Shocks, risks and global value chains in a COVID-19 world

Shocks, risks and global
value chains in a COVID-19
world
by Frank Van Tongeren, OECD Trade and Agriculture Directorate

In just six short months, the COVID-19 pandemic has swept the
globe, leaving but a few island nations untouched. The virus
and the measures required to contain it have left in in their
wake a global economy damaged beyond what was thought possible
after the financial crisis over a decade ago. Unemployment in
the OECD area increased by an unprecedented 2.9 percentage
points in April alone, up from 5.5% the previous month, and
the recent OECD Economic Outlook projects that ‘five years or
more of income growth could be lost in many countries by the
end of 2021’. The pandemic has painfully reminded us of the
vulnerability of the global economy to unexpected shocks.

In the early stages of the pandemic, we saw dramatic shortages
in the global availability of personal protective equipment
and other medical supplies due primarily to surging demand, in
some cases exacerbated by trade restricting measures. This
raised questions about whether the relative gains and risks
from deepening and expanding international specialisation in
global value chains (GVCs).

Global value chains organize the cross-border design,
production and distribution processes, creating much of what
we purchase and consume every day: from food and medicines to
smartphones and cars. Some people now wonder whether more
localised production of key goods would provide greater

security against disruptions that can lead to shortages in
supply and uncertainty for consumers and businesses.

Modelling the question of reshoring post-
COVID

While we do not have a more ‘localised’ world at hand that we
can use to compare vulnerability to shocks such as the
COVID-19 pandemic, we can use economic models to explore such
a counterfactual scenario and equip policy makers with
information that can help them start to answer these pressing
questions. Recent simulations with a large-scale OECD trade
model, METRO, compare two stylised versions of the global
economy: the interconnected economies regime captures
production fragmentation in GVCs much as we see it today, but
also taking into account the changes already resulting from
the COVID-19 crisis. These include reductions in supply and
productivity of labour, reductions in demand for certain goods
and services, and a rise in trade costs related to new customs
procedures for goods and restrictions on temporary movement of
people in services. In the localised -‘turning inward’-
regime, production is more localised and businesses and
consumers rely less on foreign suppliers. This illustrative
counterfactual world is constructed through a global rise in
import tariffs to 25%, combined with national value-added
subsidies equivalent to 1 % of GDP on labour and capital,
directed to domestic non-services sectors to mimic rescue
subsidies that favour local production. It is also assumed
that, in the localised regime, firms are more constrained in
switching between different sources of products they use,
making international supply chains more rigid. Those
assumptions create strong incentives to increase domestic
production and rely less on international trade and are meant
to illustrate a range of potential implications of policies

that aim at more localisation.

Starting from these two baseline scenarios for future trade
regimes, the models can be exposed to a ‘supply chain shock’
similar to the disruption COVID-19 caused to global supply
chains. During the pandemic, disruptions to labour, transport
and logistics increased the cost of exporting and importing to
a similar extent. The analysis, laid out in Shocks, risks and
global value chains: insights from the OECD METRO model
explores how the interconnected economies and the localised
regimes compare in terms of the propagation of, or insulation
from such shocks. The ‘supply chain shock’ is simulated with a
10% increase in the costs of bilateral exports and imports
between a given region and all other countries. Because a
shock that decreases trade costs by 10% –a big drop in oil
prices for instance— would have effects of the same magnitude,
but in the opposite direction, both the downside and upside
stability in the two regimes can be explored.

Increased localisation leads to GDP
losses and makes domestic markets more
vulnerable

Current debates over future trade regimes often focus on a
purported trade-off between efficiency and security of supply.
This model simulation study allows us to evaluate the two
simulated regimes for both. It found that a localised regime,
where economies are less interconnected via GVCs, has
significantly lower levels of economic activity and lower
incomes. Increased localisation would thus add further GDP
losses to the economic slowdown caused by the COVID-19
pandemic. Furthermore, even with the support and protection
offered to domestic producers under a localised regime, not

all stages of production can be undertaken in the home
country, and trade in intermediate inputs and raw materials
continues to play an important role in domestic production. In
that context, less international diversification of sourcing
and sales means that domestic markets have to shoulder more of
the adjustments to absorb shocks, and this translates into
larger price swings and large changes of production, and
ultimately to greater variability of incomes. In this sense,
the more localised regime delivers neither greater efficiency
nor greater security of supply.

Recent OECD analysis on The face mask global value chain in
the COVID-19 outbreak offers an concrete illustration. It
showed that producing face masks requires a multitude of
inputs along the value chain, from non-woven fabric made with
polypropylene to specialized machinery for ultra-sonic
welding. While the production itself does not require high-
tech inputs, localising the production of just this one good
would require high capital investments which would need to be
supported during periods when demand shrinks and localized
production is not competitive. With current technologies it
would therefore be excessively costly for every country to
develop production capacity that matches crisis-induced surges
in demand and which encompasses the whole value chain from raw
materials through distribution for a whole catalogue of
essential goods to match any potential crisis—foreseen and
otherwise.

More localisation also means more reliance on fewer sources
of—and often more expensive—inputs. In this regime, when a
disruption occurs somewhere in the supply chain, it is harder,
and more costly, to find ready substitutes, giving rise to
greater risk of insecurity in supply. This is also the case
for sectors that are often seen as strategic: food, basic
pharmaceuticals, motor vehicles and electronics.

Work on Trade interdependencies in Covid-19 goods further
supports these findings, demonstrating that no single country
produces efficiently all the goods it needs to fight COVID-19.
Indeed, while the United States and Germany tend to specialise
in the production of medical devices, China and Malaysia are
most specialised in producing protective garments.

