The macroeconomic effects of global supply chain reorientation

Policymakers around the world are (re)considering the trade-off between efficiency and resilience inherent in global supply chains. Many have introduced legislation seeking to encourage the local production of key inputs to reduce risks from excessive dependencies on external suppliers. We analyse the macroeconomic effects of localisation policies, such as reshoring and friend-shoring production, using a novel non-tariff mechanism in a global dynamic general equilibrium model. We find that localisation policies imply transition costs and their long-term impact on aggregate domestic output are generally negative. The size (and sign) of the impact depends on whether these policies are implemented unilaterally or as part of a global shift and, most importantly, the extent to which they lead to a reduction in domestic competition and productivity. Untargeted localisation policies are also unlikely to achieve their goal of improving macroeconomic resilience, as sensitivity to regional shocks increases, while resilience to global shocks improves only marginally. Based on these findings, we provide some tentative recommendations for policymakers considering implementing a localisation agenda.