The Price of De-Risking Reshoring, Friend-Shoring, and Quality Downgrading

The Price of De-Risking Reshoring, Friend-Shoring, and Quality Downgrading
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Volume/Issue: Volume 2024 Issue 122
Publication date: June 2024
ISBN: 9798400269646
$20.00
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Exports and Imports , Economics- Macroeconomics , Economics / General , De-risking , fragmentation , reshoring , friend-shoring , export bans , quality downgrading , , GIMF model , quality downgrading , trade diversion benefit , OECD member , OECD economy , Global value chains , Exports , Imports , Global , Southeast Asia , Asia and Pacific

Summary

This paper estimates the costs of ‘de-risking’ scenarios between China and OECD members at the aggregate and sectoral levels. Aggregate large-scale de-risking – reshoring by increasing reliance on domestic production and friend-shoring by reducing imports from specific foreign countries – is quantified with the IMF’s GIMF model, suggesting significant permanent effects on the global economy. Returning integration to 2000 levels translates into long-term global GDP losses of 4.5 percent under reshoring and as much as 1.8 percent under friend-shoring. Friend-shoring does not necessarily deliver a boon to third countries as trade diversion benefits might be largely offset by contractions in China and OECD members. Sectoral de-risking, where all trade between rivals is eliminated in specific products, is quantified through empirical estimation of the scope for quality downgrading. The results demonstrate the potential for significant losses in input quality should there be an escalation in export bans. Losses are asymmetric against China in the specific case of semiconductors but can be significant for both sides in other sectors—including in critical areas such as environmental goods.