While the argument about GVCs is often posited as one of
efficiency versus security, OECD research illustrates that
greater localisation fails to achieve either. The localization
of production is costly for the most developed countries and
virtually impossible for the less developed—while at the same
time a localised regime provides less protection from the
impact of shocks.

An alternative, more effective and cost-efficient solution to
the challenges posed by shortages in some key equipment during
demand surges may involve the combination of strategic stocks;
upstream agreements with companies for rapid conversion of
assembly lines during crises and supportive international
trade measures.

If this crisis has taught us anything, it is that viruses,
shocks, and economic consequences know no borders, and the one
and best option that we have is to meet these challenges
together.

References:

OECD Economic Outlook. Organisation for Economic Co-operation
and     Development      (OECD),      24,     June     2020.
http://www.oecd.org/economic-outlook/june-2020/

Shocks, risks and global value chains: insights from the OECD
METRO model. Organisation for Economic Co-operation and
Development         (OECD),       29,       June       2020.
https://issuu.com/oecd.publishing/docs/metro-gvc-final

The face mask global value chain in the COVID-19 outbreak:
Evidence and policy lessons. Organisation for Economic Co-
operation and Development (OECD), 4, May 2020.
http://www.oecd.org/coronavirus/policy-responses/the-face-mask
-global-value-chain-in-the-covid-19-outbreak-evidence-and-
policy-lessons-a4df866d/

Trade interdependencies in Covid-19 goods. Organisation for
Economic Co-operation and Development (OECD), 5, May 2020.
http://www.oecd.org/coronavirus/policy-responses/trade-interde
pendencies-in-covid-19-goods-79aaa1d6/

India’s export performance:
the goods and services nexus
By Isabelle Joumard, India Desk, OECD Economics Department

The government aims at making India an export hub, to help
boost job creation. The export-to-GDP ratio has risen fast
since the early 1990s and now stands broadly at par with China
(Figure 1). The large share of services in total exports
however stands out: while India has performed very well in
exporting IT services, exports of goods have lagged behind.
Exports of labour-intensive manufacturing products could grow
faster and contribute to job creation. The 2019 OECD Economic
Survey of India discusses policies to make India’s exports
more competitive.

Performance of services exports has been stellar. India’s
share of world services trade more than quadrupled from 0.5%
in 1995 to 3.5% in 2018 and India has become a major exporter
of business services, notably in the Information,
Communication and Technology (ICT) sector. Medical and
wellness tourism is also performing well, with patients
seeking high-quality medical treatment at competitive prices
in some Indian hospitals.

Exports of goods have displayed mixed results. India has
gained market shares for some skill- and capital-intensive
goods, including pharmaceuticals and refined oil. However,
performance in exporting textiles, leather and agricultural
products has disappointed. Looking at the labour-intensive
components of the textile sector (including garment) provides
an illustration: Vietnam now has a larger market share (Figure
2).

Domestic factors partly explain the relatively low performance
of labour-intensive exports. Labour regulations are more
stringent for industries and large firms. This creates
incentives for firms to stay small, making it difficult to
exploit scale economies. Electricity prices are also
relatively high and transport infrastructure bottlenecks
persist despite recent improvements. This hampers the
competitiveness of manufacturing goods which tend to be more
intensive in energy and transport than services. The length
and costs to acquire land, combined with relatively high
financing costs, are further weighing on firms’
competitiveness.

Barriers to trade also play a role. Import tariffs on goods
declined substantially in the 1990s and 2000s. They have been
raised again since 2017 and are relatively high (Figure 3).
Expensive imports of intermediate products, due to import
duties, can penalise Indian exporters if they do not receive
the full compensation for the duties paid on inputs — this is

often the case in a sector like the apparel sector where small
enterprises account for the lion’s share. The complexity of
India’s tariff structure further raises administrative and
compliance costs. Overall, import duties run against the
objective of making India an export hub.

Trade in services also faces some restrictions, with local
suppliers protected from foreign competition (Nordås, 2019;
OECD, 2017). Only Indian nationals are allowed to practise as
lawyers or architects. Services trade restrictions, as
assessed by the OECD, are also relatively high in the banking,
insurance, rail and air transport, and telecommunication
sectors (Figure 4). Because services are key inputs for the
manufacturing sector and support participation in global value
chains, stringent regulations on services are weighing on
manufacturing costs and thus on export performance.

OECD simulations suggest that India would be a major
beneficiary of a multilateral reduction in barriers to
services trade (OECD, 2019b). Better priced services
intermediates would foster a rapid expansion of production and
job creation in the manufacturing sector. It would further
support wages for low-skilled workers. Simulations also reveal
that, even in the absence of a multilateral agreement, the
economy would gain from a unilateral liberalisation of trade
and investment (Joumard et al., 2020).

India could make exports a new growth engine. India’s trade
prospects are relatively positive as it has specialised in
sectors which will likely be in high demand in the future
(e.g. ICT services, pharmaceuticals and medical devices) and
in fast growing destinations (with a large share of its
exports to emerging market economies). To unlock its potential
to seize market shares in the labour-intensive manufacturing
segment, India should modernise labour and land regulations,
address infrastructure bottlenecks and open up further the

services sector to trade and investment. Better and less
expensive services – financial, marketing, distribution,
legal, transport, etc. – will increase competitiveness in the
manufacturing sector, boost job creation and meet the
aspirations of women and new comers on the labour market.

