The coronavirus pandemic (COVID-19), which broke out in December 2019, is changing the lives of people and economies around the world. Unlike typical economic shocks, COVID-19 spreads globally through human-to-human contact and because of its diversity of biological variation, the impact of the pandemic is being prolonged. The spread of COVID-19 is acting as a new shock factor upon global value chains (GVCs) in terms of crisis management, as it has increased the biological risk caused by infectious diseases and limited the movement of human and physical resources. More specifically, in early 2020, because of the spread of COVID-19 in China, so called the world’s factory, production shutdowns were unavoidable and this disrupted production in a number of associated countries. Then in 2021, as unexpected digital demand spiked due to the continuation of COVID-19, the supply of semiconductors has encountered difficulties keeping up with the demand and production has been delayed in many countries. Considering these cases, the impact of COVID-19 on GVCs is substantial and proper policy responses are required.

   Meanwhile, it is highly difficult to directly identify the impact of COVID-19 on GVC structures. This is due to the significant difficulties involved when examining the impact of COVID-19 on GVCs, as it is continuously changing and intertwining with various factors such as policy uncertainty before COVID-19, changes in production and demand and digitalization of production. Also, the impact of COVID-19 is likely to be combined with pre-existing factors which have induced changes in GVC structure. Therefore, in this study, we comprehensively look at the direction of the ongoing GVC changes after COVID-19 based on the literature and quantitative data, and derive government support policies and tasks. The summary of findings is as follows.

   First, we attempt to identify the factors influencing GVC structure changes before COVID-19. The factors are protectionism, increased policy uncertainty, changes in production environment and demands in Asia, introduction of new technologies, digitization and automation of production, disasters and health risks, etc, all of which increase or decrease trade costs. Based on international input-output tables, when looking at the structure of participation in production, the linkage structure of final goods and intermediate goods between countries and the length of production, our analysis is that these complex factors have generated structural changes such as strengthening GVCs in Asia, localization of production network and simplification of production length, which means that proximity to markets has increased.

   Second, we explore the changes in GVCs after COVID-19. Decision-making that determines a company’s GVC structure is based on theoretical factors including transaction costs, property rights, relative price differences in production factors, overseas transfer costs of work, complementarity between production technologies and investment climate as production base (e.g. proximity to major markets, factors of production, infrastructure). Therefore, if these factors have not undergone significant changes due to the development of information and communication technology, the structural changes in GVCs due to COVID-19 are expected to be limited. However, if COVID-19 increases the possibility of accelerating the digital transformation or production automation, changes in GVCs after COVID-19 should be considered to be largely driven by changes in production technology.

   Third, COVID-19 has a negative impact on both sides of supply and demand of GVCs. When considering the proportion of overseas demand and supply of production in major countries, in the case of an external demand shock caused by COVID-19, the decrease in US demand is expected to affect Asia, and the decrease in China’s demand is expected to affect developing countries. In the area of external supply shocks, the supply shock is predicted to be particularly substantial in developing countries. When checking the trend of trade and investment after COVID-19, in trade, we have found the role of Asia’s GVC has increased and regional trade functions in Asia and Europe have become stronger. In investment, we found regional production bases in regional central countries (the United States, China, and France) expanded, and an overall trend of localization of production networks is observed. This means that the GVC structure since COVID-19 has maintained or strengthened changes in the role of Asia as a production base and reduced production length (i.e., increased production proximity to consumer markets). Also, although green field investment in most industries has been on the decline since COVID-19, investment in the telecommunications industry has increased, capturing responses to digitalization in major countries.

   Fourth, this study conducted an empirical analysis based on the gravity model to analyze the actual impact of various external shocks on GVC trade (intermediate goods trade). As a result, it is confirmed that external shocks such as natural disasters and health risks are negative factors on GVC trade, especially on the production of commodities (forward-linked) such as raw materials. In addition, the impact of external shocks on GVC trade was smaller in countries with higher levels of trade openness and digitalization. These results suggest that Korea, which has a high proportion of intermediate goods exports, is highly likely to be sensitive to external shocks, and that it is necessary to maintain a high degree of trade openness and digital access with major production-linked countries to mitigate the extent of such shocks.

