key: cord-0045570-wp9dpiqs
authors: Kimura, Fukunari; Thangavelu, Shandre Mugan; Narjoko, Dionisius; Findlay, Christopher
title: Pandemic (COVID‐19) Policy, Regional Cooperation and the Emerging Global Production Network(†)
date: 2020-06-09
journal: nan
DOI: 10.1111/asej.12198
sha: 05c804be8095bbc0d12eb373919ca7547c169eab
doc_id: 45570
cord_uid: wp9dpiqs

In this paper, we explore the possible policy responses to the COVID‐19 pandemic shock as well as the related economic (financial crisis) shocks on trade and global value chains (GVC) in East Asia. We find that regional policy coordination is critical to mitigate and isolate the pandemic shock. It is important to identify the pandemic events early to flatten the pandemic curve at the national and regional level. This supports a recent study by the World Bank (2020), which highlights the importance of early mitigation policies during the pandemic shock. The cost of the pandemic and economic shocks will increase significantly when several countries in the region experience the pandemic shock concurrently. In this case, flattening the regional pandemic curve becomes important. The results also indicate the need for greater coordination in East Asia to mitigate the pending economic shock in terms of unemployment, corporate bankruptcy and financial market fragility. The paper also highlights that the stability of the GVC network is critical during the pandemic in terms of hedging the risk of disruptions to the procurement of critical medical and health products as well as maintaining service linkages to manufacturing, such as the logistics sector. Regional policy coordination and the stability of GVC will be valuable in the post‐pandemic recovery of the region.

The World Health Organization (WHO) declared the coronavirus disease (COVID-19) a pandemic in March 2020. Few countries in the world have escaped the disease: by 10 April, 1.6 million cases had been confirmed worldwide and 96 000 people had died. In comparison, during the spread of the severe acute respiratory syndrome (SARS), another coronavirus, only 8098 people were infected worldwide and 774 died over [2002] [2003] [2004] . SARS was less infectious but had a higher death rate and individuals infected with SARS were more contagious once they started showing symptoms. COVID-19 is relatively contagious than normal seasonal flu, which can be asymptomatic and has a higher death rate.

The public health response to COVID-19, including lockdowns, has sent shocks running up and down the supply side of production processes as well as the demand side. Shocks with worldwide significance are not uncommon. However, there are some key differences in the COVID-19 shock compared with others recently experienced. These differences both add to the significance of COVID-19 and shape the potential for the recovery.

For example, as oppose to policy shocks that affect the supply side of the economy, such as the US-China trade war, COVID-19 has led to tremendous disruptions on both the demand and supply sides of the global value chain (GVC). Global shocks are also associated with natural disasters, which lead to physical damage to industrial production. In contrast, in the current situation, global capacity remains in place, just out of use, creating scope for a more rapid recovery than that of a natural disaster.

Research has found that the response to natural disasters can be relatively fast if production networks are flexible and adapt. For example, Ando and Kimura (2012) studied the impact of the 2011 Great East Japan Earthquake, primarily a supply-side shock, on Japanese domestic and international production networks in the machinery industries. They compared it to the impact of the global financial crisis, which was primarily a demand-side shock. The comparison was challenging because of the scale and prolonged impact of the global financial crisis. Their study indicated that the speed of the response of Japanese industries to both shocks was related to the stability and robustness of production networks and their links with East Asia. Abe and Thangavelu (2012) also observed the significant physical damage to production and industrial activities from natural disasters such as the Great East Japan Earthquake. Based on the coordinated efforts of private businesses in the supply chain, the supply chain recovery was faster than expected in that case. A study by Noy and Shields (2019) on the economic impact of SARS found that the impact on China, Hong Kong, Singapore and Taiwan was very short-lived and that the economies recovered within two to three quarters. This was attributed to the stronger containment policies of the countries but also to the flexibility of the GVC.

The expected effects of the COVID-19 pandemic are exceptionally large. A recent World Bank study projected that global GDP would fall by more than 2 percent in 2020 (World Bank, 2020) . In comparison, in the year after the global financial crisis, world GDP growth declined from 5.6 percent in 2007 to zero in 2009. Similarly, in the Asian financial crisis, annual GDP growth rates in East Asia fell from an average of nearly 8 percent in the previous decade to a region-wide average of zero over 1997-1999. Growth rates did not become negative, except in Thailand and Indonesia. The International Labour Organization (ILO, 2020) projected that the COVID-19 pandemic would lead to a 6.7 percent decline in working hours, which is equivalent to 195 million full-time workers in the world, including approximately 125 million full-time workers in Asia and the Pacific. Overall, the social distancing measures are affecting approximately 2.7 billion workers, which represents approximately 81 percent of the world's workforce.

