While many policymakers in the United States are calling for reshoring and nearshoring to combat trade disruptions caused by COVID-19, new research from the University of California San Diego School of Global Policy and Strategy suggests that retrenchment of global supply chains is unlikely in the post-pandemic context.
The first study to look at the long-term effects of natural disasters on global supply chains was conducted by economist Caroline Freund, dean of the School of Global Policy and Strategy. The paper examines whether importers who were more dependent on Japan before the earthquake behaved differently than importers who were less dependent on Japan in the aftermath of the 2011 earthquake in Japan.
According to the study, importers who were dependent on Japan prior to the earthquake reduced their reliance on Japan in its aftermath, but they did not reshore, nearshore, or increase import diversification in either auto or electronics. In fact, prior to the 2011 earthquake, importers who were heavily reliant on specific Japanese products increased total imports of those products, opting to intensify offshoring rather than reshoring.
The research assesses how firms behave when faced with new risks. While there is evidence the shock led to a partial reconfiguration of supply chains, there is no evidence that supply chains were increasingly reshored or nearshored.Caroline Freund
The 2011 earthquake, like the COVID-19 shocks, caused major trade disruptions. For example, a shortage of over 100 Japanese-made parts forced Toyota’s North American operations to operate at 30% capacity for several weeks.
“The research assesses how firms behave when faced with new risks,” said Freund, former global director of Trade, Investment, and Competitiveness at the World Bank. “While there is evidence the shock led to a partial reconfiguration of supply chains, there is no evidence that supply chains were increasingly reshored or nearshored. In fact, any manufacturing that did move out of Japan shifted to low-cost developing countries. Similarly, today we are seeing that with disruptions to exports from China, manufacturing is moving to countries such as Vietnam, which is not exactly closer to the U.S.”
Freund added that while manufacturing at home or importing from neighboring countries is touted as a way to build resilience among supply chains, firms in the study consistently opted to offshore — choosing to keep costs down by selecting low-cost suppliers that could produce at scale.
“These data suggest that current US initiatives to increase nearshoring and reshoring as a means of combating inflation would likely raise prices even further,” Freund said. Aside from economic fundamentals, another reason why firms continued to use offshoring after the 2011 earthquake is that supply chain relationships are difficult to replace.
“Reliable suppliers who consistently meet quality standards and customization needs and deliver goods on time,” Freund said. “These quality relationships are difficult to replace precisely because they are difficult to find.”
One significant distinction between the Japanese earthquake and the COVID-19 pandemic is that factories were destroyed in the former but not in the latter. As a result, firms today are more likely to prefer to keep production where it is rather than incur the costs of constructing new facilities closer to home or in other countries.
Natural disasters appear to strike with little warning, but the risk of such occurrences is predictable. Knowing the likelihood of such scenarios allows businesses to reduce the risks of natural disasters by incorporating redundancy and resilience into their supply chain. An effective supply chain business continuity management (BCM) plan enables an organization to quickly resume operations, ensure responsiveness to a disruption, and protect brand and reputation.
The IMF paper “Natural Disasters and the Reshaping of Global Value Chains” is co-authored by Aaditya Mattoo, chief economist for East Asia and the Pacific at the World Bank; Alen Mulabdic, economist for the Equitable Growth, Finance and Institutions’ Chief Economist’s Office at the World Bank and Michele Ruta, lead economist at the World Bank.