In the wake of the COVID-19 pandemic, global supply chains faced unprecedented challenges, leading to months-long delays in delivering goods and causing concerns among policymakers. Terms like “reshoring” gained popularity as companies contemplated moving manufacturing operations back to their home countries, such as the United States. However, a recent working paper sheds light on a more nuanced reality, describing it as the “great reallocation” rather than the end of globalization.
Harvard Business School Professor Laura Alfaro and Davin Chor, an associate professor at Dartmouth College’s Tuck School of Business, suggest that companies are shifting their operations to low-cost countries like Vietnam, Mexico, and Costa Rica. This move is not a retreat from globalization but rather a response to the evolving landscape of global trade.
The “great reallocation” is driven by various factors, including concerns about supply chain vulnerabilities highlighted by recent crises such as the COVID-19 pandemic, the war in Ukraine, and extreme weather events. Government policies have also played a significant role, with both the Trump and Biden administrations adopting tariff policies aimed at China while encouraging American companies to bring manufacturing operations back to the United States.
To understand the impact of these changes, Alfaro and Chor examined data from 2017 to 2022, a period marked by significant economic disruptions. They found that while the share of Chinese goods and services in U.S. imports decreased, it did not lead to a retreat from global trade. U.S. imports from other countries, such as Vietnam and Mexico, increased during the same period, highlighting the resilience of global supply chains.
Moreover, there is preliminary evidence of reshoring, particularly in the semiconductor manufacturing sector, as companies recognize the benefits of diversifying their production and supply chains. For example, Intel Corp. is investing in rebuilding operations in Costa Rica to reduce reliance on China for semiconductor chips and critical technologies.
However, it remains uncertain to what extent the U.S. can reduce its dependence on supply chains originating in China, as China increases trade and investment in countries like Vietnam and Mexico, indirectly linking the U.S. to China through third-party countries.
While the reshuffling of global supply chains offers advantages such as increased resilience, it may also result in higher costs and inflation concerns. Government trade policies may have accelerated the process, increasing the cost of relocating manufacturing operations and supply chains.
The authors suggest a need for further evaluation and consideration of the welfare tradeoffs associated with these changes. Despite challenges, global supply chains proved resilient during the pandemic, helping meet surging consumer demand. The pandemic highlighted the importance of adaptability and diversification in the ever-evolving landscape of international trade.