The expectation of the devastating economic effects of COVID-19 has led to the adoption of massive relief packages by governments around the world. On 4 March 2020, China's Ministry of Finance announced a special fund totalling CNY110.48 ($16 billion) as epidemic control measures. China also allocated CNY1.85 trillion ($261 billion) of the quota of new issues of local government bonds to support provincial-level governments (Huang et al., 2020) . 1 On 26 March 2020, the US Senate passed a $2.2 trillion relief package for the US economy (Beckett et al., 2020) . Several other pandemic relief packages have been announced by EU countries, Australia and East Asian countries. Several studies have highlighted the risk of a financial crisis following the pandemic shock (IMF, 2020) .

In this paper, we explore the possible policy responses to the pandemic shock as well as to the shocks to production and trade, especially through GVC. We focus on the East Asian region and the role of regional economic cooperation, through the ASEAN Economic Community and the Regional Comprehensive Economic Partnership (RCEP), which comprises ASEAN plus six countries: Australia, China, India, Japan, Korea and New Zealand. Drawing on the experience of the response to earlier global shocks and natural disasters, the present paper also focuses on the operation of the GVC and the value of maintaining linkages in manufacturing and services. According to these earlier experiences, the region's recovery in the post-pandemic period is dependent on regional trade and investment policies as well as the flexibility of GVC. This paper identifies two different shocks emanating from the COVID-19 virus. The pandemic shock is related to human health and well-being, while the subsequent economic shock (including the risk of a financial crisis) is due to the disruptive effects of the pandemic on economic activities and to the effects of public health policy responses, with both leading to heavy disruption of GVC on the supply and demand sides of production and consumption.

A recent study by Eichenbaum et al. (2020) examined the interaction of a pandemic shock and an economic shock (but not the possibility of a financial shock nor the GVC effects). People respond to the epidemic by cutting back on spending, which affects the spread of the virus. However, they do not fully internalize the latter effect, which creates a role for government and policies to internalize these effects through containment, even though they lead to a deeper economic impact.

In this paper, we try to identify and isolate the effects of the pandemic shock from the economic shock. Without a policy response, the social costs of the pandemic in terms of human isolation, death, household disruption and depression will be significant. It may have an immediate economic effect and, if persistent, the pandemic shock may also increase the scale of the economic shock that follows it if there is no relief.

With respect to policy responses, it is important to load the cost of the response to the pandemic (mitigation, isolation, lockdown and economic disruption) at the beginning of the pandemic cycle, to quickly flatten the pandemic curve at the national and then at the regional level. This helps match the demand for health services with the capacity available. The World Bank (2020) study highlighted the need for quick policy reactions (early investments in disease surveillance, testing, tracking and quarantines), as occurred in Korea and Singapore, to successfully flatten the pandemic curve. These reactions, however, have an economic cost, for which relief is also recommended.

Regional cooperation can help in the response to both the pandemic shock and the economic shock. We provide examples below but, briefly, a coordinated approach to the movement of people can reduce the extent of transmission. The adoption of a coordinated approach, internalizing the costs of not responding to the pandemic, reinforces this effect. The benefits of relief packages also spill over to other economies in the region. Internalizing these effects among countries benefits from coordination.

The paper also finds that the stability of the GVC network is critical during and after the pandemic. First, it is important to avoid disruptions to the procurement of critical medical and health products, by maintaining the stability of the service linkages, such as those provided by the logistics sector. Second, the paper highlights the value of the coordination of policy relevant to the operations of the GVC network more generally in the post-pandemic recovery period.

The paper is organized as follows. The next section briefly discusses the economic impact of the pandemic shock on East Asia. Section III discusses the possible pandemic policy response scenarios of the region, taking the Government of China's policy response to the pandemic as a case study. Section IV concludes the paper and includes a policy discussion.

The pandemic and the response to it have significant effects on both the demand and supply sides of the economy. 2 Demand for goods has dropped significantly because of social distancing and high levels of uncertainty, despite fiscal stimulus. The economy may return to normal activities in a month or two, once the number of new COVID-19 virus cases falls below a certain threshold level. Eventually, the drop in demand for goods will reverse: the item not bought today can be purchased later. However, we might not be at the same starting point as the initial stopping point. We could only expect these points to be similar if the pandemic shock is temporary.

