How to align efficiency, resilience and sustainability in GVCs? A conceptual assessment

Jan Grumiller, Hannes Grohs, Werner Raza
Sep 24, 2022
#Trade and FDI

The COVID-19 pandemic-induced lockdowns and export restrictions highlighted the vulnerability of global trade and global value chains (GVCs). What is more, many commentators argue that the likelihood of exogenous shocks that threaten international trade and GVCs will increase in the future. This includes natural disasters, pandemics, or political conflicts. The Russian war in Ukraine is the most recent and devastating example. In light of the new global context and due to the experiences during the COVID-19 pandemic, it is increasingly acknowledged in the scientific community and among policy-makers that the GVC resilience of critical and strategic products needs to be strengthened in order to guarantee security of supply (EC 2021a; Javorcik 2020; MGI 2020; The White House 2021). However, a major shortcoming of the current debate on how to improve GVC resilience is that it is not linked to the issue of social and environmental sustainability. We take on that discussion and propose a framework for thinking about resilience, sustainability and efficiency (see Grumiller et al., 2022).1

Figure 1: Efficiency, Resilience, Sustainability – linking the discourses

Source: Grumiller et al. (2022)

Resilient sustainability and sustainable resilience

Since the emergence of GVCs, firms have primarily focused on GVC efficiency and largely disregarded GVC resilience and sustainability (cf. Bogaschewsky 2020; Gölgeci et al. 2020). In general, GVC efficiency, resilience and sustainability have important trade-offs as well as compatibilities that policy-makers need to take into consideration. In many GVCs, increasing GVC resilience and sustainability requires policy interventions. This is because the desired societal level of GVC efficiency, sustainability, and resilience differs from firms’ perspectives, particularly because increasing GVC resilience and sustainability can be very costly and challenging for firms.

To operationalize a stronger focus on resilience and sustainability, albeit to some extent at the cost of efficiency, we introduce the concepts of resilient sustainability and sustainable resilience. Resilient sustainability prioritizes social environmental sustainability over resilience. Due to its focus on sustainability, the model is characterized by transparency, low carbon-emissions of trade and (as a tendency) shorter supply chains, high levels of circularity as well as environmental and labor standards. Even though there are many variables to be considered (e.g., regional differences regarding environmental and labor regulations, resource intensity of production, etc.), this model tends to be more regionalized or localized to lower the carbon-emissions of trade. To account for resilience, these regional value chains (RVCs), in addition, are characterized by a certain degree of redundancies and possibly diversification in order to withstand shocks. Sustainable resilience, in contrast, prioritizes resilience over environmental sustainability and focuses on increasing the resilience of (global) value chains in the most sustainable way. This is usually achieved by diversification of sourcing, both regionally and with respect to the number of suppliers, increasing redundancies as well as stockpiling. At the same time, higher levels of resource and energy efficiency in the supply chain as well as social standards are promoted.

Figure 2: GVC models

Source: Grumiller et al. (2022)

No classical trilemma

The policy goals of efficiency, resilience and sustainability and their associated GVC models, however, do not necessarily entail a classical trilemma situation: One can, for example, opt for highly efficient and sustainable GVC/RVCs, or increase the resilience of today’s efficient GVCs in a sustainable way (e.g., by sourcing from more sustainable production units in the context of diversification processes). The efficiency, resilience and sustainability of GVCs thus can be realigned to some extent. Policy-makers and firms face the task to optimize the most promising combinations between the three objectives, even though the prioritization of options may differ between these actors (firm vs. societal interests).

The question of which GVC model policy-makers should pursue also depends on sector specifics. Highly globalized value chains in manufacturing industries and expected high efficiency losses of regionalization strategies characterize the current situation. Thus, the concept of sustainable resilience is arguably the most appropriate GVC model in many cases, if one wants to improve both resilience and sustainability. In this case, policy-makers may want to promote the sustainability and resilience of GVCs by focusing on reducing the environmental footprint and increase social sustainability standards as well as supply chain diversification and redundancies. In contrast, in already more regionalized production systems and selected strategic sectors, such as for instance in agriculture, resilient sustainability might be the preferable option. The political question on how the costs of these adjustment processes are to be distributed between different social groups, in addition, also has important implications on the desired policy-mix (emphasis on regulations, subsidies, etc.).

