The Price of De-Risking Reshoring, Friend-Shoring, and Quality Downgrading

IMF Working Papers, June 21, 2024

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Estimates costs of “de-risking” scenarios between China and OECD members at aggregate and sectoral levels.
Two modes of aggregate de-risking analyzed with the IMF’s GIMF model:
- Reshoring: increasing reliance on domestic production.
- Friend-shoring: reducing imports from specific foreign countries.
Sectoral de-risking analyzed by eliminating all trade between rivals in specific products and empirically estimating the scope for quality downgrading.
Focus areas include inputs quality losses from export bans and sector-specific asymmetries (e.g., semiconductors, environmental goods).

Returning integration to 2000 levels implies:
- Long-term global GDP losses of 4.5 percent under reshoring.
- Long-term global GDP losses of as much as 1.8 percent under friend-shoring.
Friend-shoring may not deliver net gains to third countries because trade diversion benefits can be largely offset by contractions in China and OECD members.

Sectoral de-risking scenario: elimination of all trade between rivals in specific products.
Empirical estimation highlights potential for significant losses in input quality under escalation of export bans.
Loss patterns:
- Asymmetric losses against China in the specific case of semiconductors.
- Significant losses for both sides in other sectors, including critical areas such as environmental goods.

Large-scale reshoring has substantial permanent macroeconomic costs globally.
Friend-shoring reduces but does not eliminate macroeconomic costs and can produce complex distributional effects across countries.
Export bans and trade elimination in specific products risk quality downgrades in inputs, with potentially large sector-specific costs.
Critical sectors (for example, semiconductors and environmental goods) warrant particular policy attention given the asymmetric and significant losses identified.

IMF Working Paper by Diego A. Cerdeiro, Parisa Kamali, Siddharth Kothari, and Dirk V Muir (June 21, 2024).