On the supply side, in the immediate term, there are significant disruptions to GVC because people cannot go to work, transport systems are disrupted, suppliers shut down and borders are more difficult to cross. In addition to production disruptions, we observe significant disruptions to service linkages and service sector activities. In particular, the breakdown of the ability of the logistics sector to move intermediate goods in GVC leads to disruptions to production in other connected countries. This disruption leads to multiplier effects up and down the GVC and greater negative impacts on participating countries.

In addition, the service sector is disrupted by the restrictions on the movement of people, which directly affects key services such as tourism, finance, hotels and restaurants, business, and aviation. The key element of the COVID-19 shock is the restriction on the movement of people, as in the current state of the economy we are unable to identify and isolate the unobservable (those with the COVID-19 virus), which directly affects service activities linked to the movement of people. This impact will be more significant in countries that rely heavily on service activities to generate income and employment.

The impacts on the financial system are also significant and will increase if the pandemic shock is prolonged. There will be large negative wealth effects from unemployment and large corporate bankruptcies globally, leading to financial fragility. Mortgage default rates are expected to rise across Europe and USA, reflecting the signs of financial fragility. The global fiscal and monetary responses are designed to mitigate both the large negative wealth effects as well as the pending financial market crisis, and there could be several stages of fiscal and monetary policy stimulus across various countries over the coming months.

There could be medium-to long-run effects of pandemic shocks preceded by economic shocks to the domestic and regional economies. The medium-and long-run effects of economic shocks will be a function of the persistence of the pandemic. The key to pandemic policy is to mitigate and isolate the effects with strong regulations so that such shocks lead to only temporary disruptions to economic activities and to avoid significant loss of life. It is also important not to disrupt long-run processes of technological progress and to avoid the loss of production capacity through bankruptcies. Long and persistent pandemic shocks (more than 6 months) could lead to deep structural adjustments in the economy.

The devastating effects of COVID-19 are clearly reflected in various forecasts of the impact on global and regional GDP. Recent World Bank estimates showed that global GDP would fall by 2.1 percent in 2020 (World Bank, 2020: table I.2.1). The Economist Intelligence Unit (EIU, 2020) predicted that most G20 countries will be in a recession, and that the greatest falls in GDP will be in Italy, Germany and France (Table 1) . The EIU expects GDP in the USA to fall by 2.8 percent in 2020. Table 1 shows the relief and stimulus packages provided by the respective developed countries to mitigate the negative impact on the economy, businesses and workers (in the right-hand column).

All of the Asian economies will contract. Table 2 shows the results of two scenarios developed by the ADB. The scale of these effects is related to the strong trade and service linkages between China and ASEAN countries, driven by GVC (ADB, 2020; Figure 1 ). China's share of ASEAN exports is approximately 13.9 percent. On the supply side, ASEAN imports approximately 20.5 percent of its total imports from China. Within ASEAN, Cambodia and Thailand, which have very strong service trade linkages in tourism and production with China, are expected to experience larger declines in GDP. Relatively large contractions from a persistent pandemic shock are also expected in Indonesia, the Philippines and Vietnam.

The ADB (2020) forecasts only considered the impact of the pandemic in China on Asian countries and did not account for the current pandemic in the EU and the USA, which is more likely to cause a disruption on the demand side. Trade with the USA and the EU accounted for 9.3 and 10.2 percent of total ASEAN trade, respectively, in 2018. The US and EU export markets accounted for nearly 22.4 percent (11.2 percent each) of total ASEAN exports in 2018 ( Figure 1 ). Thus, the persistence of the pandemic in the USA and the EU will have a further strong negative impact on ASEAN countries.

Adjustment at the sectoral level will be significant, according to the ADB. In particular, agriculture and mining, light manufacturing, parts and components, hotels and restaurants, business services, and transport services are likely to be affected by the pandemic. Service trades such as tourism and logistics will be heavily affected, especially Cambodia and Thailand, for instance, which rely on Chinese tourists (ADB, 2020). Massive relief packages have been provided by the East Asian countries to mitigate the negative impact of the pandemic (Table 2 ). In fact, each of these relief packages was provided independently without much coordination across the ASEAN countries. If there had been more coordination at the earlier stage of the pandemic, the relief packages could have been lower and more targeted to mitigate the negative effects of the pandemic, within and across countries. 

