Reshoring the answer to bottling supply headaches? IMF says no
The recent shift towards protecting supply chains by ensuring a greater share of manufacturing components are produced domestically in the US — a practice referred to as reshoring — could actually make things worse, the IMF cautioned in a report last week, in response to a noticeable global movement to relocate production operations closer to home.
The COVID-19 pandemic had already raised questions about the world’s reliance on the globalization economic model that has been instrumental in breaking down trade barriers worldwide, but made countries heavily reliant on each other as production and supply lines were delocalized over the decades.
And yet despite the disruptions caused by pandemic lockdowns, trade in goods bounced back relatively quickly, helped by remote work and “suggesting adaptability and resilience in global value chains,” the Washington-based crisis lender stated, calling the push towards reshoring production “likely misguided.”
The pandemic shuttered businesses worldwide, but when diminishing cases and widespread availability of vaccines allowed economies to reopen, many industries, notably auto manufacturers, found they could not keep up with rebounding demand due to a global shortage of semiconductors and other items.
And a lack of workers, such as truck drivers, contributed to massive backlogs at ports that snarled supply chains further. That created a push in many countries to increase domestic production of semiconductors and other key inputs to reduce dependence on foreign manufacturers.
US President Joe Biden has been particularly vocal on this topic. But this “home bias” could make firms more vulnerable to disruptions, including from events like the Russian invasion of Ukraine, the IMF said in a chapter of its World Economic Outlook.
Given the “overall resilience of global trade and value chains during the pandemic, this chapter argues that policies such as reshoring are likely misguided,” according to the report released ahead of the IMF’s annual meeting next week. “Instead, supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing.”
Reducing trade barriers and taking steps such as firms making sure their products can use inputs from multiple suppliers — something the IMF calls “greater substitutability” — also would help avoid similar disruptions in the future. “Increasing supply chain resilience is important for dealing with not only health emergencies like the pandemic, but also other types of shocks such as the war in Ukraine, cyberattacks, and extreme weather,” the report said.
Higher diversification “significantly reduces global economic losses in response to supply disruptions,” but offers less protection when a shock hits all economies at the same time, IMF economists argue in a blog post about their findings. Still, the effects of the pandemic “were short-lived, however, suggesting that global supply chains were resilient,” they wrote.
© Agence France-Presse