Does deglobalization imply the end of global supply chains?

Abstract

Deglobalization, the process through which economic agents are increasingly severing their international economic links and relocating economic activity toward their domestic economies, has been affecting supply chains spanning the globe. In the face of major economic and political challenges, companies have always been redesigning their networks through which inputs are sourced, products are manufactured, and customer demand is satisfied. While the literature has addressed the traditional complexities arising from market volatility, cost differentials and emerging technologies, further guidance is needed on the impact of government policies for companies operating on a global scale. It is therefore necessary to identify the forces that drive deglobalization and understand how they shape the evolution of global supply chains. Anchored on the global value chain framework from macroeconomics, political science, international business, and operations management, we construct and validate systems dynamics models to assess the evolution of global supply chains where decisions taken at the macro and strategic levels would act as constraints or enablers at the tactical level. We observe that, independent from any other forces, the landed cost advantage, which was the principal driver of offshoring decisions, gets eroded over time through both higher competition and convergence of wages. Moreover, as competition shifts towards higher responsiveness, offshored facilities find themselves at a greater disadvantage. Political pressure in terms of tariffs and sanctions as well as management control in terms of ownership restrictions and the challenges in enforcing the rule of law reduce the attractiveness of offshoring. The rate at which offshoring decisions are reversed, however, depends on the complexity of both the manufacturing asset and the sophistication of the local ecosystem. Finally, political pressure does not necessarily lead to reshoring; nearshoring, the transfer of manufacturing facilities to a territory closer to the final market, emerges as a viable alternative. In short, these findings signal a slow transition from global to regional supply chains. As a result, supply chain professionals and policy makers are urged to adopt a broader perspective that incorporates the impact of operational, strategic, and geo-political parameters on the entire supply network in their decision or policy making processes. Going forward, emerging technologies and sustainability considerations will continue setting the boundary conditions within which global supply chains will continue to evolve.