References

Joumard I., M. Dek and C. Arriola (2020), “Challenges and
opportunities of India’s enhanced participation in the global
economy”, OECD Economics Department Working Paper No. 1597.
https://doi.org/10.1787/a6facd16-en

Nordås, H.K. (2019) “Services trade restrictiveness index,
methodology and application: The Indian context” in D.
Chakraborty and Nag, B. (eds), India’s Trade Patterns and
Export Opportunities: Reflections through Trade Indices and
Modelling Techniques, New Delhi: Sage Publications

OECD (2017), Services Trade Policies and the Global Economy,
OECD                  Publishing,                    Paris,
https://doi.org/10.1787/9789264275232-en

OECD (2019a), OECD Economic Surveys: India 2019, OECD
Publishing, Paris, https://dx.doi.org/10.1787/554c1c22-en.

OECD (2019b), Trade Policy and the Global Economy – Scenario
4: Addressing Barriers to Services Trade, OECD publishing,
Paris
https://issuu.com/oecd.publishing/docs/oecd-trade-scenario-4-s
ervices

Statistical Insight: men’s
employment more dependent on
trade than women’s
by Fabienne Fortanier, OECD Statistics and Data Directorate

Concerns are growing that globalisation may have created a few
big winners at the expense of many losers. This has stimulated
efforts to
analyse how trade can be made to Work for All, for example by
focusing on the skills and occupations of affected
workers. However, there has been less attention to the gender
dimension of
globalisation and global value chains, and in particular to
whether they are
having differing effects on men’s and women’s work.

New analysis shows that men’s employment is more dependent on
international trade than women’s. On average across the
countries studied, 37% of men’s jobs, but only 27% of women’s
jobs, depend on exports – either because the firms they work
for export directly, or because they indirectly supply other
firms that subsequently export. This compares to only 27% of
women’s employment (Figure 1).

Source: OECD Statistics and Data Directorate estimates, based
on full-time equivalent employment.

Focusing on manufacturing exports only (which account for
around 70% of international trade), Figure 2 illustrates that
in nearly all countries, the share of women in employment that
is indirectly sustained by manufacturing exports is higher
than the share in employment that is directly sustained. For
example, in Germany, women’s share of manufacturing jobs that
is directly sustained was just over 20% in 2014 but close to
35% of indirect jobs (Figure 2).

Source: OECD Statistics and Data Directorate estimates

Women’s jobs are thus both less dependent on trade overall,
and
less directly involved with manufacturing exports. These
trends arise partly
from differences in female labour participation across
industries and partly
from the relative contributions of these industries to total
trade. Overall, women
tend to work in business services and in other, mainly non-
market, services, rather
than in manufacturing, where on average they only account for
a quarter of the
workforce.

However, while men account for the lion’s share of the work
involved in manufacturing exports, that work generates a
substantial number of upstream jobs held by women. As Figure 3
shows, for each unit of labour input in direct manufacturing
exports, an additional 0.5 unit of female labour input is
generated in the companies that supply exporters, as well as
an additional 0.9 unit of male labour inputs. Put differently,

each job in manufacturing exports generates on average 1.4
additional jobs upstream, a third of which are jobs held by
women.

Source: OECD Statistics and Data Directorate estimates

The nature of the upstream participation also differs
significantly between men and women. While the bulk of
upstream jobs are in the services sector, this is particularly
true for women’s jobs. Taking again Germany as an example,
Figure 4 shows that less than 20% of women’s upstream jobs are
in industrial and goods sectors (Agriculture, Utilities,
Construction, Manufacturing and Mining), compared to 45% for
men.

Source: OECD Statistics and Data Directorate estimates.

The detailed data compiled for this analysis on the
export-dependency of men’s and women’s jobs provide an
indication of the extent
to which reducing gender wage gaps will depend on encouraging
more women to
seek employment in higher-paying sectors of the value chain.

How the indicators were
constructed

The estimates of female employment in global value chains were
produced by combining the TiVA ICIO (2008-2014) with data on
labour input by
industry, measured in hours worked as reported in the National
Accounts, broken
down by gender. The gender breakdown was derived from Labour
Force Surveys,
which is the only sufficiently detailed source to support this

analysis, using
a combination of total employees (male/female) broken down by
industry,
corrected for average weekly working hours to adjust for the
fact that in many
countries, women work fewer hours on average. For details on
the calculations, as
well as on the estimations made in case of missing data, see
the accompanying
background note.

Further reading

     Gender in Global Value Chains: the
     impact of trade on male and female employment
     Background note on women in GVCs
     Gender
     in Global Value Chains: how does trade affect male and
     female employment?,
     OECD Statistics Newsletter (2018), Issue 68, July 2018

Making       trade       and
digitalisation work for all
by Laurence Boone, OECD Chief Economist

For some, the financial crisis was an
                         eye-opener exposing the inequalities
                         in life chances between those with the
                         right skills and those without,
                         between those born and educated in the
                         right places and those who were not.
                          But for many others the growing gap
in well-being has been a reality for decades.

Widening inequalities threaten economic growth, undermine
trust in government and democracy, and fuel discontent with
the multilateral rules-based system of market economies.

Governments can and should seek to reverse the trend towards
growing inequality and ensure that economic growth benefits
everyone. Making trade and digitalisation work for all is not
about idealism: it is about improving people’s standard of
living, boosting opportunities for inter-generational mobility
and ensuring a brighter future for all.

The OECD has developed a whole-of-government approach, built
around analysis of policies and strategies to ensure that the
fruits of economic growth are better shared across society. We
identify comprehensive policy packages that optimise gains in
GDP and households incomes, including among the less well off.

There are no one-size-fits-all reform packages, but key
principles can guide policy-making for inclusive growth by
targeting three broad areas for action: firms, skills and
workers.

