1. Introduction
The supply chain in Asia has a significant regional dimension, making the East Asian countries of China, Japan, and Korea the most vulnerable to supply chain shocks. In the Association for Southeast Asian Nations (ASEAN) region as well as in Europe and America, these shocks are the primary source of economic transmission (
Baldwin and di Mauro 2020;
Kazunobu and Hiroshi 2021;
Vidya and Prabheesh 2020). According to
Guan et al. (
2020), supply chain losses associated with early COVID-19 lockdowns were primarily determined by the number of nations implementing restrictions; in particular, losses were more sensitive to the duration of a lockdown than to its strictness. This policy resulted in lower output and lower final demand for countries’ products. In addition, the pandemic has significantly affected public health, and by extension, GVCs. For example, a health shock may cause abrupt disruption of GVCs owing to numerous deaths, and physical and mental health problems. Furthermore, due to a large number of positive coronavirus cases, particularly with the emergence of new strains, governments worldwide have imposed restrictions on the international movement of capital, products, and services, thereby disrupting economic activity (see also
Danielle et al. 2020;
Ivanov 2020;
Vidya and Prabheesh 2020).
Importantly, GVCs capture the interrelation of trade, specialization, and growth among countries, and determine how a country participates in global production networks (
Hummels et al. 2001). GVCs allow countries to specialize in improving their exports’ quality and, consequently, increase their trade balance, current accounts, and economic growth (
Ge et al. 2020). The GVC concept involves the various activities required to deliver goods to final consumers (
Prete et al. 2018;
Hummels et al. 2001).
Meanwhile, researchers are still discussing ways to measure ASEAN countries’ participation in value-added trade. With international fragmentation, accurately measuring a country’s participation in GVCs requires information on the quantity of domestic and foreign value-added in exporting intermediate goods. Therefore, the calculation of the gross value is no longer feasible. Instead, participation in GVCs can be measured by decomposing gross exports based on backward and forward linkages (
Hummels et al. 2001;
Los et al. 2015;
Asian Development Bank 2019;
Borin and Mancini 2019). However, not all researchers have calculated the backward and forward linkage terms simultaneously; therefore, the assessment of ASEAN countries’ participation in GVCs is not comprehensive.
Furthermore, the measurement of GVC participation has received limited attention since it requires input-output data; accessing these data and an updated input-output database remains challenging (
Athukorala and Yamashita 2006;
Inomata 2017;
Qin et al. 2020;
Mandras and Salotti 2020). Compared with these studies, our study covered trade in value-added by using recently released Asian Development Bank Multi-Regional Input-Output (ADB MRIO) data, which allows us to trace the value-added in producing specific goods during the COVID-19 pandemic period. This study investigates the impact of the COVID-19 pandemic on GVC participation using a dynamic panel model. This model aims to capture dynamic adjustments in value-added trade, yet it has not been widely used in previous studies.
GVC participation is also directly proportional to a country’s GDP per capita. Thus, GDP per capita, which measures a country’s economic well-being or living standards, significantly impacts GVC participation. For example, to alleviate trade imbalances and sharp trade volatility, governments in high-income countries can finance intermediate export product production (see also
Koch 2020;
Felice and Tajoli 2021). Furthermore, GVC participation prospects attract foreign investment, which provides opportunities for profit-sharing as well as economic, technological, and industrial upgrading (
Gereffi and Lee 2016).
This study comprehensively assesses the COVID-19 pandemic’s impact on GVC participation under institutional quality, which differs for each country. We use the system generalized method of moments (SYS-GMM), a dynamic panel approach in the GVC framework, to estimate dynamic adjustment and address potential endogeneity issues. Using this approach, more exciting results have been discovered than the existing ones. The study also develops an analysis theory of trade in value-added by measuring worldwide countries’ GVC participation using the recently released ADB MRIO database. The empirical findings illustrate that the COVID-19 pandemic led to an average decrease in GVC participation. Furthermore, the GDP per capita plays a significant role in GVC participation in backward and forward linkages with higher quality institutions. Also, the government’s policy contribution is required in the economic recovery following the COVID-19 pandemic. Governments should promote value-added exports, particularly in high-value-added sectors. Government effectiveness and the rule of law must be realized to implement resilient GVCs.
The remainder of this study is organized as follows.
Section 2 discusses the theoretical background and undertakes the literature review.
Section 3 introduces our methodology.
Section 4 outlines the empirical results and undertakes the discussion. Finally,
Section 5 presents our concluding remarks and policy recommendations.