The impact of the pandemic shock creates a huge social cost to the economy in terms of the number of cases and fatalities. It imposes an economic cost as well, but the most important impact is the pressure on the health system. The idea of 'flattening the pandemic curve' by imposing social isolation on the community and adopting identification (testing) and implementation (enforcement) policies is to provide enough flexibility for domestic healthcare systems to respond to the most critically affected patients of the pandemic. This also reduces the social cost to the economy in terms of fatalities. However, the imposition of social isolation on the community leads to the disruption of economic activities and, thus, increases the economic cost (Baldwin, 2020; Eichenbaum et al., 2020; Gourinchas, 2020) . A World Bank (2020) simulation showed how a combination of healthcare policies with social isolation and appropriate economic policies could flatten both the pandemic curve and the 'recession curve'. The response of the economy is critical to mitigate the pandemic shock. The outcome without any response is shown by the number of total cases along the line marked 'without containment' in Figure 2 . If the economy recognizes the pandemic effects but responds later and there is less enforcement of social isolation, there will be greater pressure on the local healthcare system, as the pandemic curve shifts beyond its capacity (see the curve for 'with healthcare measures and less social distancing' in Figure 2 ). Early identification (testing), isolation (social distancing) and implementation (enforcement) can be applied to keep the number of pandemic (COVID-19) cases below the capacity of the domestic healthcare system and to reduce the number of fatalities (the curve labeled 'with strong healthcare measures and social isolation as Figure 2 ). This is the experience of China, Korea, Singapore and Taiwan. One potential impact of regional cooperation is also reflected in Figure 2 . Regional cooperation could lead to an increase in the capacity of the healthcare system through sharing of resources as well as information and experience on management methods. This is illustrated by the upward movement in the dashdotted line.

Where is East Asia in terms of managing the pandemic (COVID-19)? Figure 3 shows the number of COVID-19 cases from 20 January 2020 to the first week of April. Figure A1 in the Appendix shows these data at the level of regional aggregates.

The COVID-19 virus originated in Wuhan, Hubei Province in China. The first case was identified on 15 December 2019 and the first death occurred on 9 January 2020 (Huang et al., 2020) . Wuhan's capital was locked down on 22 January 2020. We will take the lockdown of 22 January 2020 as the initial stop point of the economy and the stopping of the growth of cumulative cases on around 29 February 2020 as the starting point of China's economic recovery from the pandemic shock. China managed to reach that point in 41 days. It can be argued that 41 days of Chinese policy regulation and mitigation caused the pandemic shock to be as temporary as possible in the Chinese economy, opening up the opportunity for the economy to recover. A shorter period of shock is likely to lead to a faster recovery period. In Korea, the pandemic began on 21 February 2020. It also managed to stop the growth in cumulative cases curve quickly, in approximately 40 days, in part based on lessons from China's response (see Figure A2 on the number of new cases at the Appendix).

As of April, other economies have yet to reach this point. Some took much longer to respond and appear to be suffering a larger and more persistent pandemic shock. For example, we saw strong pandemic effects in the USA in early March 2020, suggesting a longer learning and adaption time. Compared with China, we also saw a more rapid rise in the EU and US pandemic curves in the initial stages.

In Figure 4 , we explore ways in which regional cooperation could be used to design policy responses in East Asian countries during the pandemic, in particular if one of the major trading partners experience a pandemic (e.g. the case of China) because there will be important implications for trade and GVC activities in the region in terms disruptions in service linkages and imports of intermediate inputs. We divide the dates in Figure 4 into three phases: we discuss a policy scenario (derived from China's experience) for each phase that is different from the policy that was actually adopted, and we note how the failure to act during that phase may have subsequently affected the infection curve. The actual policy responses are summarized in Table A1 . We also focus on the extent of and the potential for regional cooperation.

In the first phase, there was no common strategy in the region. Instead, there could have been greater coordination between ASEAN Member States and East Asian countries to mitigate and isolate the movement of workers and tourists from China, even though some economies had not yet experienced infection. At this stage, more information could have been shared with businesses and workers. Efforts could have been made to manage the movement of people and to stockpile the necessary healthcare and medical equipment. During this phase, there could have been more healthcare mitigation (hospital isolation and observation for identified cases and treatment of critical cases) and social isolation (identification (testing), isolation (managed social distancing and self-isolation) and implementation (enforcement)), which, although costly to business, would have had benefits for human well-being and reducing fatalities in the longer term. Proper policy reactions could have reduced the economic impact and, when supported by regional coordination, would have been likely to shorten the gap between the initial stopping point and the new starting point at the regional level as well. In the second phase, assuming no or limited policy action in the first stage, the effects of the pandemic become significant in several countries. The interregional effects, including through GVC, also become important. At this stage, learning from the case of China, policy responses could still have been effective in reducing the growth of infections. The following are the key policy responses:

1. Greater isolation is required at the border, through regional coordination, because to reduce the chance of community transmission domestically. 2. The policy response would also involve developing flexibility in GVC to ensure the movement of goods and services: shifting to digital and virtual activities would provide flexibility to some business. This applies especially to health and medical products and services during this phase. 3. Isolation of some foreign and domestic workers would be valuable. At the same time, there will be a need to move resources, including critical medical and healthcare workers, to countries where they are more in demand and valuable. 4. The economic impact is now larger and demands stronger fiscal packages. 5. At this stage, shocks in terms of unemployment and corporate bankruptcies become more likely. Experience of the region in managing financial crises is valuable.

