Efforts by the U.S. and other countries to fix supply-chain problems by boosting domestic production aren’t likely to be effective, according to a report from the International Monetary Fund, which says diversifying sourcing is a better solution. “Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors, have gained prominence, including in major markets such as Europe and the U.S.” reports The Wall Street Journal (April 13, 2022).
Such policies “are likely misguided,” IMF economists said, and “supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing of inputs. The resilience of trade through the pandemic suggests that such proposals may be premature, if not misguided.” The IMF noted that trade has bounced back remarkably quickly, and that countries unaffected by shutdowns were often able to quickly increase their capacity to supply other regions.
The Biden administration wants to boost domestic production and encourage the reshoring of industries that have moved overseas, saying it will both create U.S. jobs and better insulate the nation against shortages from goods imported from other countries, such as semiconductors.
The IMF suggests a severe crisis in a single large global supplier (one roughly the size of China) would cause the average country’s economy to shrink by 0.8%. However, if that country had diverse supply chains running through a large number of countries, the economic damage would only be half as large.
Even the country at the heart of such a crisis would be better off with diverse supply chains, they said. By doubling down on domestic production, the country’s factories may have their own domestic suppliers disappear in a crisis, whereas if they had diverse international suppliers they would have a fallback option. Also important, the IMF said, is making sure that supplies in one country can be quickly substituted for another.
Some companies have already begun undertaking such efforts, like GM, which is seeking to reduce the number of different types of semiconductors that it uses so supplies that are disrupted from one factory can more easily be substituted by production elsewhere, or Toyota, which has sought to make more of the components of its cars easily substituted across different models.
Classroom discussion questions:
- Why does the IMF say that reshoring is not a perfect solution?
- What difficulties does the U.S. face in reshoring attempts?