      Firms: to promote business dynamism and the diffusion of
      knowledge by, for instance, lowering barriers to market
      entry or improving the efficiency of the corporate tax
      system.
      Skills: by fostering higher quality education and
      greater innovation and through better-adapted R&D
      policies so that innovation fosters productivity gains

across all types of activities.
     Workers: with policies that ensure workers benefit from
     a fast-evolving labour market, including those who are
     most vulnerable to the changing demand for skills and
     automation, or who have less bargaining power.

The principles build on extensive OECD empirical research into
the effects of pro-growth structural policy reforms on
household disposable incomes. This research highlights the
trade-offs between productivity gains and inequality when they
appear, as well as possible synergies between efficiency and
equity.

The policies needed to raise equality of opportunity are
clear. It is striking that a child whose parents did not
graduate from secondary school has only a 15% chance of doing
so himself or herself, compared to a 65% chance for more well-
off children.   Equality of opportunities can foster social
mobility: an equal access to education, finance, jobs, health,
transport and other public services helps compensate for the
environment in which people were born. Good quality education
is primordial throughout life – especially early childhood
education, but also training at work, which too often benefits
those already well educated.

Other reforms have more ambiguous effects on efficiency and
equity. Policies which reduce labour costs by lowering
unemployment benefits increase employment, but also make the
vulnerable more fragile when there is an economic downturn.
Meeting the twin objectives of raising employment while
mitigating the negative consequences on poor households
requires well-targeted active labour market policies to
enhance the employability of low-skilled workers, the long-
term unemployed and discouraged job seekers.

Some policies have more ambiguous effects: raising the minimum
wage reduces inequality, just as stronger unions may
strengthen workers’ bargaining position. When firms have the

option of investing in automation technology, striking the
right balance between bargaining power and the economic
environment is    crucial to preserving employment with
appropriate wage gains.

Spurring productivity, by easing barriers to firm entry and
competition in product markets, supports GDP growth gains
without exacerbating inequality, but only to the extent that
the associated job gains are fairly equally shared across
households. This requires the distributional effects of higher
employment – which tends to benefit the less affluent
households disproportionately – to more than offset those of
higher labour productivity, which tends to benefit         the
wealthiest households.

Inclusive growth also requires devoting careful attention to
transition. Opening markets to trade or progress in technology
inevitably leads to the decline of certain companies and
obsolescence of particular skills. Accompanying measures –
building on an active partnership between employers and
governments, often at the regional level – can help workers
and strengthen trust in the protective capacity of
governments. Safety net packages and trampoline policies for
keeping workers in the labour markets are all relevant. For
example, in Sweden, job security councils, founded by
employers, assist workers whose employment is put at risk when
firms restructure. The programmes have enabled          85% of
displaced workers to find a new job within a year, a higher
rate than any other OECD country. Conversely, the US Trade
Adjustment Assistance and the EU Globalisation Adjustment
Fund, which lack such partnerships, have barely benefitted
those affected by the displacement of economic activities.

It is important to acknowledge that transitional policy
responses have limits. This is especially the case for
persistent shocks concentrated in specific regions, sectors or
skills. When distributional effects are persistent, direct
fiscal policy measures may be needed to restore equity and

opportunity. These may include well-designed wealth and
inheritance taxation, paying particular attention to the
progressivity of the tax system, and better targeting social
benefits towards those who need those most. Separately at the
global level, the international     programme to tackle Base
Erosion and Profit Shifting (BEPS) and increase information
transparency of the tax system will help strengthen the level-
playing field and ensure a fair share of firms’ revenues is
allocated to where value added is produced. This will help
stabilise government revenues and ensure redistribution
benefits to those who need it most, but perhaps more
importantly may help increase trust in multilateral
cooperation.

Sustained growth is a pre-condition for improving living
standards and job creation, but sustainability depends on an
effective and perceived broad sharing of the growth dividends.
The OECD has been promoting an inclusive growth framework
based on three pillars: equal opportunities, business dynamism
and inclusive labour markets, efficient and responsive
governments. Implementation needs to start today.

References:

OECD (2018), Opportunities for All: A Framework for Policy
Action on Inclusive Growth, OECD Publishing, Paris,
https://doi.org/10.1787/9789264301665-en.

Causa, O., M. Hermansen and N. Ruiz (2016), “The
Distributional Impact of Structural Reforms”, OECD Economics
Department Working Papers, No. 1342, OECD Publishing, Paris,
http://dx.doi.org/10.1787/5jln041nkpwc-en.

The global impact of weaker
demand growth in China
by Nigel Pain and Elena Rusticelli,

Greater international integration has modified the
transmission channels and the impact that external shocks have
on domestic economies via increased trade openness and
exposure to global financial developments. One important
change, discussed in the special chapter of the latest OECD
Economic Outlook, is that growth prospects in OECD economies
have become more sensitive to macroeconomic shocks in non-OECD
countries. This reflects the rising share of the emerging
market economies (EMEs) in global trade and finance. EMEs now
account for one-fifth of world trade, up from around one-tenth
two decades ago.

Changes in trade patterns and also in the intensity of trade
(trade openness) have implications for the strength of the
spillovers from any shocks in the EMEs. One particular example
– the size of spillovers from a negative demand shock in China
– is discussed below, using simulations on the global
macroeconomic model NiGEM. The scenario considered is a 2-
percentage point decline in Chinese domestic demand growth
that persists for two years.

The trade-related spillovers from this shock are considered
using versions of the model with different sets of trade
patterns and different levels of trade openness (the share of
trade in GDP).

