If you listen to the politicians, you’ll hear the benefits of moving supply chains closer to home to avoid labor shocks like the lockdown of entire populations during a pandemic. Listen to economists, though, and they’ll lay out the costs.
According to new research by economists from the University of Michigan, Yale and the University of Texas at Austin, the average contraction in gross domestic product tied to the Covid-19 shock is expected to be 31.5%, with about a third of it attributed to kinks in global supply chains.
But in a world without trade in components and final products, the average GDP drop would have been 32.3%, the study showed.
“‘Renationalization’ of global supply chains does not in general make countries more resilient to pandemic-induced contractions in labor supply,” they conclude, using a model measuring production in 64 countries and 33 industries.
“This is because eliminating reliance on foreign inputs increases reliance on the domestic inputs, which are also subject to lockdowns,” the study says. “Whether renationalizing supply chains insulates a country from the pandemic depends on whether it plans to impose a more or less stringent lockdown than its trading partners.”
It’s one of the first academic efforts to quantify the next phase of globalization, but it surely won’t be the last given how pervasive the reshoring debates have become:
- In the U.K., Prime Minister Boris Johnson’s government, criticized for inadequate access to personal protective equipment and virus tests, is looking at how to reinforce supply chains to ensure essential goods keep flowing.
- French President Emmanuel Macron is set to announce measures Tuesday to support the domestic auto industry, a plan expected to include ways to reshore manufacturing and develop electric and hydrogen-powered cars domestically.
- The Trump administration hailed a move earlier this month by Taiwan Semiconductor Manufacturing, which said it plans to spend $12 billion building a chip plant in Arizona.
- An apparent outlier is Australian Prime Minister Scott Morrison, who said Tuesday the country won’t “retreat into the downward spiral of protectionism.” He added: “To the contrary, we will continue to be part of global supply chains that can deliver the prosperity we rely on to create jobs, support incomes and build our businesses.”
- Japanese Finance Minister Taro Aso said Tuesday that his country needs to increase the safety of supply chains even if it’s more expensive and the economy needs to be ready for a second wave of the virus.
- Some countries see the shift as an opportunity. India’s government is developing an area of land nearly double the size of Luxembourg to lure businesses moving out of China.The Philippines also sees decoupling from China as a chance to court foreign investment, according to its central bank governor.
–Brendan Murray in London
Charted Territory
Global trade took its biggest hit in more than a decade in March, when the spread of the coronavirus began to take an increasingly heavy toll on businesses. World trade volumes fell 4.3% from a year earlier, the most since 2009, according to the World Trade Monitor. On the month, they fell 1.4% for a third straight decline. The slump is only an initial sign of the damage from the lockdowns to contain the disease, and surveys have since shown a deep recession is underway.
Today’s Must Reads
- Not worse | Confidence among German exporters improved in May after officials within the country and around the world eased lockdown measures.
- New rules | Brazil, the biggest exporter of beef and chicken, is betting on a new set of safety standards to avoid the kind of mass processing disruptions that caused meat shortages and price spikes in the U.S.
- April surprise | Mexico unexpectedly posted a trade deficit last month as the coronavirus pandemic and an oil price slump led exports to decline at an even faster pace than imports.
- Check again | The U.K. government is launching a review into Huawei as officials draw up a plan to reduce the Chinese tech giant’s involvement in new generation mobile networks over the next three years.
- Boom 2.0 | Gold miners in Australia — set to leapfrog China next year to become the top producer — are resuming a pandemic-disrupted exploration spree as prices surge amid a dearth of major discoveries.
On the Bloomberg Terminal
- Help on way | Sweeping reforms to the U.K. insolvency program, key to the government’s coronavirus response, will give stronger-than-expected support to distressed companies, writes Bloomberg Intelligence.
- Second best | China’s position in U.S. trade has retreated. This reflects a shift in supply chains to adjust to higher U.S. tariffs on Chinese goods and risks from an increasingly fraught U.S.-China relationship, according to Bloomberg Economics.
- Use the AHOY function to track global commodities trade flows.
- Click HERE for automated stories about supply chains.
- See BNEF for BloombergNEF’s analysis of clean energy, advanced transport, digital industry, innovative materials, and commodities.
- Click VRUS on the terminal for news and data on the coronavirus and here for maps and charts.
Like Supply Lines?
Don’t keep it to yourself. Colleagues and friends can sign up here. We also publish Balance of Power, a daily briefing on the latest in global politics.
For even more: Follow @economics on Twitter and subscribe to Bloomberg All Access for full global news coverage and two in-depth daily newsletters, The Bloomberg Open and The Bloomberg Close.
How are we doing? We want to hear what you think about this newsletter. Let our trade tsar know.
