## The Stretch of Supply Chains ## Source details **Canonical URL:** [The Stretch of Supply Chains](https://www.imf.org/en/publications/fandd/issues/2022/06/the-stretch-of-supply-chains-b2b) ## Other formats - [Markdown version](/en/publications/fandd/issues/2022/06/the-stretch-of-supply-chains-b2b/index.md) - [Structured JSON version](/en/publications/fandd/issues/2022/06/the-stretch-of-supply-chains-b2b/index.json) - [Bundle manifest](/en/publications/fandd/issues/2022/06/the-stretch-of-supply-chains-b2b/bundle-manifest.json) ## Bibliographic details - Authors: Diego Cerdeiro, NIELS-JAKOB HANSEN - Published: June 2, 2022 --- ### Definition and mechanics - Supply chains are described as the assembly lines that deliver goods for final consumption, involving product development, sourcing raw materials, assembling parts, testing, and shipping. - Modern supply chains involve numerous producers around the globe and can include inputs sourced from multiple continents (example: aluminum mined in Africa, silicon produced in South America, microchips made in Asia, design developed in North America, assembled in Asia, shipped via a European company). ### Drivers of global integration - Technological advances: - Enabled seamless communication across the globe and reduced transport costs. - Institutional and policy changes: - International agreements made trade more predictable (easier to enforce contracts) and cheaper (lower tariffs and nontariff barriers). - Structural reforms: - Facilitated foreign factory investment. - Combined effect: - These changes allowed firms to fragment production processes and caused a boom in the international trade of intermediate goods. - Both advanced and emerging market economies became more integrated into global supply chains. - Integration increased dramatically in the 1990s and 2000s before leveling off somewhat in the 2010s. ### Pandemic shock and effects - Acute-phase dynamics: - Widespread factory closures caused intermediate inputs from closed factories to become scarce elsewhere in global assembly lines. - Simultaneous demand shift: consumers stuck at home increased demand for goods (away from contact-intensive services such as eating out and traveling), raising demand above pre-pandemic trends for goods that allow people to work, learn, and play at home. - Notable chokepoints and scarcities: - Semiconductors emerged as a widely reported scarcity. - Ports became choke points, with lines of container ships waiting outside major harbors. - Net effect and adaptation: - Participation in global supply chains exposed countries to lockdowns and factory closures abroad but also allowed access to foreign goods when domestic production was hit. - Available evidence suggests global supply chains adapted well during the pandemic, with relatively less affected countries filling in for those hit harder. ### Post-pandemic uncertainty and policy options - Additional sources of uncertainty: - The surge of the Omicron variant and the war in Ukraine have added to supply chain uncertainty. - Three policy/firm options under discussion: - "Reshoring": moving foreign production back home (disintegration from global supply chains). - Diversification: increasing the number of foreign suppliers for any given input, even at higher costs, to reduce simultaneous supply shock risk. - Holding excess inventory ("overstocking"): maintaining higher inventory levels to weather temporary supply shocks. - Evidence-based assessment: - The economic evidence available so far does not favor the reshoring approach. - Reshoring would yield less efficient production and does not appear to improve resilience; it is compared to "putting all your supply-chain eggs in the same domestic basket." - Diversification and overstocking are characterized as insurance strategies that entail costs—countries and companies must decide how high an insurance premium they are willing to pay. - Policy trade-offs: - Policymakers and firms must weigh the need for resilience against willingness to pay for insurance. - The optimal choice depends on country-specific circumstances and risk tolerance. ### Key takeaways - Global supply chains evolved from localized production to complex, highly fragmented international assembly lines due to technology, policy, and structural reforms. - The pandemic caused simultaneous supply constraints and elevated demand for goods, revealing vulnerabilities (e.g., semiconductors, port congestion) but also demonstrating adaptive capacity across countries. - Current debates focus on reshoring, diversification, and overstocking; available evidence discourages reshoring and frames the latter two as cost–benefit insurance decisions. - The debate over the degree of integration into global supply chains will influence whether consumers encounter products or empty shelves in future disruptions. *DIEGO A. CERDEIRO; NIELS-JAKOB H. HANSEN — June 2022. Content as presented in the original publication.* --- ## Content in this bundle - **The Stretch of Supply Chains** - [The Stretch of Supply Chains (Markdown version)](/-/media/files/publications/fandd/article/2022/june/b2b.pdf.md){rel="alternate" type="text/markdown"} - [The Stretch of Supply Chains (PDF)](/-/media/files/publications/fandd/article/2022/june/b2b.pdf){rel="external" type="application/pdf"} - **Chapter 4** - [Chapter 4 (Markdown version)](/-/media/files/publications/weo/2022/april/english/ch4.pdf.md){rel="alternate" type="text/markdown"} - [Chapter 4 (PDF)](/-/media/files/publications/weo/2022/april/english/ch4.pdf){rel="external" type="application/pdf"} - **IMF World Economic Outlook, October 2016; Chapter 2: Global Trade: What's Behind the Slowdown?** - [IMF World Economic Outlook, October 2016; Chapter 2: Global Trade: What's Behind the Slowdown? (Markdown version)](/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/2016/02/pdf/_c2pdf.pdf.md){rel="alternate" type="text/markdown"} - [IMF World Economic Outlook, October 2016; Chapter 2: Global Trade: What's Behind the Slowdown? (PDF)](/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/2016/02/pdf/_c2pdf.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2022/06/the-stretch-of-supply-chains-b2b_