While disruptions, transport network bottlenecks,and economic concerns are causing supply chains to diversify, actions that only emphasize localizing all production within national borders would harm growth. This is according to a recent report, OECD Supply Chain Resilience Review.
Drawing on a broad assessment of supply chain structures and vulnerabilities, the Review finds that most trade flows remain relatively diversified, though import concentration is on the rise as countries are increasingly sourcing products from fewer suppliers than is globally possible.
In this regard, the number of products sourced from a limited range of suppliers is 50% higher in the early 2020s compared to the late 1990s - a trend that could increase vulnerability to external shocks.
The trend is almost entirely driven by non-OECD countries, however, as OECD countries’ level of significant import concentration has remained stable over the observed period. China’s contribution to countries’ level of significant import concentration has increased from 5% to 30% over the past 25 years, while the combined contribution of the United States, Germany and Japan decreased from 30% to 15%.
“Responses to concerns about security of supply and market concentration, as well as the long-term transformation of trade flows, risk creating undesirable distortions," said OECD Secretary-General Mathias Cormann, in a statement.
"For trade to continue to provide the foundation of our shared prosperity, and to ensure trade delivers on our citizens' expectations, we need to work together to enhance the reliability and resilience of our supply chains.
"As we reflect on the future of trade, we should always remember its contribution to lifting living standards across the world, and that balanced approaches are needed, in order to mitigate supply chain risks without unduly compromising the benefits that come from global trade for competition, innovation, productivity, efficiency and ultimately growth."
The agency notes that policies aimed at making supply chains more domestic could reduce global trade by over 18% and global real GDP by more than 5%, without consistently improving resilience to disruptions, the review notes. In fact, GDP stability would decrease in more than half of the economies analyzed, challenging claims that relocalization is inherently more stable.
The Review also finds that exposure to production shocks varies by sector. Strategic manufacturing sectors, critical for national and economic security, with more complex supply chains, such as petroleum and electronics, are the most exposed. Shocks in domestic sectors also often have a greater impact than those arising from foreign sectors.
The digital transformation and policies pursuing environmental objectives are also reshaping global supply chains. Laws and regulations with environmental objectives affecting supply chains may cover almost half of global economic output either directly or indirectly.
This legislation aims to ensure environmental and social impacts are better managed, but also raises compliance costs, particularly for small and medium-sized enterprises and firms in developing economies. Similarly, the digital transition can facilitate traceability in and preparedness and responsiveness of supply chains, but also introduce new vulnerabilities, such as exposure to cyber risks and reliance on a limited number of global service providers.
The Review calls for policy frameworks that strengthen the resilience and overall performance of supply chains. Governments should adopt proactive policy approaches, including promoting trade facilitation to streamline trade procedures, reducing trade barriers in service sectors that underpin supply chains, such as transport and finance, and facilitating digitalization in supply chains with efforts to address security concerns for cross-border data flows. International co-operation and close co-ordination with the private sector are central to developing and implementing these approaches.
To support decision-makers, the Review includes a statistical annex for each OECD member country to monitor countries' degree of interdependency with trading partners and the preparedness of their policy landscape for facilitating agile, adaptable and aligned supply chains.
Note: More resources from the OECD on resilient supply chains.
