Usefulness of the article: This article reexamines the functioning of value chains and the interdependence of French production with regard to its trading partners at the onset of the coronavirus crisis in order to better understand the challenges and potential implications.
Summary:
• French production is dependent on foreign supply.
• The coronavirus crisis has highlighted the industrial dependence of French economic production and its vulnerability.
• The French government appears to be committed to securing key supplies for industry, known as strategic supplies, and thereby strengthening the resilience of its industry.
The vote for the United Kingdom to leave the European Union in June 2016 and the election of Donald Trump in the United States the same year confirmed the importance of questioning free trade and globalization in developed countries. More recently, the coronavirus crisis has highlighted the fragility of internationalized production processes, also known as value chains, and their potential to transmit shocks on an unprecedented scale. This adds further weight to the arguments of fervent defenders of protectionism. But does this crisis spell the end of global value chains as we know them?
This article aims to take stock of the interdependence of French production with its trading partners at the onset of this crisis in order to better understand the issues at stake and the potential implications.
1. The interdependence of French production at the onset of the crisis
Since the early 1990s, production processes have become increasingly internationalized. Trade in intermediate goods now accounts for two-thirds of global trade volume (Gerschel et al 2020). These recent developments have reinforced the international interdependence of production, both upstream and downstream, and France is no exception. More and more companies are organizing their production on a global scale and choosing to relocate the manufacture of components, parts, or even services to foreign countries. These companies themselves serve foreign customers. This is particularly noticeable in industries such as automotive and electronics, which produce complex goods involving numerous production stages. The production of an iPhone, designed in the United States with components sourced from around the world and assembled in China, is a prime example.
France’s international dependence is reflected upstream in the supply of foreign inputs and can be measured by the ratio of the value of imports of intermediate products to GDP. Downstream, it is reflected in the use abroad of inputs produced on French soil and can be assessed by the share of national factor compensation valued in a production process finalized abroad. In 1995, French production was as dependent on its foreign trading partners upstream as it was downstream (Resheff and Santoni 2020). Since then, its dependence on supply has increased more than its dependence on demand. France now depends primarily on European Union countries for its inputs. As illustrated in Figure 1, the European Union accounts for approximately 50% of France’s dependence on foreign supply. France’s dependence on China and the rest of the world is much lower, but there has been a significant increase in recent years. French production was 0.85% dependent on Chinese supply in 2014, compared with only 0.09% in 1995. The sectors most exposed to Chinese inputs are textiles, electrical equipment, IT, and transport equipment.
Figure 1: France’s dependence on foreign supply (1995-2014)
Source: Calculations and graph based on Resheff and Santoni (2020) using data from the World Input-Output Database
However, it is important to note that companies with foreign suppliers in France represent only 15% of all companies, but contribute 60% of aggregate market GDP (Gerschel et al 2020). A shock affecting the inputs of these companies is therefore likely to have significant repercussions.
2. Contagion through value chains: immediate repercussions
While the coronavirus was still relatively uncommon in France, on January 25, 2020, the province of Hubei, an important Chinese industrial hub, was the first area to be placed under lockdown. The onset of the crisis and the lockdown measures taken by China on January 25 in 16 cities in Hubei province had an immediate impact on production in China due to the reduction in working hours and problems with the synchronization of production lines. In effect, Chinese supply was paralyzed, disrupting the arrival of inputs in all countries dependent on China. In France, supply problems were quickly noted, particularly in vital production lines. The raw materials needed to produce surgical masks could not be transported into the country, nor could the printed circuit boards needed to produce respirators.
This contagion phenomenon due to the internationalization of production chains has already been highlighted by studies examining the impact of the 2011 Tohoku earthquake in Japan on American companies. The decline in production in the United States was comparable to the decline in Japanese imports, as companies were unable to substitute intermediate goods and find short-term alternatives to these highly specific parts that are crucial to the production process (Boehm et al 2019). For example, Toyota, which at the time imported 15% of these parts from Japan, reported that it had to adjust its car production in the US following this supply disruption.
A recent theoretical study by researchers at the Institut des Politiques Publiques (Gerschel et al 2020) assesses the impact of China’s lockdown measures on its trading partners at the onset of the crisis. Assuming a 10% shock to production in China in the first quarter of 2020 across all sectors, the model predicts a significant effect on French GDP of between 0.27% and 0.38%. The results are expressed as growth rates using as a reference the level of GDP that would have been achieved in the absence of the shock. In other words, given the INSEE’s growth forecast—established before the shock—of 0.2% for the first quarter of 2020, this shock alone could have led to a contraction in French GDP.
3. Does this crisis spell the end of global value chains as we know them?
The coronavirus crisis has highlighted the fragility of value chains and their potential to transmit shocks on an unprecedented scale. It will leave its mark and will certainly lead to a reconfiguration and adaptation of practices. However, it seems premature to consider that it spells the end of globalization.
The fundamental principles that govern business decisions have not fundamentally changed. The « world after, » if such a world exists, still seems to be one where efficiency, profitability, and cost minimization are at the heart of business decisions. The fragmentation of production for greater efficiency is not a new concept. Adam Smith already described the optimization of pin production in England at the end of the 18th century through specialization and the multiplication of production stages. The global internationalization of production chains in recent decades, and in particular the entry of China as a major player, also follows this same logic of cost minimization. Many companies have decided to set up operations in China because of its cheap labor.
However, given the scale of this crisis, we can expect to see value chains adapt and certain practices be called into question by companies and public authorities.
Significant delays at borders have jeopardized production processes, particularly those based on immediacy. Just-in-time production, a practice introduced by Toyota to optimize its car production lines and adopted by more than a third of motor vehicle companies in France (Pisch 2020), is already beginning to be singled out. This organizational principle, based on zero inventory and « made-to-order » production, is clearly not resilient to shocks such as this one. The blockage of one link in the chain leads to the paralysis of the entire chain. Building up inventories or diversifying parts suppliers could be a way to marginally reconfigure these chains by strengthening their resilience.
The recovery plan presented by the French government on September 4 seems to show a desire to strengthen domestic production and implement policies to encourage companies to set up or relocate to France, particularly in industries identified as strategic—healthcare, electronics, agri-food, and telecommunications. The main objective is to secure these key supplies and thereby strengthen the resilience of French industry. The government intends to provide significant financial support for relocation with a €600 million plan allocated between now and 2022, which will involve targeted investment support in its strategic sectors and a strengthening of the capital tools for the industrialization of relocation projects.
Conclusion
This crisis has highlighted the vulnerability of globalized production and its potential for contagion. The crisis in Chinese supply at the onset of the global epidemic spread to France—well before the virus—through value chains and will have significant consequences on French GDP, compounded by the much more severe consequences of the shutdown of activity in France during lockdown. Without completely calling into question the organization of production, this crisis will surely trigger a change in practices. In this context, companies seem to be encouraged to build up stocks, diversify the supply of key components, and even relocate part of their production.
Bibliography
Boehm, Christoph, Aaron Flaaen, and Nitya Pandalai-Nayar, 2019 « Input Linkages and the Transmission of Shocks: Firm-level Evidence of the 2011 Tohoku Earthquake, » The Review of Economics and Statistics, 101(1)
Gerschel, Elie, Alexandra Martinez, and Isabelle Méjean, 2020, « Propagation of shocks in international value chains: the case of the coronavirus, » IPP Note No. 53
Pisch, Frank, 2020 « Just-in-time supply chains after the Covid-19 crisis, » VoxEU post
Ariel Reshef and Gianluca Santoni, 2020 « Global value chains and French production dependence, » CEPII Letter No. 409
