# 1. Introduction: Shift from globalized to localized world would slow recovery

The resilience of global values chains (GVCs) has been put to the test by the COVID-19 pandemic, extreme weather events, and trade tensions spurred by growing economic nationalism and protectionism. The sudden drop in global trade in the first half of 2020 was massive by historical standards (WTO 2020). Econometric evidence shows that shocks in production and trade can be transmitted from one country to another by GVCs, though participation in GVCs may help to lessen the blow of a domestic shock such as a lockdown (Espitia et al. 2021). But GVCs can also drive recovery, spreading the benefits, for example, as countries come out of lockdowns at different times. In light of this experience, is it possible to design policies that can enhance resilience to trade shocks in developing countries without endangering growth?

The past three decades of globalization have lifted international trade to new heights while helping to drive extreme poverty to new lows (World Bank 2020a). GVCs have lengthened and strengthened to provide countries and consumers worldwide with vital goods and services, from vaccines to vacuum cleaners. The evidence from the scenarios in this chapter on the economic and social benefits of GVCs is emphatic: globalization will strengthen a recovery while localization will weaken it. Moreover, localization could drive more people into extreme poverty while globalization could lift millions above the poverty line by 2030. In short: developing and developed countries are better off in a globalized world.

In the public debate, the recent disruptions of the supply chains have cast doubt on whether the gains of GVCs outweigh the associated risks of transmission of shocks. Consequently, a new array of literature continues to appear with the goal of gaining a better understanding of the benefits of globalization and resilience of GVCs. Furthermore, one of these most recent disruptions, the Covid-19 pandemic, offers a rare opportunity to understand the role that GVCs play in making countries more resilient. Bonadio et al. (2020) and Espitia et al. (2021) both illustrate this role in their work. They show that in a pandemic-style labor supply shock, if countries try to artificially weaken the entry of foreign inputs by means of a renationalization, this will only result in a higher level of exposure to domestic shocks, more fragility and would not mitigate contractions in GDP.

A re-localization of supply chains as a possible solution to fight uncertainty seems also destined to fail. Not only would this increase costs for firms and consumers, but it also hardly protects countries from external shocks. The OECD (2020b), using its METRO computable general equilibrium (CGE) model, finds that in a localized system, with reduced GVCs, economies would have significantly lower levels of economic activity and lower incomes, making countries more – not less – vulnerable to shocks. When looking into a more specific example of the impact of a China lockdown on the US economy, Eppinger et al. (2021), using a multi-country, multi-sector trade model, reinforce the conclusion that repatriating supply chains does little to mitigate the welfare losses caused by a China shock, and the policy itself carries substantial welfare costs.

GVCs, on the other hand, not only play a role in offering to countries some protection against external and domestic shocks, but also, they have been shown to be resilient and thus offer some security to businesses and consumers. GVCs display resilience when confronted with shocks, such as natural disasters. The largest earthquake ever recorded, which occurred in Japan in 2011, had no long-term consequences on the reconfiguration of the GVCs and did not lead to reshoring nor import diversification (Freund et al. 2021).

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