2. Theoretical Background and Literature Review
Studies on GVC participation are more effective when they consider the impact of the latest developments in cross-border production sharing. However, traditional trade theory calculates trade flows between countries using gross value, not reflecting each production chain’s value distribution. These traditional measurements result in overvaluations of international trade statistics, which rely heavily on imported intermediates. Moreover, this bias has increased (
Athukorala and Yamashita 2006;
Wang et al. 2018;
Borin and Mancini 2019). Hence, academics have begun to calculate each chain’s value-added contribution to represent real value. This is possible due to the fact that goods’ production is fragmented internationally (
Wang et al. 2018;
Inomata 2017;
Hummels et al. 2001;
Widodo 2008).
Here, we employ both backward and forward linkage approaches to generate a comprehensive measure of GVC participation. This method measures the domestic and foreign value-added content of gross exports originating from economic sectors worldwide (
Koopman et al. 2014;
Wang et al. 2018;
Kersan-Škabic and Belullo 2021). Studies show that if forward GVC participation is higher than backward participation, then the country’s economy or sector is significantly involved in upstream activities, and vice versa (
Prete et al. 2018;
Asian Development Bank 2019).
Importantly, international fragmentation activities have been severely affected by the trade disruption caused to the COVID-19 pandemic, which has also induced consumer and producer behavior changes; together, these have affected production and distribution networks (
Baldwin and di Mauro 2020;
Vidya and Prabheesh 2020). Furthermore, a new wave of infections is possible due to the emergence of a new variant, which would necessitate another protracted lockdown. For example, China is a major trading partner for many countries worldwide. Therefore, the pandemic’s impact on China directly risks value-added trade in several sectors of numerous countries. Researchers also note that COVID-19 most likely disrupts industries that are more dependent on GVCs, especially those with robust integration with the global supply chains (
Qin et al. 2020;
Kazunobu and Hiroshi 2021;
Ivanov 2020). For example, when COVID-19 was confined to China by a strict 2-month lockdown, the global value-added related to China’s electronics sector dropped by 27.3%. Meanwhile, the effects on China’s electronics sector lead to significant upstream production reductions of approximately 21% in the South Korean and Japanese electronics, and Australian metals industries (
Guan et al. 2020). Thus, governments worldwide have sought to control the spread of COVID-19 by administering vaccines and adhering to health protocols. Notably, a vaccination program is required to establish herd immunity in society, just as fiscal and monetary stimulus policies are needed to restore economic conditions (see also
Danielle et al. 2020;
Strange 2020).
Note that GDP per capita significantly impacts a country’s participation in GVCs and international trade. The higher the real GDP growth rate, the greater a country’s ability to generate expected future income to finance expenditures, such as imports of intermediate goods to produce intermediate exports (
Felice and Tajoli 2021;
Kazunobu and Hiroshi 2021). This measure is essential to sustainable development’s economic and developmental aspects (
Koch 2020).
Institutions are also critical to GVCs’ sustainability. In some industries, reliance on institutions is a technological aspect of the manufacturing process. Contracts are incomplete in countries with poor institutions (
Acemoglu et al. 2005;
Levchenko 2007). Then, the economy also suffers from inefficiencies. Evidence suggests that lack of appropriate contract enforcement leads to severe distortions. The institutional quality of trade partners has a substantial impact on bilateral trade, with better institutions leading to higher trade volumes. In this paper, we analyze the drivers of GVC participation using institutional data with the following two drivers: government effectiveness (bureaucratic competence and the quality of public service delivery) and the rule of law (the quality of contract enforcement).
4. Empirical Results and Discussion
This section discusses the estimation results from the GVC participation model, where the COVID-19 pandemic and GDP per capita are our variables of interest, with institutional quality as a control variable.
Table 4 presents the descriptive statistics.
4.1. Descriptive Statistics
Table 4 shows summary statistics for the variables of interest by country group. The list of country group members is shown in
Table A1. The sample average for forward GVC participation for the ASEAN countries is 0.46, with Laos having the lowest forward GVC participation at 0.21 in 2011. Conversely, Brunei had the highest forward GVC participation at 0.85 in 2015. The standard deviation of 0.16 reveals a minimal dispersion of the sample means. Similarly, the sample average for backward GVC participation for the ASEAN countries is 0.29, with Brunei having the lowest at 0.08 in 2010 and Singapore the highest at 0.56 in 2012. Again, the standard deviation of 0.13 reveals a minimal dispersion of the sample means.
