We examine how the Covid-19 shock was transmitted from the foreign, upstream parts of value chains to domestic (downstream) production. After categorizing global value chains based on their home-producer industry and country, we quantify the multiplier effect of the transmitted shock on the entire value chain by considering changes in home production. We focus on the value-chain impact of the early stages of Covid-19 in China (1-4/2020) and measure the upstream (direct) shock using world input-output and Chinese production data. Our differences-in-differences research setup reveals that the shock impact was large: For every percentage point share of value added contributed by the Chinese producers to the value chain, there was a 1.3 percentage point larger contraction in home production. Furthermore, the multiplier effect stemming from the contraction in Chinese manufacturing substantially magnified the initial shock, increasing its impact on domestic production by an order of magnitude. The effects varied across industries and regions, with the most substantial multiplier effects observed in highly digitalized, high-R&D industries, particularly in the EU and North America. Furthermore, we provide evidence on the dynamics of adjustment.
