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Beyond BLS

Beyond BLS briefly summarizes articles, reports, working papers, and other works published outside BLS on broad topics of interest to MLR readers.

October 2022

COVID-19 has unfairly hurt the reputation of global supply chains

Summary written by: Jonathan Yoe

Until around 1990, U.S. public opinion of globalization was largely positive because it was associated with economic growth. Globalization brought consumers more selection of products at cheaper prices. However, after 1990, technology allowed firms to send certain parts of the production process to other nations, which means we sent our production know-how to low-wage nations. This process helped China replace the United States as the world’s largest manufacturer and increased reliance on global supply chains (GSCs). Since the beginning of the coronavirus disease 2019 (COVID-19) pandemic, policymakers have heavily scrutinized GSCs publicly.

In their article “Risks and global supply chains: what we know and what we need to know” (National Bureau of Economic Research, Working Paper 29444, October 2021), Richard Baldwin and Rebecca Freeman examine GSCs in the context of COVID-19. Increased demand for personal protective equipment (masks) and medical supplies (ventilators, respirators, and dialysis machines) together with worker shortages and government-mandated shutdowns of production facilities caused serious goods shortages worldwide. Now, some policymakers are recommending shorter and more domestic GSCs to limit international exposure to foreign shocks, whether these shocks are specific to a country’s geographic region (environmental or geopolitical incidents) or are broader like COVID-19. Policymakers believe that GSCs should be made more diverse, for example by firms finding multiple suppliers. The authors address the risks associated with GSCs and discuss the likelihood that policies will be passed for shorter and more domestic GSCs. Also, the authors consider the effectiveness of these policies.

Risks to GSCs take the form of supply risks (geopolitical instability, natural disasters, cyberattacks), demand risks (macroeconomic crises, like recessions), or transportation risks (shortage of drivers). The authors consider whether GSCs are too risky. Baldwin and Freeman cite studies on COVID-19-related GSC shocks, which concluded that dismantling GSCs and shortening and domesticating them will not protect a country from shocks. Rather, this reshaping of supply chains will merely concentrate the risk to the domestic economy. In addition, the authors find that getting more information about GSCs and making them more diverse can help mitigate risk. A policy of increased information and supply chain transparency is called a no-regrets policy. The authors conclude that there is no downside to having more information.

The authors also address the effectiveness and likelihood of GSC-related policies. Addressing the effectiveness of any potential policy, they first argue that a policy is only effective if it properly targets the problem. For example, the shortage of personal protective equipment was due to a sudden spike in demand. Reshaping the GSC would have had no effect. Second, a no-regrets policy encourages countries to develop contingency plans (e.g., stockpiling goods and diversifying suppliers). Third, policy will be either a tax or subsidy (gasoline taxes and agricultural subsidies) or a regulation (financial markets) or will be controlled directly by government (public goods, such as self-defense). Fourth, a country resilient at the macro level can make it resilient at the micro level. For example, good monetary and fiscal policy can help mitigate the effects of economic shocks.

Certain producers in GSCs are too specialized to change them easily or even feasibly. The authors write that any firm can produce masks, but very few have the technology and scale to produce semiconductors. The government would need to believe that an economic shock is long term for it to introduce a policy meant to promote substantial changes to GSCs. Baldwin and Freeman argue that the government would need to enact policies that would subsidize U.S. production or tax foreign production to make GSCs for manufacturing more domestic. If not this, the government would need to regulate industry or take over production. For example, medical supplies and semiconductors can be considered part of our national defense and could justify policy like this. A policy reclassified as essential to national security could be serious enough to reshape GSCs for these products.