Resilience in Services Value Chains

COVID-19 has triggered a new debate on the resilience of global value chains (GVCs) and risks associated with international production (Bonadio et al., 2020; Miroudot, 2020a). Most of this debate focuses on manufacturing and shortages of goods such as face masks or semi-conductors. This is a paradox as, in this crisis, services value chains are the ones that seem to show less resilience.

Resilience in supply chains can be defined as the ability to return to normal operations over an acceptable period of time after a disruption. Trade in services has recovered at a slower pace than trade in goods in 2020-2021 (Figure 1). This is different from what was observed during the Great Financial Crisis in 2008-2009 where trade in services was less affected than trade in goods (Borchert and Mattoo, 2010; Ariu, 2016). At this time, the recovery was synchronised between goods and services (Figure 1).

Figure 1. Imports and exports of goods and services, OECD countries, year-on-year growth rates

Source: OECD Balance of Payments Statistics. Year-on-year growth rates calculated with US-dollar converted and seasonnaly adjusted current values.

The impact of a pandemic on trade in goods is expected to be limited because goods do not carry viruses. However, lockdown policies have decreased output, while also creating important shifts in demand (e.g. from goods consumed at the workplace to goods needed for teleworking). It is also through services that trade in goods has been impacted with disruptions in the transport industry. The decrease in passenger flights has reduced the supply of air cargo services, while quarantine and sanitary measures at the border have affected road transport. Bottlenecks in ports and a lack of anticipation of the rebound in trade by shipping companies have seriously disorganised maritime transport. The pandemic reminds us that trade in goods and trade in services are intertwined.

Why is there a slower recovery for services?

There is a lot of heterogeneity across services activities and the slower recovery observed in Figure 1 is actually driven by two types of services that account together for about one third of total services exports: transport and travel (Figure 2). Other services activities, such as financial services, telecommunications and information services and other business services have not only been marginally impacted by the pandemic but have also quickly recovered in Q2 and Q3 2020.

Figure 2. Exports of services by main sector, G20 countries, year-on-year growth rates

Source: WTO Stats. Year-on-year growth rates calculated with US-dollar converted current values.

This outcome is related both to the mode of provision of these different services and the shifts in demand previously mentioned. Services that involve the movement of consumers or producers are by definition more impacted in a pandemic than services that can be supplied cross-border digitally or through commercial presence within each economy (Shingal, 2021). Financial services, information services and other business services also involve jobs that could easily switch to teleworking and be done at home (Dingel and Neiman, 2020). Shifts in demand have also benefitted some categories of services such as e-commerce, computer services and health services (WTO, 2020).

Therefore, one can question the idea that services are less resilient during this crisis. The case of transport and travel are more an issue with robustness than resilience. While resilience is the capacity to recover quickly after a disruption, robustness is the ability to continue to produce during a crisis (Brandon-Jones et al., 2014; Miroudot, 2020b). Lockdowns, social distancing and sanitary measures that have affected transport and travel have been in place all along 2020 and partially removed in the course of 2021 (at a different pace across countries with restrictive measures being removed and reintroduced following the different waves of the pandemic). Travel and transport also showed some resilience with a quick recovery in Q1 and Q2 2021 when the vaccination campaigns were successful before the apparition of new COVID-19 variants (Figure 2).

The reasons why services activities are generally more resilient to economic shocks

Generally speaking, services supply chains tend to be more resilient to economic shocks than manufacturing value chains for two reasons. First, services often involve long-term contracts or continuity in the provision that limit the role of fluctuations in demand. Long-term contracts are preferred in an uncertain environment and are a response to risks (Amann and Dalia, 1990; Swinney and Netessine, 2009). Such contracts do not offer a full protection against shifts in demand, as can be seen with the maritime shipping industry (where 85 to 90% of transactions are under contract and only 10 to 15% on the spot market). Nevertheless, they mitigate the impact, particularly in terms of costs.

Second, services value chains look more like spiders or octopuses than snakes (Baldwin and Venables, 2013; Davies and Markusen, 2021). It does not mean that these value chains are less complex but they have fewer production stages because the production of services generally takes place at the same time as their consumption. Services are somehow by default subject to just-in-time production strategies. While just-in-time has been criticised as a source of disruptions due to low inventories, it is actually the opposite. The most resilient firms rely on lean production as a way to better adjust to shifts in demand (Netland, 2020).

When demand collapses, services cannot be overproduced and the decrease in demand is instantly known by the producers. The economic impact is immediate but there is no bullwhip effect or hysteresis related to inventories along the value chain. Such effects can amplify the impact of the shock or delay the recovery. Not being storable and not being subject to inventory adjustments is actually an advantage for services (Ariu, 2016).

How to improve the resilience and robustness of services value chains

What makes services value chains resilient is not so different from what makes manufacturing value chains resilient. Resilience is built by firms and it comes from different dynamic capabilities such as agility, flexibility, cooperation with other firms and visibility in the supply chain (Kamalahmadi and Parast, 2016). An open and transparent trade and investment environment is key for allowing firms to deploy their most efficient risk management strategies, building on their international production networks.

A difference for services firms is that they often operate in a regulated environment where governments play an important role in setting rules and standards that can encourage or prevent firms from developing the needed capabilities. There is an interplay between competition, the protection of consumers and externalities related to services markets that can affect the capacity of firms to recover. Some of the sectors the most impacted by COVID-19, such as air transport or maritime transport, are also among the most trade restrictive sectors (OECD, 2022) with regulations that create bottlenecks and can accentuate disruptions. It is not easy to identify best practices and regulations for such sectors but there is an important potential in terms of reforms that would improve their capacity to adjust to shifts in demand.

Such reforms could also improve the robustness of services value chains (which was the main issue during COVID-19) and contribute to the continuity of supply. Two types of policies are particularly important when it comes to robustness. First, investment in infrastructure (including digital infrastructure) can reduce potential bottlenecks and add capacity in networks for services firms to deal with surges in demand. An efficient infrastructure also helps firms to reorganise their activities and adapt to disruptions.  Second, some regulatory flexibility can allow services firms to continue to operate during a crisis. During COVID-19, governments have followed health policies or strategies that were very restrictive for trade in services. In the future, it would be interesting to think about measures that would maintain the movement of people across borders and the provision of services involving face-to-face contacts while still enforcing strict procedures for controlling the pandemic. This would require efforts at the international level and additional co-operation across countries to agree on common rules and harmonised health measures.



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