Weak integration of resilience and sustainability in prevailing EU policies

In our study, we analyzed the most important policies in the US and the EU on GVC resilience and sustainability, and reveal that most policies currently do not link these topics in a comprehensive and systematic way. Instead, policies generally focus either on GVC resilience or on GVC sustainability. The most important exception is the US supply chain strategy under Executive Order 14017 (February 2021).2 It integrates elements of resilience as well as social and environmental sustainability. In contrast to most efforts in the EU, the strategy has a strong focus on promoting domestic manufacturing and reshoring for strategically important and critical products (e.g., batteries, active pharmaceutical ingredients, semiconductors, various minerals). The definition of strategically important products is based on various factors, but also reflects sustainability concerns (e.g., the promotion of batteries production and the transformation towards electric vehicles).

The EU’s open strategic autonomy concept increasingly incorporates aspects of GVC resilience (EC 2021b). But, so far, extensive measures to promote GVC resilience (in terms of diversification and redundancies) on the EU level are rare. Instead, the EU’s focus is on creating opportunities for diversification through trade policy. Extensive measures to promote GVC resilience and security of supply, including through reshoring, are being discussed in the case of some sector-specific strategies such as the pharmaceutical and chemical strategies (EC 2020a) or in the context of critical raw materials (EC 2020b). At the same time, with the notable exception of strategic stockpiling, it remains unclear how the EU aims to promote GVC diversification and redundancy.

While there are various important initiatives to promote GVC sustainability, such as due diligence proposals (including the recent EU due diligence legislation), they mostly focus on social rather than environmental sustainability. Moreover, the details of these measures are not yet clear and it remains to be seen how effective they will be. Preliminary lessons can be drawn from those sustainability initiatives already in place. The French Loi de Vigilance3 or the EU Conflict Minerals Regulation4 , for example, highlight that the scope of the respective regulation, as well as liability issues and sanction mechanisms are particularly challenging in designing such policies. In many cases, the effectiveness of policies is curtailed by their limited scope and low liability obligations for firms as well as the lack of a focus on environmental sustainability.

Learning from case studies: medical products

The medical products case study sheds light on the strategic aspects of resilience and sustainability in supply chain management in the context of recent GVC disruptions. The medical products GVC underlines the large diversity of product-specific supply chain structures and bottlenecks, the latter being primarily related to single sourcing and regional clusters (Park et al. 2020). Overall, security of supply is an issue of particular relevance in the case of personal protective equipment (PPE; e.g., facemasks and medical gloves). The main reasons for supply chain disruptions during the COVID-19 pandemic were related to a strong increase in global demand, production stops during lockdowns, and export restrictions as well as other COVID-19-induced global or regional trade barriers. While such problems are now widely shared, what is less known is that many medical product GVCs suffer from a large variety of social and environmental sustainability issues. This includes the high environmental impact of mostly single-use PPE in general (Singh et al. 2020), but also poor working conditions, for example in the medical gloves industry (Bhutta/Santhakumar 2016).

The analysis of firms’ resilience and sustainability strategies revealed that many firms in the medical products sector – so far – are not implementing a comprehensive resilience strategy to upgrade their supply chains. The main reason for this is that the costs of managing stocks and of introducing multiple sourcing strategies can be very high due to i) complex buyer-supplier relationships (in particular in the case of medical devices) in light of stringent EU regulations and buyer-requirements; ii) lengthy and complex product accreditation processes for medical products; iii) and often years of experience in working together.

Another major limiting factor is that buyers of medical products – including public institutions as the by far most important buyers – are rarely willing to pay a premium for resilience and sustainability. Thus, firms continue to prioritize efficiency. This is also related to the rising problems of EU meltblown and facemask producers.5 After rapidly expanding their production capacities during the first phase of the pandemic, not least due to political demands, they increasingly struggle to withstand global competition, in particular from China, with the public sector lacking commitment to continuously source domestically.

Policy recommendations

In the context of intensifying geopolitical conflicts and environmental crises as well as an increasing likelihood of exogenous shocks, policy-makers need to promote sustainable resilience and resilient sustainability in selected GVCs. The trade-offs and compatibilities between GVC efficiency, resilience and sustainability need to be assessed on a sector-by-sector and product-by-product basis. Accordingly, policy-makers need to select a sector- and product-specific policy-mix, taking into account GVC-specific governance structures and (lead) firms’ strategies.

Given the costs and challenges of GVC diversification, policy-makers need to incentivize and support sustainable diversification processes in selected sectors. Besides GVC diversification, production-related measures that include re- and near-shoring of selected critical products are both necessary and viable. In addition, policy-makers should contemplate to extend the scope of supply chain and due diligence laws to include GVC resilience. Adjusted public procurement practices, in addition, will be crucial to promote GVC sustainability and resilience. In this context, the distribution of adjustment costs is also an important open question, with potential implications on the desired policy-mix (e.g., taxes, regulations, subsidies). Short term costs must however be weighed against the long-term social benefits of more resilient GVCs, particularly during crises.

