to region _s_ . Essentially the role of the CBAM is to bring the level of emissions per unit of imported output to the average sectoral level in the domestic economy, in this case of the EU.

# 4.  The risks of GVC reshoring

The COVID-19 shock and recovery in a post-pandemic world The COVID-19 pandemic has been both a supply and a demand shock. The supply shock was sparked by lockdowns shutting down production. The demand shock was caused by a drop in the ability and willingness of consumers to consume, shifting expenditures away from services that required human interaction and toward goods necessary to work from home. Looking at the long run impacts of COVID19, it is the developing countries that are the most affected in the COVID L-shape recovery scenario, with South Asia showing the slowest recovery (a difference of 31 percentage points between real income growth between 2019 and 2030 in the no-COVID-19 baseline and an L-shape recovery from COVID-19). Developed countries also see their real income levels reduced in an L-shape recovery scenario, with China and the United States losing respectively 8 and 5 percentage points (Figure 3.a and 3.j), but still doing better than Western Europe (with a drop of 9 percentage points by 2030) (Figure 3.c).

Welfare in the Middle East and North Africa, China, Rest of East Asia and Pacific, and Europe and Central Asia is hit the hardest by reshoring of production.<sup>10</sup> Developing countries are the most negatively affected in a reshored world, with the Middle East and North Africa, Rest of East Asia and Pacific, and Europe and Central Asian regions being hit the most severely. In the case of the Middle East and North Africa, the real income growth between 2019 and 2030 would amount to 70 percent in an L-shape recovery, compared to a 56 percent increase in a reshored world. Developing countries also stage a slower recovery in a reshored world, with China’s real income growth rate reduced by 11 percentage points in a world where all countries attempt to reshore. In the rest of East Asia and Pacific (EAP), the decline in real income could be even more dramatic, dropping from an increase of 71 percent under an L-shape recovery to 62 percent under reshoring. This is due to much higher levels of openness and integration in GVCs in the EAP region.

In terms of exports, reshoring would see South Asia suffer the biggest export drop with China recording the biggest drop in imports (Figure 4). When all countries reshore their production, the region of South Asia sees the highest reduction of exports (a 45 percentage points drop from a global world with COVID to a reshored world), followed by China (37 percentage points reduction), and the rest of East Asia and Pacific (34 percentage points difference). These are all regions that are deeply integrated in the GVC network. The highest reductions of imports between a globalized and reshoring world would be seen in China (42 percentage points drop), Rest of East Asia and Pacific (35 percentage points reduction), and SubSaharan Africa (33 percentage points decrease). In a world where all countries attempt to reshore their production, both global exports and global imports go down by 27 percent, changing from 25 percent growth in the COVID-19 scenario without reshoring, to a 2 percent decrease in the scenario with reshoring.

> 10 All percentage changes in this and the following paragraph are stated relative to the 2019 baseline without COVID-19.

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