Efforts to relocalise supply chains by sourcing components from domestic rather than international suppliers may have negative effects on global trade, while doing little to benefit resilience, the OECD has warned.
Modelling from the organisation’s latest Supply Chain Resilience Review shows that a global focus on sourcing supplies domestically could cause global trade to fall by more than 18%, while cutting global GDP by over 5%.
Major economies, including G7 nations Canada and the UK, could see their annual GDP fall by more than 10% under such scenarios.
Large exporters like India and China would be the least affected, but no country included in the OECD’s modelling would see an increase in GDP compared to a scenario in which supply chains are not reshored.
A reshoring scenario would also do little to increase supply chain resilience, the report says, contrary to “claims made in the general debate” on the risks of globalised supply chains.
Recent global shocks, including Covid-19, Suez Canal disruptions and Russia’s invasion of Ukraine, have all increased uncertainty about global trade, and the report notes that business surveys show a rising number of companies planning to make “significant investments in reshoring, relocating and broadening their supplier base”.
Some countries, most notably the US, have also moved to a more protectionist stance in recent years. President Donald Trump’s imposition of global tariffs has forced companies to reconsider their supply chain strategies, and his ‘America First’ policies are intended to encourage US companies to use domestically manufactured goods.
But the OECD cautions that there are risks in domestic markets that can be akin to those in foreign countries from which inputs are sourced. “Firms seek resilience strategies for all types of risks and cannot focus only on risks related to foreign supply,” the report says.
The OECD says the impact of supply chain shocks on a nation’s GDP, production and consumption would be no less in a relocalised scenario than one of globalised supply chains.
In fact, reshoring would mean supply chain shocks would have a greater impact on GDP, production and consumption for many countries, the modelling suggests.
Widespread reshoring of supply chains does not appear to be prevalent in the Western world. The report shows that OECD countries still export to and import from a wide range of possible markets, and trade concentration among the G7 nations has decreased since the late 1990s.
Outside of the G7, however, import concentration is growing. This trend is largely driven by an increased reliance on China, which now accounts for almost a third of countries’ significant import concentration, up from 5% at the turn of the century.
This rising dependence on China means that many goods, even those available from multiple sources, are increasingly being sourced from Chinese suppliers. The data suggests that recent moves by corporates to diversify away from China have not yet had a significant impact .
The OECD says this kind of trade dependency is dangerous, as it leaves importers exposed to supply restrictions, policy changes or geopolitical instabilities in the partner country, but domestic shocks would have a greater impact.
In two OECD example models – motor vehicles in Germany and South Africa’s entire economy, broken down by sector – domestic supply chain shocks are seen as having the biggest impact on output, followed by disruptions originating in China.
Policy recommendations
Rather than turning inward, the OECD argues that countries and companies should focus on developing resilience within global supply chains. It proposes countries implement policy aimed at four areas: trade facilitation, efficient services regulations, digitalisation and cooperation, both internationally and with the private sector.
Trade facilitation policies, such as the streamlining of import and export processes, reduce the costs associated with moving goods, allowing for more efficient inventory management. This is particularly important in crisis situations, the report says, where “expedited import and export of goods can save lives”.
Currently, Europe and Central Asia perform best across indicators of trade facilitation assessed by the OECD, while Sub-Saharan Africa ranks the lowest.
The OECD recommends governments take “ambitious efforts” to ease trade barriers, including restrictions on owning and registering vessels under national flags, restrictions on the chartering of vessels, obligations to use local maritime port agents and visa restrictions for crew entering a country. This report says this can be achieved through creating common regulatory standards, fostering international cooperation and lifting market barriers.
Digital transformation policies include the streamlining of data regulations to increase the uptake of digital services and improving cross-border data flows through programmes like the World Trade Organization’s Joint Initiative on e-commerce.
The OECD also calls for international and private sector cooperation to create “aligned” supply chains where “all partners have incentives to improve the performance of the entire chain”.
In practice, this means information-sharing between countries to improve transparency and trust in global markets, regulatory alignment on trade and logistics, and identifying opportunities for technical assistance and capacity building between nations.
