The impact of COVID-19 on global value chains: Disruption in nonessential goods production

Public health measures enacted to mitigate the spread of coronavirus disease 2019 (COVID-19) have dampened economic activity by shuttering businesses that provide 'nonessential' goods and services. Not surprisingly, these actions directly impacted demand for nonessential goods and services, but the full impact of this shock on the broader economy will depend on the nature and strength of value chains. In a world where production chains are increasingly fragmented, a shock in one industry (or a group of industries) in one country will affect other domestic industries as well as international trade, leading to impacts on production in other countries. We employ the World Input-Output Database to depict the interdependencies among both industries and countries, which provides a full representation of global value chains. By assuming a homogeneous impact on demand for nonessential goods and services around the world, we demonstrate asymmetric effects on production by industry and international trade, leading to asymmetric relative impacts on national economies. Our results indicate that if demand for nonessential goods and services decreases by 50%, the global gross domestic product will decline by 23%, leading to relative impacts that are larger in China, Indonesia, and some European countries. Also, international trade declines by almost 30%, largely due to a reduction in economic activity associated with the production of raw materials and certain types of manufacturing. This work highlights the relevancy of going beyond measuring the direct effects of COVID-19 and provides insights into how international trade linkages will induce broader economic impacts across the globe.