Comment on “Supply Chain Decoupling: Geopolitical Debates and Economic Dynamism in East Asia”

While the COVID-19 pandemic raised questions about vulnerabilities to economic shocks resulting from production in global supply chains, the debate has recently shifted to geopolitical risks. Russia's war of aggression against Ukraine has highlighted that trade dependencies in international production networks can be “weaponized” (Farrell & Newman, 2022). Escalating geopolitical tensions between the USA and China hint at a potential “bifurcated global economy” (Teece, 2022).

However, contrary to the prevailing narrative, compelling evidence of widespread decoupling or deglobalization remains elusive. Inter-country input–output tables that track flows of value added across countries at the aggregate level reveal a slowdown in the fragmentation of production since the 2008–2009 Financial Crisis (Jaax et al., 2023). Yet, globalization has not regressed. Production fragmentation persists at historically high levels, even after the COVID-19 pandemic. However, East Asia presents a nuanced picture with China moving toward more domestic supply chains since the mid-2000s. This trend can be explained by a decline in processing trade and more exports of branded products following the upgrading of Chinese value chains. It is therefore important to disentangle recent trends related to COVID-19 and geopolitical tensions from more structural trends.

The paper by Ando et al. (2024) is one of the first to look at some evidence of supply chain decoupling in East Asia, with a focus on machinery international production networks. Ando et al. confirm that, when looking at aggregate trade data, there is no significant change in exports and imports in the region, despite the recently introduced trade controls that affect this industry. However, disaggregated trade data, coupled with econometric analyses accounting for COVID-19-induced shifts, reveal the negative impact of some US export restrictions on high-tech goods. The impact on Japanese exports to China is particularly strong in the case of wireless communication equipment.

A notable conceptual contribution from Ando et al. is the distinction between “defensive” and “offensive” decoupling. Defensive decoupling encompasses policy measures that are aimed at mitigating the impact of sudden disruptions in the supply of imported products from strategic rivals. The debate on reshoring, “friend-shoring” or diversification of supply to reduce trade dependencies is often focused on this type of decoupling. Leaving aside the case of reshoring (which is generally not a realistic option), defensive decoupling is more likely to lead to a re-organization of supply chains for domestic firms (still with important costs). Conversely, offensive decoupling entails measures that are designed to restrict access to technologies and products in nonfriendly countries and that directly hurt exports of domestic firms and firms in partner countries when there are no clear alternative markets. As such, it is not surprising that the trade impact is higher and can already be measured in some industries.

As Ando et al. (2024) conclude, a clear border line should be set between the part of the economy under export controls and the rest of activities where the benefits of international production networks will be preserved. Economic simulations of a broader decoupling between the “West” and the “East” point to significant welfare losses (Felbermayr et al., 2023), with models that are likely to underestimate some of the supply chains effects. Hence, policy measures necessitate meticulous impact analyses and compliance costs need to be minimized. Offensive decoupling can backfire or create “friendly-fire” in partner countries. It can inadvertently weaken strategic industries at home, depriving them of the productivity and efficiency gains inherent in international production networks.

An important point made in Ando et al. is that it is difficult to assess the impact of trade controls and new measures designed in the context of geopolitical risks. Beyond the conventional issue of the aggregation of trade data, there is a lack of information on the rules set by governments and their implementation. More transparency is important for impact assessment but also for firms to be in a better position to adjust, while also preserving a level playing field. In the current international business environment, uncertainty has emerged as an important barrier to trade and investment.