## The Stretch of Supply Chains

## Source details

**Canonical URL:** [The Stretch of Supply Chains](https://www.imf.org/-/media/files/publications/fandd/article/2022/june/b2b.pdf)

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### What supply chains are and how they evolved
- Supply chains are "the assembly lines that deliver goods for final consumption."
- Modern supply chains involve numerous global producers and intermediate goods, with components potentially sourced across multiple continents (example components: aluminum mined in Africa, silicon produced in South America, microchips made in Asia; design in North America; assembly in Asia; shipping via a European company).
- Factors enabling global fragmentation of production:
  - Technological leaps that have "allowed firms to communicate seamlessly" and reduced transport costs.
  - International agreements that made trade more predictable and cheaper by reducing tariffs and nontariff barriers.
  - Structural reforms that have allowed businesses to invest more easily in foreign factories.
- The expansion of international trade in intermediate goods was dramatic in the 1990s and 2000s and "leveled off somewhat in the 2010s."

### Pressure from the pandemic
- The pandemic caused widespread factory closures, making intermediate inputs scarce and reverberating through global assembly lines.
- At the same time, consumer demand shifted from contact-intensive services toward goods, raising demand for goods above pre-pandemic trends.
- Notable supply-chain stress points mentioned: scarcity of semiconductors; ports as choke points with "lines of container ships waiting outside major harbors."
- Participation in global supply chains during the pandemic carried trade-offs:
  - Costs: exposure to lockdowns and factory closures abroad.
  - Benefits: access to foreign goods when domestic production was hit hard.
- Overall evidence cited: "global supply chains adapted well during the pandemic, with countries relatively less affected filling in for countries hit harder."

### Policy and business options being discussed
- Three broad strategies under consideration for reshaping supply chains:
  - "Reshoring" — disintegration from global supply chains by moving foreign production back home.
  - Greater diversification — increasing the number of foreign suppliers for any given input, even if it entails higher costs.
  - Holding excess inventory — carrying higher levels of inventory to better weather temporary supply shocks.
- Characterization of diversification and overstocking: described as "insurance strategies" where countries and companies must weigh how high an insurance premium they are willing to pay because "having spare suppliers or carrying excess inventory is not free."

### Evidence and recommendations
- The economic evidence available so far "does not favor the reshoring approach."
  - Reason: pursuit of self-reliance would yield less efficient production and "does not suggest that it will improve resilience."
  - Analogy used: reshoring is "akin to putting all your supply-chain eggs in the same domestic basket."
- Policy guidance distilled from the analysis:
  - Policymakers and firms must balance the need for resilience against willingness to pay for insurance.
  - The optimal choice is country-specific and depends on risk tolerance.
  - The debate over levels of integration into global supply chains is expected to persist and will influence the availability of products versus empty shelves.

*Diego A. Cerdeiro and Niels-Jakob H. Hansen; June 2022. Source: b2b PDF.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/june/b2b.pdf_