The global supply chain is in turmoil

Supply barriers have worsened since the war began, especially in the export-dependent sectors of Russia and Ukraine.. We create a new index of the Global Sectoral Supply Chain Pressure (GSSP) that breaks down the contribution of seven industries to the overall supply pressures in the manufacturing sector. This indicator is derived from a vector auto-regression (VAR) whose Global Purchasing Managers Index (PMI) variables such as: output, output price and delivery time to suppliers in seven manufacturing sectors. A global supply shock is characterized by a sign restriction and the indicator is bottomed up by combining the fluctuations of the Delivery Time (SDT) of the sectoral PMI suppliers as defined by the Global Supply Shock.¹ The GSSP indicator suggests that supply pressures have intensified again since March (Figure 1), with natural resources and the chemical industry sectors being major contributors. This pattern of sectoral disturbances probably reflects the effects of the war in Ukraine, as both Russia and Ukraine are important exporters of metals and mining products as well as products used in fertilizer production (ie the chemical sector).² Such supply disruptions, not yet fully captured by the available economic data, could intensify in the coming months, especially in Europe.

Figure 1 Supply Chain Pressure Indicator at Global Manufacturing
(Ideal deviation from average value and point contribution)

Formula: IHS Market and Writers Count. Last Observed: April 2022.
Comments: The left (right) hand side panel is assembled on a quarterly (monthly) frequency. The higher value of the index indicates the deterioration of the supply chain pressure.

Figure 2 Russia’s share in global raw material exports and the degree of export market density
(Share in world exports; Harfindhall-Hershman index; 2019)

Formula: Trade Data Monitor, European Commission and Author Count.
Comments: The material marked by the red circle refers to the strategic raw materials defined by the European Commission’s latest critical assessment (2020 Factsheet). The size of the bubble refers to Russia’s share in global exports.

Looking at Russia’s trade specialization is useful for assessing the potential effects of war-related disruptions on global supply chains and their geographical dimensions.. Russia’s oil, gas and coal exports account for 15% of the world’s exports of these products, and the European Union is its largest importer and the region with the highest import dependence from Russia. This explains the supply pressures in the natural resources sector. In addition to energy products, Russia is a major exporter of raw materials, which have been classified by the European Commission (2020) due to their economic importance and high supply risk (Figure 2). Russia, for example, exports materials used in fertilizer production, especially potash, where it has an influential position, but also contains sulfur and phosphate rocks. Looking at the critical raw materials, Russia is a major exporter of palladium, vanadium and cobalt, the most widely used in the 3D printing, drones, robotics industry, batteries and semiconductor production, affecting other sectors, such as electronics and electronics. Russia is also the fourth largest producer of coking coal, used for steel production, where it enjoys an influential market position, while Ukraine is one of the largest exporters of iron ore, used in the iron and steel industry.

War-related barriers to production and trade flows from Russia could extend through global manufacturing networks due to the country’s integration into significant progress in the global price chain.. Russia’s share in global forward global value chain participation is almost double its share in global trade (2.8% vs. 1.5%). Significantly, Russia has the highest growth participation rate in the supply chain, as more than 30% of its exports consist of inputs used as inputs between its trading partners, compared to the global average of only 18% (Figure 3). This is explained by Russia’s specialization in the energy and metals industries, which are internally more advanced, upstream in the manufacturing process. Therefore, barriers to Russian exports may extend well through the supply chain network, which may also have an impact through indirect trade (Winkler and Wister 2022, Winkler et al. 2022). Furthermore, since Russian inputs are involved in different stages of production, the impact of the barrier may be potentially long-term, consistent with previous strong-level empirical evidence based on the Tohoku earthquake (Bohem et al. 2019).

Quantitative trade models responsible for global value chain connectivity find that the size of the welfare effect of trade disruption due to war is twice the size of the standard model. A recent work (Borin et al. 2022) used a multi-sector, multi-country general equilibrium trade model (Antràs and Chor, 2018) to measure how much the supply chain could expand the impact of a trade collapse within Russia. And its trading partners. In line with the most recent trade data, the decline in Russian imports from the embargoed countries has resulted in increased bilateral trade barriers. The results suggest that Russia and some EU countries, especially Central and Eastern European countries and Finland, will be unevenly affected, while the effects of welfare are significantly greater when energy sanctions are assumed, suggesting a much broader role for energy inputs. In production (Figure 3). The effects of indirect cross-country and cross-sectoral linkages serve as a significant magnifier, as they double the size of the standard (i.e., non-global value chain) effects, especially for countries with stronger supply chain connections to Russia. One caveat to these results is that quantitative trading model inputs have a high degree of substitution, a feature arguably unrealistic, especially in the short term for critical inputs such as energy (Bachmann et al. 2022). Under low but reasonable levels of replacement, Borin et al. (2022) show that barriers to trade in energy products will have a greater impact on economic activity than previously thought, and in the case of a complete energy embargo, they will increase significantly and reach 4% of GDP. Euro area.

Figure 3 Russia’s participation in the global value chain across the sector by various modes
(Percentage of total exports, 2020)

Formula: World Bank WITS, ADB MRIO Table.
Comments: Measurements are based on Borin et al. (2021).

Figure 4 Expansion effect of global value chain
(GDP change, percentage)

Formula: Borin et al. (2022).
Comments: The model with GVC depends entirely on the input-output structure. The model without GVC uses a modified input-output structure where the intermediate product trade is responsible for the final product trade. The data points to 2018. Only in countries where welfare changes have been reported more than 0.2%.

References

Antràs, P and D Chor (2018), “On the Measurement of Upstreamness and Downstreamness in Global Value Chains”, LY Ing and M Yu (eds.), The evolution of world trade: growth, productivity and employmentLondon, UK: Routledge, Chapter 5.

Bachmann, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peich, K Pittel and M Schularick (2022), “If? The economic implications for Germany for stopping the import of energy from Russia, “said the working paper.

Borin, A, FP Conteduca, E Di Stefano, V Gunnella, M Mancini and L Panon (2022), “Quantitative Assessment of the Economic Impact of Trade Barriers after the Russian Invasion of Ukraine”, Auction Paper Series, Banca D’Italia, Upcoming

Borin, A., M. Manchini and D. Taglioni (2021), “Measuring Risk in the Global Value Chain”, World Bank Policy Research Working Paper No. 9785.

Boehm, CE, A Flaaen and N Pandalai-Nyar (2019), “Input Connection and Shock Transmission: Strong-Level Evidence from the 2011 Tōhoku Earthquake”, Economics and Statistics Review 101 (1): 60-75.

European Commission (2020), “Important Raw Material Resilience: charting a path to greater security and sustainability”.

Winkler, D. L. Wester and D. Knight (2022), “Impact of Russia’s Global Value Chain Participation”, M. Ruta (ed.), The effects of the Ukraine war on global trade and investmentWorld Bank.

Winkler, D and L Wuester (2022), “Impact of Russian Invasion of Ukraine for Intervaluation Chain”, VoxEU.org, 11 May.

Endnote

1 The index is obtained by combining the fluctuations in sectoral PMI delivery time which is due to the shock of global supply. These sectoral fluctuations depend on the relevance of different sectors in the world economy. The index compares well with the index GSCPI produced by the NY Fed, sharing high levels of correlation (about 90%). Sectors considered in the index are chemical, natural resources, automobile and auto parts, food and beverage, household and personal use products, industrial products and technical equipment.

2 Our index also highlights the effects of the severe lockdown measures introduced in China since mid-March, probably in response to the spread of the Omicron variant, which disrupted economic activity and supply.