The desire to “make supply chains more resilient” has been a major talking point for conservationists (and other industrial policy advocates). The talk is more urgent since the COVID-19 pandemic has allegedly shown how fragile global supply chains are. A few years ago, I wrote a post questioning the authenticity of such claims from a market failure perspective. Here, I will question the theoretical and empirical foundations of the claim.
The argument that protectionism can make supply chains stronger is important. Prima facieIt makes sense: when supply chains are distributed, they will be subject to more political, social, and economic conditions in a larger area. For example, if a company’s supply chains pass through Argentina, China, Germany and Canada, then political and social unrest in those areas can affect procurement. If the series were completely domestic, the political and social problems in those countries would not really affect the company.
However, some considerations show the weakness of such an argument. They say it’s common sense not to put all your eggs in one basket. Rather, diversification is a way to reduce the risk of catastrophic losses. If all your eggs are in one basket and that basket should break, you lose all your eggs. If your eggs are spread over many baskets, your risk of loss is much less if one basket breaks.
The same is true for supply chains. If firms rely on a single supplier, then they are more vulnerable to production shocks (for a technical discussion of this point, see or this paper by Acemoglu et al or this paper according to me). A single shock has negative effects on the entire economy, which may affect firms far away from the initial shock. Indeed, the shock effect is big ones where there is less variation, such as an avalanche, than when there is more variation.
In theory, protectionism can make supply chains more fragile than under free trade. And, empirically, we see this effect playing out. The latest paper from Japan looking at Asian firms during the COVID-19 crisis found that firms with strong ties to the global economy had stronger supply chains and better performance than those with weaker ties. When supply shocks hit, global firms had many partners to choose from and could absorb the shock. Firms with fewer ties to the global market could not easily absorb shocks and thus perform worse.
In theory, we can expect protectionism to make supply chains more fragile. In reality, this is exactly what we see. If politicians really want to protect the supply chain, then getting out of the way and letting firms build their own network of partners will do more good than protection. By increasing the costs to domestic firms of creating such powerful networks in the global economy, protectionism weakens the very thing it is meant to strengthen. Defense does no good; injury only.
*In the case of a globalized world like ours, this last statement is not entirely true. Many things are traded around the world, so anything that affects global prices will affect the company, regardless of how it is connected to international trade. But, to strengthen the defense argument, we will ignore this fact.
Jon Murphy is an assistant professor of economics at Nicholls State University.
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