RIETI Report December 9, 2022

The economic effects of import disruption can be magnified by domestic supply chains

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we present topics related to the economic effects of import disruption and how domestic supply chains can magnify them. By using a large dataset on Japanese firms, Yasuyuki Todo and Hiroyasu Inoue found that the level of magnification of the effect of import disruption depends on the supply chain structure. They emphasize the importance of supplier substitution domestically and internationally to alleviate the risks of disrupted imports.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

The economic effects of import disruption can be magnified by domestic supply chains

INOUE HiroyasuAssociate Professor, Graduate School of Simulation Studies at University of Hyogo

TODO YasuyukiFaculty Fellow, RIETI

Lockdowns resulting from COVID-19 caused huge, lasting disruption to global supply chains. The Russian invasion of Ukraine and resulting economic sanctions on Russia have led to further disruption. This column uses a large dataset on Japanese firms to estimate the effect of supply chain disruption on economic production. It finds that when imports of Chinese production inputs are disrupted by 80% for two months, total production in Japan during the same period declines by 15%. This shows that global supply chain disruption can be propagated by domestic supply chains, amplifying the effect on production.

In recent years, global supply chains have often been disrupted. For example, because of lockdowns in various cities and countries to prevent the COVID-19 pandemic in 2020, international trade in material, parts, and components shrank substantially, resulting in reduced production in importer countries. Since 2019, the US has restricted exports of goods produced in the US, and goods produced using US-made equipment, to a number of Chinese high-tech firms such as Huawei to reduce national security threats from China. More recently, it has strengthened export controls even further. Exports of semiconductor-related products from the US to China have declined drastically since early 2021 in response to the controls. Moreover, because of the Russian war in Ukraine and economic sanctions on Russia associated with the war, exports of natural gas, minerals, and cereals and grains from the two countries have declined. This raises concerns that the disruption of global supply chains is being further exacerbated because of national security issues.

According to an emerging strand of literature, the effect of such supply chain disruptions will propagate widely through, and be magnified by, supply chains (Barrot and Sauvagnat 2016, Carvalho et al. 2021). At the beginning of the COVID-19 pandemic, Guan et al. (2020) estimated that a six-month lockdown in China could result in a reduction in world GDP by 12%, by simulating a model that incorporates input-output linkages across countries and sectors. We estimated in earlier work (Inoue and Todo 2020) that a one-month strict lockdown of only Tokyo could reduce Japan’s GDP by 5%.

Although our research (Inoue and Todo 2020) used a simulation approach similar to Guan et al. (2020), one advantage of our method is that we used firm-level data for 1 million firms and 4 million supply chain relationships in Japan, as opposed to Guan et al. (2020) and others whose simulations use industry-level data. Therefore, we could incorporate the complexity of firm-level networks, which enhances the propagation of the economic effect through supply chains. However, one notable shortcoming of our paper (Inoue and Todo 2020) and its predecessor (Inoue and Todo 2019), is that we used domestic supply chains within Japan due to data limitations, and thus could not examine the effects of global supply chain disruptions resulting from trade restrictions and conflicts, for example, on the domestic economy.

To read the full text:

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