Global Trade Needs More Supply Diversity, Not Less
IMF Blog, April 12, 2022
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- Authors: Davide Malacrino, Adil Mohommad, Andrea Presbitero
- Published: April 12, 2022
Overview
- The demand and supply shocks from the pandemic were expected to cause a dramatic collapse in trade, but international commerce proved more resilient than during previous global crises.
- Goods trade fell sharply in Q2 2020 but bounced back to pre-pandemic levels later in the year.
- Services trade declined more in 2020 (such as tourism) and has recovered more slowly due to persistent restrictions.
International spillovers
- Goods imports were larger in 2020 than predicted by demand (and relative prices) alone, especially in countries with stringent lockdowns or severe outbreaks.
- Countries with trade partners that implemented more stringent lockdowns experienced larger declines in imports of goods.
- Trade partner lockdowns accounted, on average, for up to 60 percent of the decline in imports in the first half of 2020.
- These impacts were larger in industries that rely heavily on global value chains and are further downstream in the production process (such as electronics).
- Effects were short-lived, suggesting global supply chains were resilient; remote work also lessened trade spillovers from lockdowns.
Global value chains adapted
- By mid-2020, Asian countries increased their market share of GVC-related products by 4.6 percentage points in Europe, and 2.3 percentage points in North America.
- These gains were large and quick by historical standards but have partially unwound as countries adjusted, suggesting the changes were likely temporary.
- Some industries, such as automobiles, faced large supply disruptions, indicating a need to enhance resilience.
- Two options for building supply chain resilience analyzed: diversifying inputs across countries, and greater substitutability of inputs.
Boosting trade resilience — model simulations and key statistics
- Scenarios considered: supply disruption in a single, large, input supplier country; and supply shocks to multiple nations.
- Diversification outcomes:
- Following a sizable (25 percent) labor supply contraction in a single, large global supplier, gross domestic product for the average economy falls by 0.8 percent under the baseline.
- In the high-diversification scenario, this decline is reduced by almost half.
- Diversification reduces volatility when multiple countries are hit by supply shocks: volatility of economic growth in the average country is reduced by around 5 percent in this scenario.
- Diversification offers little protection when a major disruption hits all economies at the same time (e.g., the first four months of the pandemic).
- Current sourcing patterns and risks:
- Firms in the Western Hemisphere source 82 percent of their intermediates domestically, indicating significant “home bias.”
- Re-shoring of production would lower diversification further.
- Substitutability outcomes:
- Substitutability can be achieved via greater flexibility in production (example: Tesla Inc. rewrote software to enable its cars to use alternative semiconductors) or by standardizing inputs internationally.
- Example: General Motors Co. is working with semiconductor suppliers to reduce the number of unique chips it uses by 95 percent, down to just three families of microcontrollers.
- Considering the 25 percent labor supply contraction in a large global supplier of intermediate inputs, with greater substitutability, GDP losses in all countries (other than the source country) are reduced by about four-fifths.
Policy implications and recommendations
- First priority: ensuring equitable access to vaccines and treatments; ending the acute phase of the pandemic everywhere is in all countries’ self-interest.
- Greater diversification and substitutability in inputs can enhance resilience amid concerns about global economic fragmentation and “friendshoring.”
- Government roles to support corporate decisions on GVC resilience:
- Improve infrastructure:
- Upgrade and modernize port infrastructure on key global shipping routes to reduce global chokepoints.
- Improve digital infrastructure to facilitate telework and mitigate spillovers to other countries.
- Make information more widely available so firms can make more strategic decisions:
- Automobile manufacturers on average conduct business directly with about 250 Tier1 suppliers, but this number rises to 18,000 suppliers in the full value chain.
- Improving access to information on inter-firm transactions and supply chain networks (for example, digitalizing firms’ document filings, such as tax returns) can help, especially for smaller firms.
- Reduce trade costs to help diversify inputs:
- There is room to reduce non-tariff barriers, which would give a significant medium-term economic boost, especially in emerging markets and low-income developing countries.
- Reducing trade policy uncertainty and providing an open and stable, rules-based trade policy regime can support greater diversification.
— This blog, based on Chapter 4 of the April 2022 World Economic Outlook, “Global Trade and Value Chains During the Pandemic,” includes research by Galen Sher and Ting Lan, under the guidance of Shekhar Aiyar, and support from Shan Chen, Bryan Zou, Youyou Huang, and Ilse Peirtsegaele. The analysis was concluded in early 2022, prior to Russia’s invasion of Ukraine, and does not focus on the implications of the war for global trade and value chains.