     In a first scenario, the shock is simulated at a single
     point in time with two different sets of bilateral trade
     linkages in the model – the linkages that existed in

1995 and those that existed in 2016. The share of China
     in total global trade rose by close to 8 percentage
     points between these years.
     In a second scenario, the shock is simulated using a
     single set of bilateral trade linkages – those for 2016
     – but with the shock occurring at two different starting
     periods with very different levels of trade openness. On
     average across economies, trade openness is 11
     percentage points higher in the second starting point
     for the shock than in the first. This change is broadly
     comparable to the rise in trade openness in the decade
     or so prior to the financial crisis.

The adverse effects of the China shock on GDP growth in other
countries increase as China becomes more integrated into
global markets and as each country becomes more open to trade
(figure below). In the scenarios considered, negative
spillovers increase by more when trade openness is changed
than from the stronger role of China in global trade, thus
indicating that the general rise in cross-border trade over
recent history contributes more extensively to changing
transmission of shocks than the increase in the weight of
single countries. GDP growth in most major OECD economies is
reduced modestly, by 0.1-0.2 percentage points per annum, with
a stronger impact in Japan. Negative output spillovers are
larger in open economies more exposed to China via tighter GVC
linkages, such as East Asia or commodity exporters.

GDP growth in China declines by between 1¼-1½ per cent per
annum, depending on the particular scenario considered, with
import demand falling sharply. In the scenario with the higher
level of trade openness, world trade growth declines by 1
percentage point per annum relative to baseline. At the same
time, the slowdown in China puts downward pressure on export
prices and import prices decline in all trade partners,
partially helping to correct negative growth spillovers. Such
effects become more important as the share of trade with China

increases, and as economies become more open to trade.

The negative output spillovers would be larger still if
monetary policy did not react, or was unable to react, to
offset the adverse demand shock. Central Banks, targeting the
deviation of inflation and nominal GDP from their target
levels, cut policy interest rates, which by the second year of
the shock decline by 25-50 basis points on average in the OECD
countries (depending on the scenario considered) and by more
in the economies most heavily exposed to China.

Heightened financial market uncertainty and weaker commodity
prices could intensify the adverse impact of a demand shock in
China over and above the direct trade-related impact
considered here (OECD, 2015).

References:

OECD (2015), OECD Economic Outlook, Volume 2015 Issue 2, OECD
Publishing, Paris.

OECD (2018), OECD Economic Outlook, Volume 2018 Issue 1, OECD
Publishing, Paris.

Brexit and Dutch Exports:
Fewer glasshouses, more glass
towers as agri-food shrinks
and finance gains.
by Donal Smith,    OECD   Trade   Directorate   and   Economics
Department

                The Netherlands is likely to be one of the
                European countries that is going to be
                significantly affected by the United Kingdom’s
                planned departure from the European Union
                (Brexit). As an open economy with strong trade
                and investment links to the United Kingdom,
                the Netherlands is exposed to increases in
                barriers to trade between the United Kingdom
and EU (Vandenbussche et al., 2017). New OECD simulations show
the potential extent of this impact, as well as the different
sectors of the Dutch economy likely to be affected.

The sector-level impacts will depend on differing UK trade
exposures, tariff rates and non-tariff measures (NTMs) applied
to different products; varying degrees of global value chain
integration of the sectors; and differences in sectors trade
diversification opportunities. On trade exposure for example,
the agri-food sector has a comparatively high UK exposure.
This sector accounts for 23% of the total exports of the
Netherlands to the UK while the UK market makes up 12% of
total Dutch agri-food exports (OECD 2018).[1]

An illustrative worst-case Brexit scenario – assuming the UK
leaves the EU without any trade agreement – is simulated using

the OECD METRO model (OECD, 2015).[2] The key advantage of
this analysis is that it accounts for changes in both tariff
and non-tariff barriers. The scenario assumes that trade
relations between the EU and UK default to the World Trade
Organisation’s (WTO) Most-Favoured Nation (MFN) rules, that
is, the most basic trade relationship. Relative to current
arrangements, this corresponds to an increase in tariffs on
Dutch trade with the United Kingdom of between 0 and 12 per
cent.

Simulation results show that Dutch exports to the UK would
fall by 17%in the medium-term. The Dutch agri-food sector is
estimated to experience a 22% fall in its UK exports (Figure
1). This is driven by a substantial 35% decline in exports in
the meat products sector. Smaller materials manufacturing
sectors such as wood and leather products and textiles would
see a 20% fall in their UK exports. The 2% fall in production
in agri-food contributes to a 7% decline in the value of
agricultural land. Four of the five sectors that record the

largest declines in employment following production falls are
in the agri-food sectors.

Of all the non-agri-food sectors, electronic equipment would
see the largest decline in total exports at 3% and the largest
decline in production at 2.4% in the scenario. Access to
supply chains for intermediate imports from the UK for Dutch
sectors is also curtailed; intermediate imports from the UK
would fall by over 40% in the finance and insurance sector in
the scenario.

There are a few sectors which have export gains under this
scenario. These include motor vehicles, finance and insurance
and transport equipment, these sectors show increases in
exports to the rest of the EU as well as the United States.
The gas sector expands slightly, but this translates into
relatively larger gains of gross exports of 6% (to EU) and 10%
(to US).

[1] OECD METRO model data.

[2] This shock implies a scenario could be the result of a
disorderly conclusion to negotiations and can be considered
something close to a worst case outcome and does not consider
the impact via investment.

References

OECD (2018), OECD Economic Surveys: Netherlands 2018, OECD
Publishing, Paris.

OECD   (2015),   “METRO      v1   Model    Documentation”,
TAD/TC/WP(2014)24/FINAL.

