2024-06-20-IMF-The_Price_of_De-Risking_Reshoring,_Friend-Shoring,_and_Quality_Downgrading_30页_1mb

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

Introduction
This working paper analyzes the economic costs of de-risking scenarios between China and OECD countries, focusing on reshoring, friend-shoring, and quality downgrading. De-risking involves reducing reliance on foreign supply chains to mitigate risks, but it risks significant economic losses.

Aggregate De-Risking

• Reshoring: Increased domestic sourcing leads to a 4.5 percent permanent loss in global GDP, with larger impacts on open economies like Korea.
• Friend-Shoring: Shifting imports away from rivals to friends results in GDP losses of 1.8 to 0.4 percent globally. Friend-shoring policies are distortionary and do not yield net benefits for third countries like the rest of the world.

Sectoral De-Risking

• Quality Downgrading: Export bans and reduced access to high-quality inputs can cause substantial productivity losses. For example:
  • Semiconductors: China faces a 5 percent quality drop, while OECD economies see no change.
  • Environmental goods: China loses about 11 percent in quality, and OECD economies lose 5 percent. Overall, both sides could experience an 8 percent input quality decline, leading to significant output losses.

Conclusion
De-risking measures between China and OECD countries impose large negative effects at both aggregate and sectoral levels. These scenarios highlight the risks of supply chain fragmentation and underscore the need for maintaining global economic cooperation to avoid further de-risking.