The sample mean for GDP for ASEAN countries is 8.62, with Cambodia having the lowest at 6.79 in 2010, while Singapore has the highest at 11.02 in 2019. The standard deviation of 1.24 reveals a large dispersion among countries from the sample average of 6.79%. In these countries, the sample averages for the institutional variables of government effectiveness and the rule of law are 0.35 and −0.02, respectively.
Comparatively, NA has the highest average forward GVC participation of 0.56, while the EU has the highest average backward GVC participation of 0.39. High GDP per capita in developed countries drove high GVC participation, which had an average of 10.12 in the EU and the highest in Luxembourg at 11.56 in 2019. In general, NA has the highest average values for government effectiveness and rule of law, whereas ASEAN has the lowest. The rule of law has the lowest institutional score in ASEAN (−0.02), while NA has the highest (1.67).
4.2. Panel Unit Root Test
Next, we perform the unit root test for the variables of interest using LLC tests. As shown in
Table 5, all variables are stationary since the LLC test’s
p-value is less than 5%, which means that the null hypothesis (Ho)–all panels containing a unit root–is rejected.
4.3. Backward and Forward Linkage Global Value Chains Participation
Figure 1 demonstrates that NA had the highest average GVCF participation over the observation period (0.64). Meanwhile, the East Asian countries group had the lowest score (0.46). In terms of backward linkage, the EU has the highest average GVCB participation of 0.44, while NA has the lowest of 0.21. Furthermore,
Figure 1 reveals that forward GVC participation by major countries dominates backward linkages.
In ASEAN, based on backward linkage, Singapore has the highest GVC participation rate, with a GVCB value of 0.56 in 2012. Notably, Singapore’s GVCB participation remained high until the pandemic outbreak. However, in 2020, it dropped to 0.457. The substantial contribution of FVA to value-added exports suggests that a greater downstream area may be integrated into the higher value-added production stage. In terms of exports, Singapore has a high level of vertical specialization, particularly in the manufacturing sector (
González and Kowalski 2017). Furthermore, according to
Prete et al. (
2018), comparatively developed countries have made major contributions to the creation of FVA.
A forward linkage perspective reveals that most ASEAN countries best use their local resources (
González and Kowalski 2017). Notably, the pandemic interrupted the international production network, on average.
Figure 2 illustrates that during the introduction of the lockdown restriction, the DVA embedded in intermediate inputs provided to the first importer and subsequently re-exported to a third country (DVA_INTrex) of all ASEAN countries exhibited a downward trend. Consequently, the pandemic hampered ASEAN countries’ efforts to increase GVCF participation: ASEAN GVCF participation decreased, on average, from 0.482 in 2019 to 0.478 in 2020.
South Korea (hereafter Korea) has the highest GVC participation rate based on backward linkages in East Asia, with a GVCB participation value of 0.40 in 2012. GVCB participation in Korea remained relatively high until the emergence of the pandemic in 2020, it dropped to 0.286. In the early stages of the COVID-19 pandemic, GVCB participation in China and Japan decreased by 4.44% and 6.02%, respectively. This was mainly due to restrictions that resulted in a 5.87% decline in FVA from the importer, who was embedded in intermediate exports to manufacture its exports (FVA_INT). According to the forward linkage perspective, China’s GVCF participation decreased significantly to 13.54%, reflecting China’s exports’ high domestic value-added content (
Kee and Tang 2016). During the early stages of the COVID-19 pandemic, the DVA_INTrex of East Asian countries decreased by 6.89% (
Figure 2).
Luxembourg, with a GVCB participation value of 0.73 in 2011, has the highest GVC participation rate based on backward linkages in the EU. Still, the GVCB value decreased due to the pandemic to 0.66 in 2020. Malta was another European country with a high GVCB score of 0.58 in 2018, also 0.55 during the pandemic. According to the forward linkage perspective, Romania experienced a considerable drop in GVCF of 8.94%. During the early stages of the COVID-19 pandemic, Romania’s DVA_INTrex declined by approximately 2.21%.
Canada has the highest GVC participation rate in NA based on backward linkage, with a GVCB score of 0.26 in 2019. However, due to the pandemic, this score declined by 3.52% to 0.247 in 2020. A forward linkage perspective shows that the United States and Canada consistently have high GVCF participation rates. In 2020, the projected value of GVC participation in the United States was 0.59. However, during the pandemic, the United States experienced a decline in DVA_INTrex of approximately 20.53% compared to 2018 (
Figure 2).