Vandenbussche, Hylke and Connell Garcia, William and Simons,
Wouter, Global Value Chains, Trade Shocks and Jobs: An
Application to Brexit (September 2017). Available at SSRN:
https://ssrn.com/abstract=3052259                         or
http://dx.doi.org/10.2139/ssrn.3052259

Insertion de la Tunisie dans
les   chaines    de   valeur
mondiales    et   rôle   des
entreprises offshore
Isabelle Joumard, responsable du bureau Tunisie, Département
d’Économie de l’OCDE

L’ouverture de la Tunisie aux échanges internationaux a
fortement progressé depuis le milieu des années 90, témoignant
des avantages comparatifs du pays. Les exportations ont
sensiblement augmenté, tirées par le secteur manufacturier,
avec une transformation en faveur de secteurs plus intensifs
en technologie et en compétences.     De plus, l’analyse des
échanges commerciaux sur la base de la valeur ajoutée remet en
cause la perception selon laquelle les activités à faible
teneur en valeur ajoutée dominent. Cette analyse montre aussi
que le degré d’intégration de la Tunisie dans les chaines de
valeur mondiales est similaire à celui de pays de l’OCDE, le
Portugal notamment, et supérieur à celui de nombreux pays
émergents. La montée en gamme et la diversification des
exportations augurent de plus d’un potentiel de croissance de
l’économie tunisienne élevé.

Cette bonne performance à l’exportation est pour l’essentiel
le fait d’entreprises entièrement exportatrices (dites
offshores). Le secteur offshore dégage un excédent commercial
croissant. La contribution des entreprises du secteur à la
création d’emplois formels a aussi augmenté – en 2016, les
entreprises du secteur offshore contribuaient à hauteur de 34%
des emplois formel du secteur privé – alors que le travail
informel reste un problème majeur (environ 50% des jeunes).
Néanmoins, ces entreprises sont pour l’essentiel localisées
proches des ports, contribuant à la concentration géographique
de l’activité économique. En outre, l’effet d’entrainement sur
le reste de l’économie est faible : les entreprises offshore
s’approvisionnent peu sur le marché local et servent rarement
la demande locale. La complexité des procédures douanières,
fiscales et administratives est perçue par les entreprises
comme une barrière aux échanges avec les entreprises du régime
onshore. De leur côté, les entreprises du secteur onshore sont
pénalisées par des difficultés lors du passage en douane de
leurs produits et des services logistiques peu performants.

La levée des contraintes à l’exportation rencontrées par les
entreprises du secteur onshore et le décloisonnement entre
régimes offshore et onshore permettraient à la Tunisie de se
hisser dans les chaines de valeur mondiales et d’en tirer plus
d’avantages, notamment en termes de progrès technologique, de
création d’emplois et de richesse.

Références :

Joumard I., S. Dhaoui et H. Morgavi (2018), « Insertion de la
Tunisie dans les chaines de valeur mondiales et rôle des
entreprises offshore », Document de travail du Département
d’Économie N°1478.

OCDE (2018), Étude économique de l’OCDE sur la Tunisie.

Stronger Growth                        but        Risks
loom large
By Álvaro S. Pereira, OECD Chief Economist ad interim,
Economics Department

After a lengthy period of weak growth, the world economy is
finally growing around 4%, the historical average of the past
few decades.

This is good news. And this news is even better knowing that,
in part, the stronger growth of the world economy is supported
by a welcome rebound in investment and in world trade. The
recovery in investment is particularly worth emphasising,
since the fate of the current expansion will be highly
dependent on how investment will perform.

Although long anticipated, the pick-up in investment remains
weaker than in past expansions. The same is true for global
trade, which is expected to grow at a respectable, albeit not
spectacular, rate, unless it is derailed by trade tensions.

However, contrary to previous periods, 4% world growth is not
due to rising productivity gains or sweeping structural
change. This time around the stronger economy is largely due
to monetary and fiscal policy support.

For many years, monetary policy was the only game in town.
During the international financial crisis, central banks cut
interest rates aggressively, injected funds into the economy
and purchased assets at a record pace in an attempt to boost
the economy.

In contrast, in most countries, fiscal policy remained prudent
or even became contractionary. Still, historically low
interest rates provided an opportunity for governments to use
their available fiscal space to help foster growth, as the
OECD argued forcefully in 2016. Many OECD governments are now
following this advice. At first, the resources enabled by
lower interest payments were used by governments to avoid
cutting expenditures or raising taxes. With the improving
economic situation, many governments have started to undertake
additional fiscal easing.

Now that monetary policy is finally starting to return to
normal, governments are stepping in to provide fiscal policy
support. We can say that fiscal policy is the new game in
town: three quarters of OECD countries are now undertaking
fiscal easing. The fiscal stimulus in some countries is very
significant, while it is less ambitious in other countries.
Still, this fiscal easing will have important repercussions

for the world economy. In the short run, it will add to
growth. However, countries that have been experiencing longer
expansions might find that this fiscal stimulus (where it is
large) will also add to inflationary pressures in the medium
term. Only time will tell if these short-run gains might be
offset by some medium-term pain. What matters is that, in
making these choices, governments are fully aware of the
medium-term impact of their policies, and do not focus only on
the short-term benefits from fiscal stimulus.

The strong growth we are witnessing is also associated with
robust job creation in many economies. In fact, it is
particularly satisfying to see that in the OECD area,
unemployment is set to reach its lowest level since 1980, even
though it remains high in some countries. Thanks to this
robust job creation and the related intensifying labour
shortages, we are now projecting a rise in real wages in many
countries. This increase is still somewhat modest. However,
there are clear signs that wages are finally on the way up.
This is an important development, since the global crisis had
a severe impact on household incomes, particularly for the
unskilled and low-income workers.

