Recent disruptions, transport network bottlenecks and rising concerns about economic security all point to the need to strengthen and diversify supply chains. However, simply re-localising all production within national borders would harm growth and undermine, rather than strengthen, supply chain resilience, according to a new OECD report.
The OECD Supply Chain Resilience Review emphasises the importance of agile and effective risk management and offers evidence-based insights to strengthen supply chain resilience in the face of multiple complex global challenges, to help firms and governments to navigate uncertainty without retreating from international trade.
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. 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," OECD Secretary-General Mathias Cormann said. "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. Towards this objective, the OECD will continue to foster dialogue, offer insights, and provide robust evidence-based analysis to help governments make globalisation work better for people."
The Review finds that policies aimed at relocalising - 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. In fact, GDP stability would decrease in more than half of the economies analysed, challenging claims that relocalisation 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 take proactive policy approaches, including promoting trade facilitation for more efficient trade procedures, reducing trade barriers in service sectors that underpin supply chains such as transport and finance, and facilitating digitalisation 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 develop and implement 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.
