Effects of US supply chain re-orientation: Part I

Executive Summary

Many American industries, especially manufacturing, have become more dependent on foreign suppliers over the past few decades. But the lockdowns that many countries have employed to combat the spread of COVID-19 could lead some of these industries to rethink their supply chains. In the first report in a two-part series, we explore which U.S. industries could face the biggest adjustments if they shift from foreign vendors to domestic ones, as well as the macro effects on the U.S. economy and its major trading partners.

The aircraft & aerospace industry has registered the largest increase in its ratio of imported inputsto- total imports since 1997. In addition, the leather & apparel, machinery, auto & auto parts, and electrical equipment industries have all experienced large increases in their respective imported input ratios. These industries would potentially face the most significant adjustments if they reoriented their supply chains back toward domestic vendors, although the effect on the macro U.S. economy would not be very large. We also find that China would have the most to lose on an absolute basis, although Mexico and Canada would be the biggest relative losers given their extensive trade ties with the United States.

Will the Pandemic Cause Supply Chains to Move Back on Shore?

The ongoing COVID-19 pandemic will have a depressing effect on the global economy this year. As we discussed in our most recent Monthly Economic Outlook, we look for global GDP to contract nearly 4% in 2020, the sharpest slump in decades, before rebounding in 2021 under the assumption that the outbreak is brought under control and/or an effective vaccine is developed in the not-toodistant future.

But the pandemic could also have some more lasting effects on the global economy. Specifically, lockdown measures have called into question the desirability of supply chains that stretch around the world. For example, China, which is a critical link in the supply chains of many manufacturers, was essentially shut down for a month or two earlier this year. Although some businesses were starting to move operations out of China due to a number of different reasons, concern about future pandemics could accelerate the pace of relocation out of China. Could supply chains be moved from China and other countries back to the United States?

In the first of a two-part series of reports, we analyze the effect on different industries if firms reorient their supply chains to domestic vendors. Industries that have developed complex global supply chains over the past few decades may face some meaningful adjustments in coming years, if they curtail the use of their current foreign vendors in favor of domestic ones. But some domestic industries that have been negatively impacted by the embrace of foreign suppliers over the past few decades could benefit if supply chains move back onshore. We analyze this potential benefit in an upcoming second report.

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