Why reshoring is not the answer to disruption

Increasing diversification within supply chains can “significantly” reduce the economic impact of disruptions and improve resilience, according to the International Monetary Fund (IMF). 

Supply challenges caused by the pandemic led to “more domestic production of goods” in an effort to beat logistical disruptions, research by the IMF found.

However, “dismantling global value chains is not the answer; more diversification, not less, improves resilience,” the IMF concluded.

Its World Economic Outlook, Global Trade and Value Chains During the Pandemic report found increasing diversity within supply chains “significantly reduces global economic losses in response to supply disruptions”.

The IMF simulated a lockdown akin to those that occurred at the onset of the pandemic and found by reducing labour supply by 25% in a single large global supplier for components, average economic output fell by 0.8%. 

When it simulated a lockdown where companies had high levels of supplier diversity, this decline was halved to 0.4%

It found higher supplier diversification reduced volatility when multiple countries were hit by supply shocks. High diversification reduced GDP decline by around 5%.

The research conceded, however, “diversification offers little protection when a major disruption hits all economies at the same time, like the first four months of the pandemic”.

Eight in 10 (82%) firms in the western hemisphere currently source supplies domestically and they have a “home bias” when sourcing. The report warned: “Reshoring of production would thus lower diversification further.”

Corporate decisions will “predominantly” shape the future resilience of global value chains, but the IMF said governments can provide a “supportive environment” and lower costs for businesses by investing in infrastructure, reducing trade costs, and digitalising processes. 

“The pandemic has shown that infrastructure investments in certain areas are critical to mitigate supply disruptions related to trade logistics,” said the IMF. 

Upgrading port infrastructure on key global shipping routes would help reduce global chokepoints, and “reducing trade policy uncertainty and providing an open and stable, rules-based trade policy regime can support greater diversification”, it said. 

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