By The Wall Street Journal
This article was published in The Wall Street Journal April 12, 2022.
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 United States,” IMF economists wrote in the report released Tuesday.
Such policies “are likely misguided,” the IMF economists said, adding that “supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing of inputs.”
The Biden administration wants to boost domestic production and encourage the so-called 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 report countering that view was released as one of the advance chapters of the organization’s World Economic Outlook prepared for spring meetings of the IMF and World Bank in Washington next week.
The supply-chain analysis was based around studying how economies have behaved during the past two years of rolling shutdowns as Covid-19 surges hit different countries at different times.
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 resilience of trade through the pandemic suggests that such proposals may be premature, if not misguided,” the IMF said.
The IMF said its economic models suggest a severe crisis in a single large global supplier (one that they assumed to be 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.
The report noted that some companies have already begun undertaking such efforts, like General Motors Co., 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 Motor Corp., which has sought to make more of the components of its cars easily substituted across different models.
The IMF said if such substitutability was widespread it could reduce the economic fallout of a disruption by about 80%.
The analysis didn’t address that some countries are seeking to bolster domestic supply chains as a national-security issue, and not strictly as the most economically efficient option.