In spite of all this good news, risks loom large for the
global outlook. What are these risks? First and foremost, an
escalation of trade tensions should be avoided. It is worth
remembering that, in part, the rise in trade restrictions is
nothing new. After all, more than 1200 new trade restrictions
have been implemented by G20 countries since the outset of the
global financial crisis in 2007. Still, as outlined in Chapter
2, since the world economy is much more integrated and linked
today than in the past, a further escalation of trade tensions
might significantly affect the economic expansion and disrupt
vital global value chains.

Another important risk going forward is related to the rise in
oil prices. Oil prices have risen by close to 50% over the
past year. Persistently higher oil prices will push up
inflationary pressures and will aggravate external imbalances
in many countries.

In the past few years, very low interest rates have encouraged
borrowing by households and corporations in some countries and
led to overvaluation of assets (e.g. houses, equities) in many
others. In this context, rising interest rates might be
challenging for highly indebted countries, families and
corporations. Of course, this rise in interest rates has been
widely anticipated and should thus not cause any major

disruptions. Nevertheless, if inflation rises more than
expected and central banks are forced to raise rates at a
faster pace, it is likely that market sentiment could shift
abruptly, leading to a sudden correction in asset prices.

A swifter rise in interest rates in advanced economies might
also continue to lead to significant currency depreciation and
volatility in some emerging market economies (EMEs) that are
highly reliant on external financing and facing internal or
external imbalances. Geopolitical tensions might also
contribute to sudden market corrections or a further rise in
oil prices. Brexit and policy uncertainty in Italy could add
pressures to the expansion in the euro area.

What does this all mean for policy? Since private and public
debt remain high in some countries, improving productivity,
decreasing debt levels and building fiscal buffers is key to
strengthen the resilience of economies. As monetary and fiscal
policies will not be able to sustain the expansion forever and
might even contribute to financial risks, it is absolutely
essential that structural reforms become a priority. In the
past couple of years, few countries have undertaken
substantial structural reforms. Most of the countries that
reformed are large EMEs, such as Argentina, Brazil and India.
In the advanced economies, important labour reforms were
introduced in France and a sweeping tax reform was implemented
in the United States. However, as the 2018 OECD Going for
Growth points out, these important exceptions do not counter
the rule that reform efforts have been lagging.

Why is this important? Because the only way to sustain the
current expansion and to make growth work for all is to
undertake productivity-enhancing reforms. As many OECD
Education Policy Reviews and OECD National Skills Strategies
show, it is crucial to redesign curricula to develop the
cognitive, social and emotional skills that enable success at
work, and to improve teaching quality and the resources
necessary to deliver those skills effectively. In many

countries, investment in quality early childhood education and
vocational education and apprenticeships are of particular
importance. Skills-enhancing labour-market reforms are also
crucial. Reforms to boost competition, improve insolvency
regimes, reduce barriers to entry in services and cut red tape
are also key for making our economies more dynamic, more
inclusive and more entrepreneurial. Investment in digital
infrastructure will also be essential in this digital age. In
addition, there are significant opportunities to reduce trade
costs in both goods and, in particular, services, boosting
growth and jobs across the world.

In spite of stronger growth, there is no time for complacency.
Structural reforms are vital to sustain the current expansion
and to mitigate risks. Therefore, at this juncture of the
world economy, it is truly crucial to give reforms a chance.
After monetary and fiscal policies have done their jobs, it is
time for reforms to sustain the expansion, to improve well-
being, and to make growth work for all.

References

Economic Outlook, May 2018.

La croissance                       s’affermit,
mais      des                           risques

assombrissent                            fortement
l’horizon
Álvaro S. Pereira, Chef économiste de l’OCDE par intérim,
Département des affaires économiques

Après une longue période de croissance atone, l’activité
économique mondiale croît enfin au rythme d’environ 4 %, qui
correspond à la moyenne historique des dernières décennies.

C’est une bonne nouvelle, et qui apparaît encore meilleure
lorsque l’on sait que ce rebond de la croissance de l’économie
mondiale est, pour partie, le résultat d’un redémarrage
opportun de l’investissement et des échanges mondiaux. La
reprise de l’investissement mérite tout particulièrement
d’être soulignée, sachant que l’avenir de l’expansion actuelle
dépendra fortement de l’évolution de l’investissement.

Bien qu’anticipé depuis longtemps, le redressement de
l’investissement demeure plus timide que lors des phases
d’expansion passées. Il en va de même pour les échanges
mondiaux, dont on attend qu’ils progressent à un rythme
respectable, sans toutefois être spectaculaire, à moins que
des tensions commerciales ne viennent les mettre en péril.

Cependant, contrairement à ce qui avait pu être observé
précédemment, cette croissance mondiale de 4 % ne repose pas
sur un accroissement des gains de productivité ou sur une
évolution structurelle profonde. Cette fois, l’intensification
de l’activité économique est dans une large mesure imputable
au soutien procuré par les politiques monétaire et budgétaire.

Pendant de nombreuses années, la politique monétaire a été le
seul levier utilisé. Durant la crise financière
internationale, les banques centrales ont procédé à des
réductions draconiennes des taux d’intérêt, elles ont injecté
des fonds dans l’économie et acquis des actifs à un rythme
sans précédent dans l’espoir de donner un coup de fouet à
l’activité économique.

Dans la plupart des pays, en revanche, la politique budgétaire
est restée guidée par la prudence, voire est devenue
restrictive. Au demeurant, le niveau historiquement bas des
taux d’intérêt offrait aux pouvoirs publics l’occasion
d’employer la marge de manœuvre budgétaire dont ils
disposaient pour contribuer à relancer la croissance, selon la
position défendue avec force par l’OCDE en 2016. Un grand
nombre de pays de l’OCDE suivent désormais ce conseil. Dans un
premier temps, les États ont utilisé les ressources dégagées

par la diminution des versements d’intérêts pour éviter
d’avoir à comprimer les dépenses ou à augmenter les impôts. La
situation économique s’améliorant, nombre d’entre eux se sont
désormais engagés sur la voie d’un nouvel assouplissement
budgétaire.

