Global supply chain risks and implications for Korea [BOK Issue Note 2023-4]

BOK Issue Note
COVID-19 글로벌 공급망 인플레이션 중국 러시아
Research Department(02-759-4200)

Since the outbreak of COVID-19, the deepening global supply chain disruptions caused by the continued epidemic prevention and control measures and the Russian invasion of Ukraine have intensified inflation risk and undermined economic activity. Although these supply chain disruptions have significantly moderated since last year, China’s reopening, in the short term, and geoeconomic fragmentation, in the medium term, remain major risks to global supply chains.

China’s recent reopening is expected to relieve the supply chain disruptions that have been driven by its Zero-COVID policy during the pandemic and normalize the economy. To assess the impact, this paper constructs a supply chain pressure index based on the methodology of the Federal Reserve Bank of New York. The supply chain bottlenecks in China have contracted global trade by restricting the supply of intermediate goods and raising costs, helping boost the inflationary pressure in major countries. Analysis of the impact shows that the supply chain disruptions in China (one standard deviation, three standard deviations during Shanghai’s shutdown) slowed global trade by 0.3% to 0.5% over one year and raised global inflation by 0.2%p (CPI) to 0.5%p (PPI).

Going forward, although China’s continuing reopening would boost the global economy, uncertainty regarding inflation in major economies remains due to a mixture of the downside factor of reduced supply chain disruptions and the upside factor of increased demand for raw materials. The moderation of supply chain disruptions in China may put downward pressure on global prices, but as the extent of the disruptions caused by the recent COVID-19 resurgence was less serious than during past pandemic waves, the effect of additional moderation may not be large. On the other hand, if the pent-up demand rises sharply, it could boost raw material prices, increasing global inflationary pressure.

In the medium term, fragmentation due to the U.S.-China conflict and geopolitical tension may expand global supply chain risks. Fragmentation had a significant impact on the global economy by constraining trade and technology diffusion and the mobility of labor and capital (IMF, 2023). As Korea’s key products have significant exposure and rely on imports for raw materials, if risks do increase, the impact is likely to be serious. For instance, if Korea’s goods exports to China are restricted amid the U.S.-China trade dispute, Korea’s gross exports would decline by 1.0% to 1.7%, along with a decline in GDP of 0.1% to 0.3%, in the short term. Meanwhile, as for semiconductors and batteries, which are major products that have recently been exposed to trade and technology fragmentation, fragmentation offers positive factors, such as technology partnership and market penetration opportunities, and negative factors, such as the deterioration of the domestic industry ecosystem and contraction of employment. Therefore, it is necessary to mitigate risk through geographic and product diversification and technological innovation.

The changes that have occurred in global supply chains since the outbreak of COVID-19 call for a new perspective and response in terms of the macroeconomy and across industries. It is to be noted that, in terms of the macroeconomy, the inflationary pressure driven by supply restrictions may strengthen the trade-off between prices and the economy, unlike in the pre-pandemic period, and in the medium term, the realignment of supply chains could affect growth potential. Moreover, changes in both the supply side and demand side need to be carefully considered in order to assess economic slack. Industries need to take this opportunity to implement the restructuring that has been delayed, in response to the unusually strong demand from China to date, and strengthen the resilience of supply chains through geographic and product diversification. Furthermore, as the recent fragmentation is related to diplomatic and security factors as well as economic ones, the private and public sectors should establish a system for collaboration-based responses and actively participate in global discussions on new technologies and climate change.

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