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How to Deglobalize

  • Geoffrey Gertz
  • Aug, 2020
  • 169
  • Argument

In the midst of the COVID-19 pandemic, politicians are calling for a rethinking of global supply chains. If they are serious, they’ll need to proceed carefully

Following the global COVID-19 pandemic, a wave of politicians have railed against the supposed vulnerabilities of global supply chains and promised to bring production of critical goods back home.

In the United States, the Trump administration is reportedly “turbocharging” its plans to disconnect supply chains from China and debating a new $25 billion “reshoring fund” to encourage U.S. firms to bring manufacturing back to the states. Not to be outdone, presidential candidate Joe Biden’s campaign has outlined how his administration would tackle supply chain vulnerabilities. He’s placed the topic alongside trade, taxes, and immigration as key planks for managing globalization. Meanwhile, European Union Trade Commissioner Phil Hogan has argued that Europe needs to diversify its supply chains in order to promote “strategic autonomy,” while also noting that autonomy doesn’t necessarily mean full self-sufficiency. Japan has perhaps acted the most decisively so far, announcing a new fund to subsidize Japanese firms moving production out of China; to date 87 companies have taken the government up on the offer. South Korea is exploring similar ideas.

Many outside analysts are skeptical that such plans for deglobalization will succeed. They rightly note that contemporary global supply chains are extremely complex, the outcome of millions of individual uncoordinated firm decisions. Any attempts to unwind these processes will be cumbersome and costly. Although COVID-19 has prompted firms to revisit the trade-offs between efficiency and resiliency in their own supplier relationships, this does not mean that they’ll welcome government interference in such assessments. In fact, early reports suggest that firms around the world have been cool to their governments’ efforts to woo them away from China.

The skeptics are correct that rewiring supply chains will be difficult, and that firms are unlikely to simply fall in line with the wishes of politicians, particularly when doing so cuts against their bottom lines. Yet governments have more power to shift supply chains than may be obvious at first glance: Yes, it’s true that global supply chains reflect individual firm decisions. But these decisions are made within a policy environment set by governments. The current form of globalization is a policy choice; other worlds are still possible.

And it might be worth pursuing them. Although some politicians’ rhetoric on supply chains may drift into old-fashioned protectionism, there are genuine concerns about the risks and vulnerabilities that have developed through deep globalization. Complex global supply chains have undoubtedly improved efficiency and increased consumer choice, but they have also limited states’ abilities to manage, regulate, and, when necessary, direct the flow of critical goods. Governments should take the threats of supply chain disruptions seriously, whether from natural disasters, economic crises, or the deliberate weaponization of interdependencies in the global economy. And they should realize that firms’ individual private interests may not always align with broader public interests, suggesting greater government intervention may be needed.

What is clear, however, is that political exhortations alone won’t shift supply chains: Governments need concrete policy proposals, not vague directives, if they want to see real change. Moreover, restructuring supply chains should be done carefully and strategically, not through ad hoc, piecemeal policy announcements. In short, governments need to do their homework before acting. Rushing to dole out untargeted subsidies or implement new export controls will be both costly and ineffective: Governments will end up not only wasting money but also failing to address the vulnerabilities that worried them in the first place. Here are some practical steps to get started.

First, governments need better information on the existing structure of supply chains. Modern supply chains are intricate webs of purchasing relationships linking hundreds of firms across dozens of countries; while many individual firms map their direct suppliers to assess potential vulnerabilities, it is difficult to piece together the bigger picture of backward and forward linkages both within and across industry groups. In general, governments do a good job tracking when products move across borders (in part because they want to tax them, through tariffs), but they do a far worse job measuring how various intermediate inputs are integrated into supply chains, or how domestic and foreign production processes interact.

This dearth of data means that governments not only are blind to potential vuln...

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