University of California San Diego School of Global Policy and Strategy research suggests that a post-pandemic global supply chain retrenchment is unlikely to happen. The study from economist Caroline Freund, dean of the School of Global Policy and Strategy, examines natural disasters’ long-term consequences on global supply chains. The paper relies on detailed international trade data for two major Japanese export sectors—automobile and electronics—and looks at whether, after the 2011 earthquake in Japan, importers more dependent on Japan before the earthquake behaved differently than less dependent importers.
The research published by International Monetary Fund Economic Review reveals that importers dependent on Japan before the earthquake reduced their dependence on Japan. Still, they did not re-shore, nearshore, or increase import diversification in either auto or electronics.
Importers highly dependent on specific products from Japan before the 2011 earthquake increased total imports of those products, intensifying offshoring rather than reshoring.
Comparing the actions taken by businesses during and after the COVID-19 pandemic to efforts after the earthquake, their research showed that although the shock led to a partial reconfiguration of supply chains, there is no evidence that supply chains were increasingly re-shored or nearshored. Manufacturing that did move out of Japan shifted to low-cost developing countries. That is also true with disruptions to exports from China; manufacturing is moving to countries such as Vietnam.
One key difference between the earthquake in Japan and the COVID-19 pandemic is that factories were destroyed in the former but not in the latter. Firms are more likely to keep production where it is, rather than incurring the costs of building new facilities closer to home or in other countries.
For more information, view the paper: “Natural Disasters and the Reshaping of Global Value Chains”
