeking parts and components, industry’s capacity for innovation will grow. Interconnected supply ecosystems would also allow actors to immediately share information, identities, trade documents and logistical details without having to build one-to-one connections, reducing friction to a minimum and in turn, reducing risk. In turn, the cost of trading would significantly reduce while trust between suppliers would be improved.

Indeed, supporters of this approach believe it is also one of the most economically attractive, and fastest ways to end poverty as supply ecosystems enable a commercially, competitively and politically neutral digital foundation for global trade. Consequently, driving inclusive trade and development by supporting SMEs and entire GVCs to digitally transform, could help to meet the UN’s first Sustainable Development Goal – “no poverty” – as businesses from all over the world are able to join in global supply and value chains.

Therefore, although the pandemic has caused major damage to the health and economies of almost every nation, it has also presented an unprecedented opportunity to reset traditional systems for the better. The current situation offers an opportunity to make major change to cumbersome systems so it is critical that at this moment of crisis that a long-term view on how economies, supply chains and GVCs can be structured to protect themselves from future events, is embraced. Consequently, as governments around the world build strategies to rebuild their economies, close attention needs to be paid to ways digital transformation can aid this restoration.

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