It is just over six months since the eu, panicking about its covid-racked member states blocking sales of face masks to each other, systemised sauve qui peut protectionism and restricted european exports of protective gear to the rest of the world.
A worldwide rush towards medical export restrictions raised fears of bans and shortages in other vital goods, especially food. more generally, governments encouraged by analysis such as a widely-discussed mckinsey global institute report on production chains feared that overextended global value networks had made economies vulnerable to supply disruptions.
Bureaucratic machinery cranked into life. in april, the japanese government announced $2bn for its companies to subsidise diversifying or reshoring supply chains. this week, eu member states will ask the european commission, the unions executive arm, to assess vulnerabilities in strategic sectors that might later be filled by an active industrial policy. joe biden is promising a break with previous democratic administrations with a big expansion of buy american domestic procurement and bringing production in sensitive products home from china.
However, early expectations of a spontaneous rapid shift in supply chains have been downgraded. resistance is emerging from business to being bounced into reshoring. and, experts note, the imperative has diminished as widespread disruptions in goods supplies have not materialised. it is likely to take sustained influence by governments, probably reflecting geopolitical tensions, to effect significant change.
Compared with the global food crisis in 2007-08 there have been few large-scale blocks on food exports, with odd exceptions such as russia, and no worldwide spike in prices. apart from one or two products affected by rapid shifts in demand, such as domestic toilet paper, there have not been many obvious shortages of consumer goods. covid restrictions have affected labour-intensive and personal services, particularly transport, tourism and hospitality. but capital-intensive manufacturing and goods trading have mainly been hit by reduced demand rather than interrupted supply.
Anabel gonzlez, senior fellow at the peterson institute think-tank and a former costa rica trade minister, says: ultimately, decisions on supply chains are made according to fundamentals like production costs and access to large markets like china. most of those factors havent changed. before the pandemic, she says, some companies were already spreading risk by diversifying part of their production from china to countries like mexico and vietnam, but at most covid-19 has encouraged rather than created that trend.
True, some japanese companies, particularly those producing basic medical equipment abroad for the home market, have applied for the government subsidies. but others with investments in china have been sceptical. a minority of american companies generally with low-value chinese operations such as making clothes and assembling smartphones are leaving, but few have gone back to the us. the mckinsey report itself said the feasibility of large-scale relocation of high-value innovative industries based on economics alone was low.
The us pharmaceutical industry, often cited as a priority for reshoring, has marshalled a determined counter-attack to official pressure. it says setting up a new biopharmaceutical facility can take 5-10 years and cost $2bn, and points at the effects of hurricane maria on the production of medication in puerto rico in 2017 as evidence of the vulnerability of geographical concentration. in the eu, business associations such as the confederation of swedish enterprise have also tried to push back against the reshoring lobby.
Economists stress that it is too early to tell beyond anecdotal evidence whether the pandemic has seriously affected foreign direct investment. but emily blanchard, associate professor at the tuck school of business at dartmouth college, says governments will probably have to put a lot of money behind domestic procurement, or radically change regulation as they have with online tech companies, to effect a big shift.
Prof blanchard says: any long-term effect of the pandemic on global value chains won't be so much from the disruptions to trade we have seen so far but the extent to which it facilitates large-scale trade-restrictive policies from governments in the future.