Hidden Exposure: Measuring U.S. supply chain reliance

BBL summary

Global framing of supply chain disruption issues

Historically, global supply chains were perceived as drivers of productivity and growth, benefiting both developed and developing nations. However, the contemporary perspective has shifted, now characterizing them as potential sources of vulnerability. The recent G7 Communique underscored the significance of supply chain resilience, acknowledging it as a critical concern. Heads of state are increasingly vocal about supply chain disruptions and the inherent vulnerabilities they introduce.

What led to the shift from a positive perception to one of uncertainty and vulnerability? The focus lies in the concept of supply chains as “links” and disruptions as “shocks.” The problem doesn't stem from the links themselves. Rather, there has been a noticeable trend toward de-fragmentation in the global supply chain. Between 1995 and 2013, production fragmentation increased, but in the last decade, this trend has reversed. Presently, world supply chains are experiencing a shift towards localization: they are becoming less “involved.”

Analyzing Japan's reliance on imported industrial inputs from 1995 to 2020 reveals that the percentage of Japan's industrial inputs has remained relatively stable since 2015. There is no discernible escalation in the extent of dependence on foreign imports. Additionally, the proportion of Japan's imports of industrial inputs in relation to all industrial imports demonstrates a declining trajectory. It becomes evident that the challenge posed by foreign shocks does not arise from an increase in the links to foreign sources.

The crux of the issue lies in the nature of the shocks themselves. In the past, shocks were predominantly idiosyncratic, confined to specific sectors or nations, such as earthquakes or strikes. However, the contemporary landscape presents more systemic and prolonged shocks, concurrently impacting numerous sectors and nations simultaneously. Instances like U.S. tariffs, Brexit, the COVID-19 pandemic, and events like the Russian invasion of Ukraine and now the war in the Middle East exemplify this shift. While businesses could navigate idiosyncratic shocks, systemic shocks prompt governmental involvement due to their widespread and enduring impact.

We have classified these shocks into six distinct combinations based on their source: supply, demand, or the connectivity between supply and division. Furthermore, we classify the shocks as either idiosyncratic or systemic in nature. It's crucial to emphasize that these shocks are not mutually exclusive and in fact can have causal interlinkages. While the media recently attributes these shocks almost exclusively to supply-related issues, we contend that the problem is more intricate and extends beyond such simplistic characterization.

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