In the third phase, most (or all) of the regional countries will experience the pandemic shock, assuming the action in the second stage is not significant. Each country is likely to experience a different pandemic curve due to population demographics, urban densities, healthcare facilities and rural-urban migration dynamics. GVC will now be largely shut down, directly affecting the procurement of medical and health equipment and services as well as basic food. During this phase, we should anticipate the impacts of the pandemic shock on the economic shock, with massive unemployment, large corporate bankruptcies and greater financial fragility. In this phase, the likelihood of economic crisis is high, even if it is possible to maintain the caseload within the capacity of the health system. The economic cost of the pandemic shock as well as the economic shock (unemployment and financial crisis) will be high. The social and human costs (e.g. individuals experiencing depression from unemployment and home isolation, and the human cost of death) will be especially large. The policy response includes the following:

1. We need to provide heavy relief packages to support the basic livability of the domestic population. 2. We could expect a long fiscal and policy response to flatten the regional (not individual country) pandemic curve (see Figure A1 ) and a long economic recovery from the economic shock.

3. We expect a significant shift and coordinated fiscal policy to support the economic recovery. 4. At this stage, the probability and expectation of a financial crisis will be high.

A larger fiscal stimulus will mitigate both the economic and pending financial crisis.

Our conclusion from this comparison of the evolution of policy options for each phase is that policy coordination and regional cooperation at the earliest stage could help to reduce the business and social costs, prevent death and reduce the healthcare cost on the society.

The policy experiment conducted here reveals that policy coordination and regional cooperation in the early phase of the pandemic shock are critical to mitigate its effects and to minimize the reinforcement effect on economic shock in domestic economies and the region. It is important to mitigate the pandemic shock in the early phase through regional coordination. Cooperation is critical so that real economic activity picks up sooner. This result supports the World Bank (2020) study, which highlighted the early policy reaction (early investments in disease surveillance, testing, tracking and quarantining) in countries such as Korea, Singapore and Taiwan to mitigate and be successful in flattening the pandemic curve sooner.

It is important to manage the pandemic (mitigation, isolation, lockdown and economic disruption) at the beginning of the pandemic cycle to quickly flatten the pandemic curve at both the national and regional level. The cost of the pandemic and economic shocks also increases significantly when several countries in the region experience the pandemic shock concurrently.

We find that regional policy coordination is critical to mitigate and isolate the pandemic shock and that reacting early to the pandemic shock reduces the pending economic shock. We believe early policy reaction at the regional level will have a positive impact on flattening the pandemic curve but also on the responses of the GVC and domestic healthcare systems to the pandemic shock. Regional-level policy coordination will also provide the opportunity to recognize the infrastructure and institutional gaps in the healthcare and regional GVC network to mitigate such a pandemic shock. This also allows for greater risk management and risk sharing of the pandemic shock (social and economic cost) across countries in the region and with businesses. This will increase the capacity of the regional healthcare system to react to the pandemic shock ( Figure 2 shows the shift upwards in the regional healthcare system capacity).

There is a strong need to understand the trade-off between the social cost and the economic cost of the pandemic shock. The challenge is to recognize the trade-off between economic growth and the cost of border lockdown, leading to unemployment and lower growth. The key to mitigation and isolation of the pandemic shock is to internalize the cost of adjustment to business and workers. Thus, there is a need for coordination between various agencies within and between countries. In fact, there is a need to internalize the cost of the pandemic shock in the policy reaction functions of policymakers in the region due to the economic and social cost of unemployment, including, for instance, depression experienced by individuals as a result of isolation, increases in household violence and drug use, and the human cost in terms of death.

In the next section, we identify more specific areas for regional cooperation. This is followed by consideration of some points which are specific to the development of GVC.