4.4. The SYS-GMM Dynamic Panel Estimation
Table 6 presents the results of the SYS-GMM estimation. This study uses the SYS-GMM dynamic panel approach to avoid cross-sectional regressions, as in previous studies, leading to potential bias (
Zergawu et al. 2020). Furthermore, it provides more reliable results by addressing the endogeneity problem through the system-GMM estimator (
Arellano and Bover 1995;
Blundell and Bond 1998).
For GMM-type instruments, this model uses the first and higher lags of the predetermined variable, and the second and higher lags of the endogenous variable. The first lag-dependent variable, GVCF or GVCB, is chosen as the predetermined variable. The COVID-19 pandemic dummy is treated as an independent variable to examine the pandemic’s effect on GVC participation. Furthermore, we incorporate GDP per capita, which influences GVC participation, as an independent variable and institutional variables as control variables (see also
Mouanda and Gong 2019;
Koch 2020;
Zergawu et al. 2020). The preliminary assessment suggests that our variable of interest is not completely exogenous, and that robustness checks with a two-step system GMM are required to address endogeneity issues in the model (
Arellano and Bond 1991;
Arellano and Bover 1995;
Blundell and Bond 1998).
The analysis was performed using STATA version 17.
Arellano and Bond (
1991) tests for autocorrelation in differences are AR (1) and AR (2). As previously stated, Hansen’s test is used for over-identification constraints (
Zergawu et al. 2020). Since GVC is a process, the lagged form of the variable was included in the models to allow for partial adjustment of the GVC to its long-run equilibrium value. Consequently, previous levels of GVC influence the current levels.
As shown in
Table 6, the coefficient of the lagged GVC variable was positive and significant in all regressions estimated using the
Arellano and Bond (
1991). The positive sign of the coefficient indicates that the GVC of global countries in previous periods contributed positively to that of the current period as a result of raw material imports in the previous period. Notably, approximately 35.3% of domestic value-added exports reflect the previous period’s exports. Furthermore, the results of the SYS-GMM regression show that GDP per capita has a positive and significant effect on GVC participation, consistent with previous research (
González and Kowalski 2017;
Amendolagine et al. 2019;
Felice and Tajoli 2021). These findings indicate that GDP per capita affects both forward- and backward-linkage GVC participation with coefficients of 0.178 and 0.050, respectively. This difference between the coefficients may be due to the performance of developing countries, which have lower levels of GDP per capita than developed countries. In addition, for most of the world’s countries, GVCF dominates GVCB.
Furthermore, we find that COVID-19 has a significant negative (−0.006) impact on international trade in value-added, and forward and backward linkages (
Kazunobu and Hiroshi 2021). Due to the COVID-19 pandemic, policies such as border closures and quarantine-related restrictions limited trading activity, and reduced the use of domestic and foreign resources. A longer lockdown should cause more significant losses and potentially suffer inoperability sectors over time (
Guan et al. 2020;
Danielle et al. 2020;
Strange 2020).
Consequently, the supply of intermediate inputs from other countries is restricted, resulting in decreased current aggregate demand and aggregate supply (
Baldwin and di Mauro 2020;
Ivanov 2020;
Strange 2020). Restrictive policies during the pandemic seems to cause shocks in supply and demand. These shocks are the reasons behind economic transmission which limits international sharing distribution activity and reduced the use of domestic and foreign resources. The further impacts are lower output gap and final demand for the countries’ products. This implies that the COVID-19 pandemic will negatively impact global trade (
Qin et al. 2020;
Vidya and Prabheesh 2020;
Kazunobu and Hiroshi 2021). However, despite the recent recovery in health and economic conditions, it is still too early to declare it an epidemic due to the possible emergence of new strains.
The control variable coefficients reveal several interesting findings. We use quality institutional variables as the control variables. Despite the large differences in regional institutions and high political volatility among countries, institutions play an important role in GVC participation (
Ge et al. 2020). Institutions play a role in contract enforcement, property rights, and shareholder protection, among other aspects. This role is critical since contracting imperfections between private parties affect production relationships (
Levchenko 2007). Inefficiencies and substantial distortions occur in this situation. This situation may be due to segmented factor markets (
Acemoglu et al. 2005;
Levchenko 2007). Larger trade volumes are associated with countries with better institutions, which are usually developed countries.
Gereffi and Lee (
2016) have emphasized the importance of synergistic governance as a strategy for simultaneously achieving economic and social upgrading among GVC and industrial cluster actors. Further,
Levchenko (
2007) argues that differences in institutional quality can be a source of comparative advantage and an essential determinant of trading patterns.
