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he increasing integration of more and more economies into international trade and production has shaped the modern world – both as a driver of growth and sometimes as a source of instability. This globalisation now appears to be at a tipping point. Its vulnerabilities and disadvantages have triggered a rethink. Many companies that used to source their inputs from around the world now face tough times and are being forced to adapt. The reasons for this are clear. For example, many customers in Europe had to wait several months for a new car as critical parts, like microchips from Asia, became scarce in 2021. And Russia’s war in Ukraine has laid bare the euro area’s dependence on energy and critical raw materials from just a few suppliers.
Are we merely seeing a reshuffling of supply and production chains? Or is this a paradigm shift and the start of a new trend towards deglobalisation?
Let’s take a step back and look at the ways firms can make their production and supply chains secure and resilient. They can establish stockpiles of resources that can serve as buffers in the face of unexpected disruptions. They can broaden the range of countries from which they acquire the resources they need to produce goods and services. They can also go even further and relocate production back home or to neighbouring countries – known as reshoring and nearshoring respectively. All of these options have distinct implications for the integration of global trade.
For instance, reshoring, which can prompt deglobalisation, entails benefits and costs. It can benefit firms and consumers if it provides better control of production processes. Reshoring can also reduce the negative effects that disruption in one country can have in others.
But reshoring is also likely to have drawbacks. Less geographical diversification leaves a country more vulnerable to domestic shocks.[1] The deglobalising effects of reshoring can also reduce international trade and cross-border investment, while making it harder to transfer productivity gains from one country to another. All this can reduce prosperity, especially in the small, open economies that benefit most from international trade. Transferring production back from overseas can eliminate previous gains from international comparative advantages and increase domestic production costs.[2]
The past decade has been characterised by a trend towards nearshoring. Yet, trade data provide no clear evidence that recent events – e.g. pandemic and war – have accelerated this trend. The data also do not indicate reshoring of production chains to Europe.
Chart 1 shows that in the past decade the share of intermediate goods imported from within the EU increased.[3] This mirrors the long-term global trend of producing goods closer to their final markets, which has benefited central and eastern European countries.[4] This shift has reversed in the wake of the pandemic as the share of both intermediate and strategic goods imported from the EU decreased. And it is the result of comparatively smooth global supply chain conditions and cheaper input costs outside the EU.[5]
Overall trade in intermediate goods (a reliable indicator of global production chains) has remained high. The share of trading partners from outside the EU accounted for about 40% of total imports of intermediate goods (including those between euro area countries) in 2022. The figure for strategic goods was even higher, at 65%, with Asia as the major sourcing region owing to its leading role as an exporter of electronics.[6] Analysis shows that there is no change in the pattern of euro area imports of intermediate goods from within the EU compared to those from outside the EU.[7]
These data support survey and anecdotal evidence that there has been no strong response in terms of reshoring within the EU. Companies are instead pursuing other strategies, including diversifying suppliers (e.g. via the increase of sourcing countries) and building up strategic inventories.[8]
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