Regional coordination on the pandemic shock is critical in mitigating and isolating the effects of the shock. The following are the key considerations:

1. One possibility is to set up an ASEAN pandemic task force to oversee and coordinate the policy responses across the ASEAN Member States. 3 This task force could also act as an early warning system for ASEAN and East Asian countries of such a pandemic. 2. Information is the key to manage the pandemic shock, and more forwardlooking indicators are critical to understand the dynamic cost of the pandemic. Thus, there is an urgent need to develop critical data on, for instance, health, hospital capacity and healthcare workers, for all ASEAN Member States. The forward-looking pandemic indicators will help to identify the infrastructure and policy gaps of the respective ASEAN Member States. 3. Regional cooperation provides a platform to recognize the institutional and infrastructure differences in the region. It also allows less developed countries to raise policy and resource concerns with respect to pandemic shocks. It is important to recognize the underreporting of cases of the pandemic in less developed countries because of their lack of infrastructure and medical facilities to test for COVID-19. Thus, regional coordination will also permit ASEAN countries to recognize the infrastructure and policy gaps in less developed ASEAN Member States. More aid and infrastructure support could be provided early to less developed countries to prepare for pandemic shocks. 4. The task force could also establish an ASEAN pandemic network consisting of healthcare workers, hospitals, pharmaceutical companies and research institutions to share information on medicines, virus research, and other best practices in healthcare and medicine. This network could be useful to activate healthcare resources in key countries and regions that require resources to mitigate the pandemic shock. 5. Safety standards are critical during a pandemic shock, and regional cooperation will be important to identify the key safety standards required for medical and healthcare products and equipment. There is a need for more mutual recognition of safety standards across the ASEAN Member States that allow best practices to be adopted during a pandemic. 6. An ASEAN pandemic support fund could be established to undertake data collection and policy research, and to become a depository for forwardlooking indicators on medical and healthcare data. 7. It is also important to create leading and forward-looking indicators for pandemic shocks in the East Asian region to provide early warning to the region of a potential pandemic. The pandemic preparedness score (index) is a possible index that could be used to identify the preparedness gap and the pandemic policy gap in the region. 4 8. Regional cooperation is also required for the movement of basic food and supplies as countries undertake border lockdowns. The movement of essential food and supplies in the region will be important to maintain the affordability of basic supplies in the domestic economy, especially in the vulnerable parts of the economy (e.g. unskilled temporary workers and poor households).

Regional coordination and cooperation are also expected to improve the resource allocation (allocative efficiency) to critical sectors and hospitals in response to the pandemic shock and to support the well-being of healthcare workers. This will enable the region to coordinate and regulate price distortions due to the pandemic shock and manage the excess supply effects in the some regions. They will also provide a regional platform to coordinate the flexibility of the GVC in terms of managing GVC activities after the pandemic shock and to concentrate on managing the pending economic shock. Recent studies have highlighted the impending financial fragility and financial crisis after the pandemic shocks (Becker et al., 2020; IMF, 2020; Segal & Gerstel, 2020) .

Given the rural and urban dynamics in East Asia, the less developed countries are likely to experience persistence of the pandemic shock as more urban to rural migration will occur with the movement of people back to rural areas due to the lockdown in urban regions. This increases the spread of the pandemic shock across the region and countries, leading to a longer domestic and regional policy response.

An additional reason for the consideration of regional cooperation is not evident in our earlier discussion of the three phases of the infection. Acting early on social isolation has the advantage of reducing the rate of growth of infections and flattening the curve. There is, however, a concern that the infection rate could rise again as lockdown conditions are lifted after the initial lockdown when the infection curve is flattened. This 'second wave' could be considered a 'fourth phase' that is yet to emerge in terms of Figure 4 . A response to this risk, in the absence of immunization, which may take a considerable time to develop, is to apply more widespread testing to isolate people who carry the virus or areas where it is localized.

The paper also highlights that the governance and stability of the GVC are critical during the pandemic in terms of hedging the risk of disruptions to the procurement of critical medical and health products as well as maintaining service linkages to manufacturing, such as the logistics sector and digital services. GVC disruptions (border closures and restrictions on the movement of people) will increase the cost of the pandemic in terms of the procurement and sourcing of health and medical products in the global market due to limited supply. Businesses in the global production network could play an important role in facilitating the flexibility of the GVC. Knowledge sharing and innovation regarding new situations of the pandemic shock are advantages of the open and flexible global production network. The GVC network could also play an important role in identifying and maintaining standards and in the quality control of key medical and healthcare products and equipment.

We also expect the GVC network in Asia to adjust to hedge the risk of the COVID-19 shock in the region and globally. It is important to recognize the important contributions of GVC network to employment, productivity and incomes for both developed and developing countries. It provides greater knowledge sharing of the information and innovation that we have experienced over the past two decades from, for instance telecommunication technologies, artificial intelligence and social media platforms. It also allows for greater participation of developing countries in global development and growth, such as Grab, Foodpanda and Go-Jek. The logic remains for their continuation.

