Global supply chains took some heat during the COVID-19 pandemic, with consumers waiting months for goods and politicians wringing their hands over trade policy. “Reshoring” is one of the hottest new corporate buzzwords, as many companies look to move some manufacturing operations back to the United States.
But appearances can be deceiving. What may look to more casual observers like the end of globalization—or, at least, a major step back—is anything but, suggests a new working paper. Call it instead the “great reallocation,” says Harvard Business School Professor Laura Alfaro, whose work documents how and why companies are moving operations to low-cost countries like Vietnam, Mexico, and Costa Rica.
They moved into a world where they thought there were no more shocks. Now, they realize there are shocks of many kinds.
It’s unclear what impact this massive reshuffling of global supply chains will have on US businesses and consumers, with worrying signs that it could result in higher costs and prices, say Alfaro and her coauthor Davin Chor, an associate professor at Dartmouth College’s Tuck School of Business. Yet, there are also advantages to diversification that could help companies weather the next global shock or crisis when it inevitably happens.
“Some geographic diversity may pay off,” Alfaro says. “Firms used to know this, then they moved into a world where they thought there were no more shocks. Now, they realize there are shocks of many kinds.”
A new sense of vulnerability
A series of major crises and surprises over the past few years raised concerns of the potential fragility of sprawling supply chains for both companies and governments.
The rethinking extends beyond the COVID-19 pandemic and the war in Ukraine to include extreme weather events such as the 2011 Tohoku earthquake and tsunami in Japan, the paper notes.
Government policy has played a leading role. The Biden Administration has continued former President Trump’s tariff policies aimed at Chinese goods, while also offering incentives that encourage American companies to bring manufacturing operations back from China.
The authors examine the effects of these variables between 2017 and 2022, a tumultuous period that put stress on the global economic system. They crunch product-level trade statistics from United Nations Comtrade, as well as information on US manufacturing, multinational activity, and foreign direct investment from multiple sources, including corporate earnings calls.
Less business in China, but trade remains global
One major takeaway from the analysis: The share of Chinese goods and services fell to 16.5 percent of all US imports in 2022, down from a peak of 21.6 percent in 2017, Alfaro notes.
Yet, the step back from business with China did not represent a retreat from global trade; US good imports hit an all-time high of $3.2 trillion in 2022, according to the US Census Bureau. That indicates that global supply chains were more resilient than commentators believed.
While the share of US imports from China fell, they were replaced by imports from other locations. For instance, the share of imports from Vietnam and Mexico, the paper notes, increased 2 percentage points and close to .7 percentage points, respectively, over the same five-year period.
In addition, there has also been some very preliminary evidence of reshoring amid plans to boost semiconductor manufacturing in the US, says Alfaro, whose research shows that worker headcounts in that space rose by 1.9 percent in the US between 2017 and 2022, but not in other sectors.
The Intel example of diversification
Companies are also starting to recognize—and rediscover, as in the case of Intel Corp.—the benefits of diversifying their global production and supply chains, Alfaro says.
The chip manufacturer downsized its plant in Costa Rica in 2014 and relocated many operations to Asia, where costs were lower, Alfaro explains. Now, with the US looking to shift its reliance on China for semiconductor chips and other critical technologies, Intel is spending more than a billion dollars to rebuild its operations in Costa Rica, which is a closer flight to the US.
One lesson leaders can learn from Intel’s story: Geographic diversification can provide a backstop against some of the inherent risks that come with relying on global supply chains and operations, says Alfaro.
Where do we go from here?
Despite all the upheaval, it’s not clear to what degree the US will succeed in reducing its dependence on supply chains that originate in China. As American companies relocate operations from China to Vietnam and Mexico, China, in turn, is increasing both trade with and investment in those two US trading partners, Alfaro says.
“This means that the US could well remain indirectly connected to China through its trade and [global-value chain] links with these third-party countries,” the paper notes.
The global supply chains actually helped us during COVID-19.
Moreover, there are growing concerns that the reshuffling of global manufacturing and logistics systems could prove more expensive than anticipated at a time when concern over inflation remains high. Government trade policy may in fact have pushed companies to move faster than they would have liked, raising the cost of relocating manufacturing operations and supply chains, Alfaro says.
The authors suggest further evaluation may be warranted. Alfaro suggests that what is missing amid current debates is the need to evaluate these welfare tradeoffs.
While there is a popular perception that the pandemic highlighted the problems with far-flung global supply chains, the reality is far different, Alfaro says. If anything, the global supply chain stood up under intense pressure as federal monetary policy and pandemic relief programs stoked a huge surge in consumer demand.
“The global supply chains actually helped us during COVID-19,” Alfaro says. “[Demand] would have been very hard to fill just by domestic supply chains.”
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