Maintenant que la politique monétaire commence enfin à revenir
à la normale, les pouvoirs publics s’emploient à soutenir
l’activité par la politique budgétaire. On peut dire que la
politique budgétaire est le levier qui a désormais la faveur
des pouvoirs publics : les trois quarts des pays de l’OCDE
s’engagent à présent sur la voie d’un assouplissement
budgétaire. La relance budgétaire est très ample dans certains
pays, et moins ambitieuse dans d’autres. Pourtant, cet
assouplissement budgétaire aura des répercussions importantes
sur l’économie mondiale. À court terme, il renforcera la
croissance. Cependant, les pays ayant connu de plus longues
périodes d’expansion s’apercevront peut-être que cette relance
budgétaire (lorsqu’on lui donne de l’ampleur) accentue
également les tensions inflationnistes à moyen terme. Seul le
temps nous dira si les gains à court terme seront
contrebalancés par des effets douloureux à moyen terme. Ce qui
compte, c’est que les responsables de l’action
gouvernementale, au moment de choisir telle ou telle option,
soient pleinement conscients de l’impact à moyen terme de
leurs politiques, et ne se bornent pas à considérer uniquement
les avantages à court terme de la relance budgétaire.

La forte croissance que nous observons va également de pair
avec une création d’emplois vigoureuse dans de nombreuses
économies. De fait, il est particulièrement satisfaisant de
constater que dans la zone OCDE, le chômage devrait atteindre
son plus bas niveau depuis 1980, même s’il reste élevé dans
certains pays. Compte tenu de la vitalité de la création
d’emplois et de l’accentuation des pénuries de main‑d’œuvre
qui en résulte, nous prévoyons désormais une progression des
salaires réels dans de nombreux pays. Cette hausse est encore
assez timide, mais on perçoit des signes indiquant clairement
que les salaires sont enfin sur une pente ascendante. Il
s’agit d’une évolution importante, sachant que la crise
mondiale avait eu de graves effets sur les revenus des
ménages, en particulier pour les travailleurs peu qualifiés et
à faible revenu.

Malgré toutes ces bonnes nouvelles, des risques assombrissent
fortement les perspectives mondiales. Quels sont-ils ? D’abord
et avant tout, une escalade des tensions commerciales, qui
doit être évitée. N’oublions pas que, pour une part, un
recours accru à des restrictions commerciales n’a rien de
nouveau. La preuve en est que plus de 1 200 restrictions
nouvelles ont été instituées par des pays du G20 depuis que la
crise financière mondiale a éclaté en 2007. Au demeurant,
comme indiqué dans le chapitre 2, parce que l’économie
mondiale est beaucoup plus intégrée et interconnectée
aujourd’hui que par le passé, une nouvelle escalade des
tensions commerciales pourrait porter gravement atteinte à
l’expansion de l’activité économique et déclencher des
perturbations dans des chaînes de valeur mondiales
essentielles.

Un autre risque important est lié à l’envolée des cours du
pétrole. Ceux-ci ont augmenté de près de 50 % au cours de
l’année écoulée. La persistance de cette tendance intensifiera
les tensions inflationnistes et accentuera les déséquilibres
extérieurs dans nombre de pays.

Ces dernières années, le niveau très bas des taux d’intérêt a
encouragé les ménages et les entreprises à recourir à
l’emprunt dans certains pays et a abouti à une surévaluation

des actifs (notamment des logements et des actions) dans
beaucoup d’autres. Dans ce contexte, un relèvement des taux
d’intérêt pourrait mettre en difficulté les pays, les familles
et les entreprises lourdement endettés. Certes, cette
augmentation des taux d’intérêt a été largement anticipée et
ne devrait donc pas induire de perturbations majeures.
Néanmoins, si l’inflation augmente davantage que prévu et si
les banques centrales sont contraintes de relever plus
rapidement les taux d’intérêt, les perceptions sur les marchés
pourraient s’inverser brusquement et conduire à un ajustement
brutal des prix des actifs.

Une remontée plus rapide des taux d’intérêt dans les économies
avancées pourrait également entraîner encore d’importants
phénomènes de volatilité et de dépréciations des monnaies dans
certaines économies de marché émergentes qui sont très
tributaires des financements extérieurs et sont confrontées à
des déséquilibres internes et externes. Les tensions
géopolitiques pourraient également favoriser de brusques
corrections du marché ou un nouvel essor des cours du pétrole.
Le Brexit et l’incertitude autour de l’action gouvernementale
qui sera menée en Italie ne font qu’ajouter aux pressions qui
pèsent sur l’expansion dans la zone euro.

Que faut-il en déduire pour l’action publique ? Parce que la
dette publique et la dette privée demeurent élevées dans
certains pays, il est primordial de rehausser la productivité,
de faire baisser les niveaux d’endettement et de constituer
des marges de manœuvre budgétaires pour renforcer la
résilience des économies. Étant donné que les politiques
monétaire et budgétaire ne permettront pas d’alimenter
indéfiniment l’expansion et pourraient même contribuer à
accroître les risques financiers, il est absolument essentiel
que la priorité soit donnée aux réformes structurelles. Ces
dernières années, rares sont les pays qui ont engagé des
réformes structurelles d’envergure. La plupart de ceux qui ont
mené des réformes sont de grandes économies de marché