In doing so, policy-makers need to keep in mind that the reorientation and restructuring of GVCs has implications for countries in the Global South. Thus, they must ensure policy coherence for development and establish coordination as well as monitoring and evaluation mechanisms to keep track of compatibilities and trade-offs between efficiency, resilience and sustainability.

Endnotes

1. This blog post is based on Grumiller et al. (2022), which covers all aspects in more detail.

2. See https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/

3. See https://www.legifrance.gouv.fr/jorf/id/JORFTEXT000034290626/

4. See https://ec.europa.eu/trade/policy/in-focus/conflict-minerals-regulation/index_en.htm

5. Meltblown is an electret non-woven fabric, which provides the filtering functionality of, for example, FFP2 masks. It is the most sophisticated input and essential for the proper functioning of these masks.


References

Bhutta, Mahmood/Santhakumar, Arthy (2016): In good hands. Tackling labour rights in the manufacture of medical gloves. London: British Medical Association Medical Fair, Ethical Trade Group, European Working Group on Ethical Public Procurement. https://www.bma.org.uk/media/1093/in-good-hands-medical-gloves-report-web-23-03-2.pdf

Bogaschewsky, Ronald (2020): Lieferketten im Stresstest – aber wollen wir wirklich die alten wiederhaben? In: ifo Schnelldienst 73(5), 31–34. https://www.ifo.de/DocDL/sd-2020-05-goerg-moesle-etal-corona-globale-lieferketten.pdf

EC (2021a): Strategic dependencies and capacities. Commission Staff Working Document (SWD/2021/352 final). Brussels: European Commission. https://ec.europa.eu/info/sites/default/files/swd-strategic-dependencies-capacities_en.pdf

EC (2021b): An open, sustainable and assertive trade policy. Open strategic autonomy. Brussels: European Commission. https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159434.pdf

EC (2020a): Pharmaceutical Strategy for Europe (COM/2020/761 final). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Brussels: European Commission. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0761

EC (2020b): Critical Raw Materials Resilience: Charting a Path towards greater Security and Sustainability (COM/2020/474 final). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Brussels: European Commission. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0474&from=EN

Gölgeci, Ismail/Yildiz, Harun Emre/Andersson, Ulf (2020): The rising tensions between efficiency and resilience in global value chains in the post-COVID-19 world. In: Transnational Corporations 27(2), 127–141. https://doi.org/10.18356/99b1410f-en

Grumiller, Jan/Grohs, Hannes/Raza, Werner (2022): Resilience in Sustainable Global Supply Chains: Evidence and Policy Recommendations. Study for the Research Network Sustainable Global Supply Chains. https://www.swp-berlin.org/assets/swp/Research_Network_Working_Paper_Resilience_in_GVCs_March_2022.pdf

Javorcik, Beata (2020): Global supply chains will not be the same in the post-COVID-19 world. In: Baldwin, R.E./Evenett, SJ (Eds.): COVID-19 and Trade Policy: Why Turning Inward Won’t Work. a VoxEU.org eBook, CEPR Press, 111–116. https://voxeu.org/system/files/epublication/Covid-19_and_Trade_Policy.pdf

MGI (2020): Risk, resilience, and rebalancing in global value chains. McKinsey Global Institute. https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains

Park, Cyn-Young/Kim, Kijin/Roth, Susann/Beck, Steven/Kang, Jong Woo/Tayag, Mara Claire/Grifin, Michael (2020): Global Shortage of Personal Protective Equipment amid COVID-19: Supply Chains, Bottlenecks, and Policy Implications. ADB Briefs 130, Mandaluyong City: Asian Development Bank. http://dx.doi.org/10.22617/BRF200128-2

Singh, Narendra/Tang, Yuanyuan/Ogunseitan, Oladele A. (2020): Environmentally Sustainable Management of Used Personal Protective Equipment. In: Environmental Science & Technology 54(14), 8500–8502. https://doi.org/10.1021/acs.est.0c03022

The White House (2021): Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth. 100-Day Reviews under Executive Order 14017. June 2021. Washington: The White House. https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf

Werner Raza

Head of the Austrian Research Foundation for International Development (ÖFSE)

w.raza@oefse.at

Jan Grumiller

Programme Director Environmental and Sustainablity Management, IMC Krems

jan.grumiller@fh-krems.ac.at

Hannes Grohs

Junior Researcher, Austrian Research Foundation for International Development (ÖFSE)

H.Grohs@oefse.at

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