In the longer term, the heightened perception of vulnerability will lead to business process redesign. For example, responses from business will include duplication and higher levels of stockpiling to mitigate future GVC disruptions. Perhaps, at a lower cost, there could also be architectural changes such as the following: 6 1. New designs of products to reduce the specificity of inputs and to raise substitutability in sourcing. 2. Fewer complex loops, where input suppliers use less inputs as final products from downstream firms. 3. Movement of products 'point to point' and a lesser role for hub firms.

Firms will also undertake more vulnerability analysis. The service links in the goods value chain were already understood to be important, but new elements related to chain management are likely to be added. All of this takes time and funding, which are lacking in the current environment. The nature of COVID-19 and the rolling process required to combat it may help. As demand recovers in the rest of the world, capacity on the supply side in Asia will likely have become available. The response to rising demand could be rapid in that case, even within the existing regional patterns of the GVC. This situation also offers the time and space to make longer-term adjustments to the shape of the chains.

There is also a drop in demand for services, as people stay home and businesses shut down. This will not be made up for by later purchases. However, substitution to new forms of services is possible through the application of digital technology (e.g. health service providers now offer more telemedicine). On the supply side, for instance, more people are working from home and schools and universities are delivering online learning. Firms are learning how to do things differently. In a digital environment, it is also a short step to organize procurement across borders. As that happens, trade in services will increase. This will result in more opportunities for suppliers in developing countries, by dividing tasks and providing them online.

Virtual platforms will be useful for matching providers and users, providing assurance to both parties. Matching and assurance services, also relevant to the new goods value chains, is a growth area of international business. In this respect, accelerating the digital trade protocol is important to provide a stable platform for trade and investment in services.

There might be an offsetting force. Agglomeration appears to be important for some services (e.g. the way high-paid professionals congregate), but will the 'Zoom community' get together in new ways?

Capturing the opportunities in services and facilitating the adjustments in goods value chains will be helped by tackling unnecessary policy impediments. Important in that respect are commitments to avoid new types of protectionism: both export controls and tariffs. The extent to which selected RCEP members (plus Taiwan) have imposed quantitative controls is shown in Table 3 (end dates are not always available). A significant number are listed here (some more than once as conditions have been revised). Table 4 shows the average tariffs currently applied to a range of medical products. Some countries show zero values or values less than 5 percent (Australia, Brunei, Malaysia and Singapore). Others have values exceeding 5 percent (shown as *) and some have relatively high levels (shown as **, for example on disinfectants, soap and protective garments).

A group of APEC trade ministers have called for a commitment on trade, but this should be reinforced and made more widespread (Ministry of Trade and Industry, Singapore, 2020). The information in Tables 3 and 4 indicates the scope to relax bans on exports, and reduce tariffs and bind them at zero.

In addition, we expect standards and other regulatory barriers to increase during and after the pandemic, which will add to the cost of international transactions. Questions are now being asked within economies about the rationale for various rules and regulations, in the context of responding to the crisis. We should ask similar questions about cross-border regulatory differences. These are not matters for negotiation but for discussion in relation to alignment, which is a process suited to and already experienced in the systems of regional cooperation in ASEAN and APEC. Now is the time to accelerate such efforts. Instead of asking 'why align?', ask instead 'why not?'. There is no better example of the relevance of this approach than the current challenges in GVC for health and medical products. This renewed energy from regional cooperation in trade facilitation in goods and services could be a positive outcome from the war on COVID-19. Highly restrictive. RCEP, Regional Comprehensive Economic Partnership. Source: Global Trade Alert (https://www.globaltradealert.org/).

The COVID-19 shock also provides an opportunity to accelerate connectivity in the hard and soft infrastructure development of less developed countries, increasing their ability to manage the risk associated with such shocks and to participate in procurement and gain access to key regional and global services.

It is equally important to examine the post-pandemic and pre-pandemic policies. Post-pandemic policy is critical to manage the recovery in the region. This might refer to a fifth phase in terms of the framework of Figure 4 , in place once the pandemic is under control. There will be debate about the value of reliance on international markets, the value of economic integration, and how to increase the resilience of economies. There could be more restrictions and inward-looking policies after the pandemic, which would impede the function of GVC and trade and investment in the region.