Our findings imply that institutional quality has a positive and significant impact on GVC participation in countries worldwide. Furthermore, local institutions may significantly impact the location of production chains, resulting in the spread of GVCs throughout the region. Our findings show countries may participate more in GVCs when they have higher government effectiveness; better bureaucracy competence and quality of public service delivery; the better rule of law; higher quality of contract enforcement, the police, and the courts; and a lower likelihood of crime and violence. These findings are consistent with previous studies (
González and Kowalski 2017;
Amendolagine et al. 2019;
Mouanda and Gong 2019;
Ge et al. 2020;
Zergawu et al. 2020).
4.5. Robustness Test
To ensure the validity of our findings, we modeled the regressions using other COVID-19 variables, such as COVID shocks, which indicate economic fluctuations (
Zergawu et al. 2020). COVID shocks are based on the gross export gap (hereafter, the export gap), the difference between real and potential exports (
Hubbard et al. 2014). We chose the export gap since it directly impacts trade fluctuations. Further, identifying this gap can help a country achieve its best export performance (
González and Kowalski 2017). A recession occurs when the potential value exceeds the real value and vice versa. As potential exports are difficult to observe in the real world, they are frequently proxied by their expected value. We used the Hodrick-Prescott (HP) filter to determine the expected export value (
Hubbard et al. 2014;
Gordon 2014). Indeed, COVID shocks reveal changes in exports over time. Furthermore, this method helps examine whether other aspects of COVID-19 affected countries’ GVC participation.
The robustness test results reveal that the COVID shock harms GVC participation, forward (−0.059) and backward (−0.082) linkages. The increasing fragmentation of production makes countries that are mostly domestically oriented vulnerable to global shocks. Furthermore, the regression results in
Table 7 show that GDP per capita has the expected sign and magnitude. The two index measures have positive and significant coefficients when controlling institutional quality. This indicates that institutional factors in the exporting country, such as government effectiveness and the rule of law, have a critical and significant effect on export performance. Notably, the export performance is enhanced by market-oriented institutional systems in the exporting country. In both backward and forward GVC participation models, all factors proxying institutional quality are positive and significant. Thus, our findings support and emphasize the role of institutional quality in trade performance (
Acemoglu et al. 2005;
Levchenko 2007;
Francois and Manchin 2013;
Ge et al. 2020;
Zergawu et al. 2020). Moreover, the estimation results from these alternate measures are consistent with the preliminary results.
Finally, our specification tests supported our instrument’s validity. The over-identification and AR (2) test statistics at the 95% confidence level revealed no evidence of poor instrument selection or inadequate model specification in any regressions. Consequently, the findings of the dynamic panel are relatively reliable, indicating that the COVID-19 pandemic has a significant impact on GVC participation. Similarly, with the quality of institutions as a control variable, GDP per capita tended to significantly increase GVC participation. Finally, our estimation results show that even after addressing possible omitted variables and endogeneity issues by employing SYS-GMM-based panel data estimators, the COVID-19 pandemic is crucial for GVC participation (
Baldwin and di Mauro 2020;
Qin et al. 2020;
Guan et al. 2020).
5. Concluding Remarks
The COVID-19 pandemic’s fluctuating economic conditions can destabilize global output and lead to possible negative trade growth. Moreover, shocks in world manufacturing centers of a country can spread to other countries since each country is currently connected to GVCs. This study examines the influence of the COVID-19 pandemic on GVC participation using the ADB MRIO database from 2010 to 2020. We employ backward and forward linkage approaches based on value-added exports to address the overvaluation problems in gross exports. We also investigate potential GDP per capita determinants affecting GVC participation and use institutional quality as a control variable. In addition to assessing dynamic adjustment observations, we use the system generalized method of moments estimator to address potential endogeneity concerns.
The empirical results illustrate that the COVID-19 pandemic led to an average decrease in GVC participation. Furthermore, GDP per capita plays a significant role in GVC participation in backward and forward linkages with higher-quality institutions. We discovered that forward GVC participation dominated backward linkage in most countries, indicating that these countries’ economies or sectors are heavily involved in upstream activities. North American countries had the highest average GVC participation from the forward linkage perspective. Meanwhile, EU countries have the highest backward linkage values.
This study demonstrates the importance of government assistance in recovering economic and health conditions following the COVID-19 pandemic. Furthermore, governments worldwide should expand value-added exports to increase GVC participation, particularly in leading sectors. High-quality institutions must also be realized to implement resilient GVCs. Finally, more research is needed to determine a country’s position in GVCs so that each government can improve its comparative advantage.