The economic impact of supply-chain decoupling due to geopolitics
In this paper, Attinasi et al. conduct a detailed analysis of the economic costs of supply chain decoupling, considering various scenarios and their potential impact on different economic variables. The authors use a non-linear model developed by Baqaee and Farhi (2023)and focus on the short-term effects of supply chain decoupling, considering both flexible and rigid economic setups. They present various scenarios and their potential impact on welfare, nominal variables, and global income. The model used in the paper captures rich sectoral interlinkages through production networks and heterogeneities across countries. The production technology is specified using a constant elasticity of substitution (CES) production function. The model is calibrated on the 2017 version of the ADB MRIO table, which covers 73 countries and provides a more balanced sample compared to the 2008 WIOD table used in the original model.
We find that, in terms of welfare losses, the costs of decoupling are roughly five times higher in the short run compared to the long‐run, while country losses are heterogeneous. A reshaping of global supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade‐intensive manufacturing sectors. Global supply chain decoupling entails also a reallocation of labour across skill levels. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production.
The economic costs of supply chain decoupling
Authors: Maria-Grazia Attinasi, Lukas Boeckelmann, Baptiste Meunier
From: ECB
Which countries will be impacted the most?
In this paper, Hakobyan et al. use a structural gravity framework to examine the sensitivity of bilateral trade to geopolitical factors and present estimates of the impact of geopolitical alignment on trade patterns across countries and sectors. They find that differences in individual countries’ geopolitical ties act as a barrier to trade, with the largest effects concentrated in food and high-end manufacturing. The authors then introduce a dynamic many-country, many-sector quantitative trade model to explore the long-run macroeconomic impacts of various fragmentation scenarios. They find that geoeconomic fragmentation leads to lower trade and incomes, with emerging markets and developing economies (EMDEs) being the most impacted. The real per-capita income losses for the median EMDE in Asia are 80 percent larger, and for the median EMDE in Africa 120 percent larger, than for the median advanced economy. This suggests that the costs of trade fragmentation could “fall disproportionately on countries that can afford it the least.”
Divided We Fall: Differential Exposure to Geopolitical Fragmentation in Trade
Authors: Shushanik Hakobyan, Sergii Meleshchuk, Robert Zymek
From: IMF