   Fifth, in order to examine the microscopic changes before and after COVID-19, we analyzed the global production network changes of global leading companies. Analyzing changes in the production and sales structure of representative companies in countries leading certain industries can be a crucial clue to identify changes in GVCs after COVID-19, but due to concerns over leakage of sales know-how, information on production and sales networks is restricted from collection through surveys or expert interviews. As an alternative, the analysis was conducted using Bloomberg Supply Chain Analysis (SPLC) containing relationship values between the analyzed companies and their suppliers and customers. The results of our case analysis of global leading companies showed similar flows to previously identified changes in GVCs. Taiwan’s share increased in all supply chains of leading semiconductor companies, while Japan and France’s share increased in global automakers’ supply chains. Japanese companies’ share increased in the supply chain of the world’s top three clothing companies, while French companies’ share in Selling, General & Administrative expenses (SG&A) increased. In other words, the role of production in East Asia and some European countries has increased. In addition, there are clear indications that digitalization and automation of production has progressed under COVID-19, such as the introduction of robots or expansion of investment in digital technology in the semiconductor, automobile and fast fashion industries.

   Last, in this paper, we conducted a survey of 229 overseas Korean companies in the industries where Korean companies have entered global markets most actively — electronics, transportation equipment, textile, clothing, and shoe manufacturing — to examine changes in GVC structure and policy demands in these industries before and after COVID-19. According to the results of the survey, compared from before and after COVID-19, the proportion of raw materials and intermediate goods supplied (i.e. procurement/importation) from East Asian sources as well as the proportion of raw materials and intermediate goods sourced from the local countries the companies had increased. When it comes to sales networks, we found an increase in the proportion of China, a reduction in the proportion of Korea, ASEAN and EU, and an increase in the proportion of sales to all local markets except for the EU.

   Meanwhile, the results indicate that most of the Korean companies surveyed had suffered loss during COVID-19, of which approximately one-third have recovered from the damage sustained. In particular, the fundamental causes of losses caused by the COVID-19 pandemic can be analyzed in various aspects of demand and supply, such as “deterioration or restriction of working environment due to the spread of infection or lockdown,” “reservation, reduction, cancellation of orders from domestic and foreign supply lines/customers,” “delay or disconnection of imports of raw materials, parts and products,” and “deterioration of the logistics environment.” In order to overcome COVID-19, overseas Korean companies first responded by mobilizing their internal capabilities by for instance “reducing local employees or reducing labor costs”, “adjusting the utilization rate”, or “adjusting inventory.” Relocation of production bases, which were directly triggered by COVID-19, accounted for 6.6% (15 firms) of all surveyed companies, 6.6% (15 firms) of changes in procurement routes, and 7.0% (16 firms) of alterations on sales route. As above, very few companies had changed their production networks and most of these were surveyed as companies operating in Vietnam. In addition, Korean companies recognize the digitalization of production and the spread of the green economy as risk factors for GVCs and in the case of SMEs, they seem to lack sufficient preparation for these transitions. According to the results of this survey, before and after COVID-19, overseas Korean companies are generally strengthening their dependence on production in China, ASEAN, and South Asia, and simplifying production paths centered on local markets in GVCs. They evaluated COVID-19 as a short-term factor, so they are primarily responding to it by utilizing internal resources of their companies. And there have not been much changes in the GVC structure of Korean companies with COVID-19 as a direct factor.

   In summary, our analysis shows that the changes in the GVC structure after COVID-19 are relatively more influenced by existing factors, such as increased demand in Asia, changes in the production environment, and policy uncertainty such as the US-China trade dispute, rather than the direct factors of COVID-19. However, as examined in the empirical analysis, health disasters are a major negative factor in trade of intermediate goods, and overseas Korean companies have suffered from production reduction and sluggishness in terms of supply, and a decrease in sales/exports and demand due to COVID-19. Therefore, in this study, we propose two policy directions: responding to short-term factors, such as damages and supply chain disruption due to COVID-19, and responding to mid- to long-term factors, such as the rise of production networks in Asia, digitalization and automation of production, and the rise of the green economy. Short-term response means short-term policy support to alleviate disruption of GVCs caused by the direct impact of COVID-19. More specifically, we propose strengthening international cooperation in labor mobility and trade liberalization and providing customized support by country and industry to respond to shocks in supply chains. In addition, in consideration of the mid- to long-term factors that currently affect changes in GVCs, we suggest strengthening production linkage centered on ASEAN and India, reinforcing the establishment of the regional value chain (RVC) of Korea through support for local productivity improvement and participation in mega FTAs, establishing a global vaccine hub for rapid health risk response, improving digital connectivity and increasing robustness in GVCs based on the Digital New Deal, and providing support for low-carbon production in preparation for a green economy based on the Green New Deal.