Risks and Global Supply Chains: What We Know and What We Need to Know

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 had been 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 at 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-resilience 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. Expected final online publication date for the Annual Review of Economics, Volume 14 is August 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Assessing the importance of risky products in international trade and global value chains

“…It should also be noted that despite severe disruptions, many value chains – for example in the food industry – have continued to function during the crisis (Miroudot, 2020 ). Baldwin and Freeman ( 2022 ) propose a risk-versus-reward framework according to insights from the portfolio theory and discuss foreign exposures and potential supply chain disruptions in an input–output framework. Their results argue using measures based on the global Leontief inverse (i.e.…”

“…Robustness and resilience of GVCs can, for example, also be achieved by providing information on potential concentration and bottlenecks along supply chains, urging stress tests for value chains in these categories, or engaging in strategic stockpiling of such products (see, e.g. also Baldwin, 2022 , coming to similar conclusions). Thus, there are several overlapping challenges at work here: (i) increase the resilience and robustness of global value chains, (ii) enhance competitiveness in industries and products which are deemed to be strategically (e.g.…”

Policies to strengthen the resilience of global value chains

“…Geographic concentration is computed from ICIO data as the share of the top-5 producers in total gross output. The measurement of industry concentration is based on past and ongoing work at the OECD (Bajgar et al, 2019[17]; Bajgar, Criscuolo and Timmis, 2021 [18]). The data measures concentration as the sum of sales of the top 4 firms over total production by 2-digit industry in 14 countries between 2016 and 2018.…”

“…Even though these proportions are only illustrative due to the ad-hoc definitions of geographic concentration and strategic importance, they nonetheless imply that risk mitigation policies are relevant only for a small fraction of GVCs. 18 In sum, in most value chains, ex-ante and ex-post adaptation measures are likely to be sufficient to deal with GVC disruptions. Moreover, even in highly concentrated and strategically important value chains, the potential benefits of risk mitigation policies need to be balanced with potential costs.…”

Deconstructing Deglobalization: The Future of Trade is in Intermediate Services

“…Why did the intensity of goods trade fall? Much of the fall in the mining and fuels ratio to world GDP is due to a large and long price swing known as the ‘commodity super cycle’ (Baldwin, 2022). The cause of the drop in manufactures ratio is less clear.…”