The study examines how the Covid-19 shock was transmitted from foreign, upstream parts of value chains to domestic (downstream) production. The impact was large: for every percentage point of dependence on the Chinese value chain, there was a 1.3 percent larger contraction in domestic production. The multiplier effect of the manufacturing contraction amplified the direct foreign shock by an order of magnitude. These 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. The study provides evidence on the dynamics of adjustment.