The following are the key areas that require urgent regional policy coordination in this context:

would be valuable, noting the capability that is created for responding to shocks. 2. Greater flexibility in GVC would increase the response of business to the disruptions; and the removal of tariffs and non-tariff measures would assist. 3. A protocol needs to be developed on the movement of people during such pandemics and on the movement of people after the pandemic. The movement of people will be important to re-establish the service linkages in the GVC. 4. The protocol for the movement of people could include pre-tested health certificates, improved medical and travel insurance to cover diseases, and a framework for the virtual movement of people. 5. The policy framework for the recovery of the aviation and logistics sector is critical, and the sequence of policy coordination needs to be appropriate to manage the opening up of the connectivity and border activities between countries. 6. Reforms to services also need to be accelerated, especially in aviation, logistics and digital services. These critical services require innovation and more platforms for the sharing of information and activities in virtual activities as well as the actual movement of goods. 7. The connectivity of the hard and soft infrastructure of less developed ASEAN Member States needs to be improved, as these countries are likely to experience more GVC disruptions and to take longer to recover in the post-pandemic period.

The challenge of the early policy reaction to the pandemic is to officially recognize the initial stages of the pandemic curve. However, responses have been delayed, and we are most likely already closer to the latter phases of the pandemic. Several countries in East Asia are experiencing the pandemic shock simultaneously, increasing the economic and social costs to the domestic economy and the region. Nevertheless, scope remains for a coordinated policy response and regional cooperation, including in: the application of fiscal policies; the sharing of information, experience and resources in the health sector; and the application of technology for testing.

The key policy response includes a focus on GVC, immediately because of their role in providing medical equipment and in the longer term to facilitate recovery. The disruption to economic activities by COVID-19 is not due to the weakness of the global production network but to the lack of institutional preparedness and regional cooperation to deal with and respond early when one of the key trading partners experiences a pandemic (in this case, China). The experience of earlier shocks is that GVC can respond to the disruption. However, we need stronger regional and global institutional cooperation and preparedness to deal with such shocks. This will be the key to mitigate the pandemic and create flexibility for GVC to manage the risk and disruptions caused by such pandemic shocks. In fact, the strength of businesses in the GVC network is managing such disruptions and responding quickly to meet the needs of the market in the most efficient manner. The complete shutdown of regional borders restricted the ability of the GVC to respond to and support the market and pandemic policies in the region, which increases the economic cost of the pandemic.

The post-pandemic recovery will be critically based on the recovery of the GVC activities and regional cooperation in opening up the borders in terms of managing and easing the border closures. The protocol for the movement of people (adoption of standards and recognized testing of people for infection) for trade and investment will be very important for the post-pandemic recovery, as this will have critical implications for GVC in terms of service linkages and service GVC. The recovery of the service sector in the post-pandemic period is important for the region's economic activities, particularly those of the developing countries.

The most immediate task for ASEAN and East Asia is to set up a regional task force to coordinate across the ASEAN Member States, including businesses, to recognize and identify policy and production gaps that exist in the current pandemic (COVID-19) so as to increase the responsiveness of current policies and support the longer term development of GVC in the region. 

The Economic Impact of COVID-19 Outbreak on Developing Asia, ADB Briefs

How did the Japanese exports respond to the two crises in the international production networks? The global financial crisis and the Great East Japan Earthquake

The supply side matters: Guns versus butter, COVID-style, VOX CEPR policy portal, 22 March [online

Trump signs $2.2tn stimulus bill after invoking defense production act -As it happened, The Guardian, 27 March

Corporate debt burdens threaten economic recovery after COVID-19: Planning for debt restructuring should start now, VOX CEPR Policy Portal

The Macroeconomics of Epidemics, NBER Working Paper, No. 26882

COVID-19 to Send Almost All G20 Countries into a Recession

COVID-19 and the 'Zoom' to New Global Value Chains

In: Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes

Saving China from the coronavirus and economic meltdown: Experiences and lessons, VOX CEPR Policy Portal, 23 March

ILO Monitor 2nd Edition: COVID-19 and the World of Work, Updated Estimated and Analysis, Briefing Note

Policy steps to address the corona virus, Policy Paper, No. 20/015, 6 March

Propagation of Economic Shocks Through Supply Chains, VOX CEPR Policy Portal

A primer on the macroeconomic effects of an influenza pandemic, Treasury Working Paper, No. 2006-01. Canberra: Government of Australia, The Treasury. Ministry of Trade and Industry

The 2003 Severe Acute Respiratory Syndrome Epidemic: A Retroactive Examination of Economic Costs

Coronavirus: The world economy at risk, OECD Interim Economic Assessment

Centre for Strategic and International Studies

East Asia and the Pacific in the time of COVID-19

 Figure