Working Paper: CEPR ID: DP16672
Authors: Richard Baldwin; Rebecca Freeman
Abstract: Recent supply disruptions catapulted the issue of risk in global supply chains (GSCs) to the top of policy agendas and created the impression that shortages would have been less severe if GSCs were either shorter and more domestic, or more diversified. But is this right? We start our answer by reviewing studies that look at risks to and from GSCs, and how GSCs have recovered from past shocks. We then look at whether GSCs are too risky starting with business research on how firms approach the cost-resiliency trade-off. We propose the risk-versus-reward framework from portfolio theory as a good way to evaluate whether anti-risk policy is justified. We then discuss how exposures to foreign shocks are measured and argue that exposure is higher than direct indicators imply. Finally, we consider the future of GSCs in light of current policy proposals and advancing technology before pointing to the rich menu of topics for future research on the risk-GSC nexus.
Keywords: risk; resilience; supply chains; GVCs; input reliance; globalization
JEL Codes: F10; F12; F13; F14; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Disruptions in GSCs (D59) | Significant shortages in essential goods (P33) |
| Reliance on foreign inputs in GSCs (F64) | Amplification of macroeconomic shocks (F41) |
| Disruptions in one part of the supply chain (L14) | Propagation through to the overall economy (F69) |
| Decoupling from GSCs (F69) | Increased domestic risk (F52) |
| Policies aimed at reducing reliance on GSCs (F68) | Overlooking benefits of diversification (G11) |