The Price of De-Risking Reshoring, Friend-Shoring, and Quality Downgrading

By Diego A. Cerdeiro, Parisa Kamali, Siddharth Kothari, Dirk V Muir

June 21, 2024

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Diego A. Cerdeiro, Parisa Kamali, Siddharth Kothari, and Dirk V Muir. The Price of De-Risking Reshoring, Friend-Shoring, and Quality Downgrading, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates the costs of ‘de-risking’ scenarios between China and OECD members at the aggregate and sectoral levels. Aggregate large-scale de-risking – reshoring by increasing reliance on domestic production and friend-shoring by reducing imports from specific foreign countries – is quantified with the IMF’s GIMF model, suggesting significant permanent effects on the global economy. Returning integration to 2000 levels translates into long-term global GDP losses of 4.5 percent under reshoring and as much as 1.8 percent under friend-shoring. Friend-shoring does not necessarily deliver a boon to third countries as trade diversion benefits might be largely offset by contractions in China and OECD members. Sectoral de-risking, where all trade between rivals is eliminated in specific products, is quantified through empirical estimation of the scope for quality downgrading. The results demonstrate the potential for significant losses in input quality should there be an escalation in export bans. Losses are asymmetric against China in the specific case of semiconductors but can be significant for both sides in other sectors—including in critical areas such as environmental goods.

Subject: Exports, Global value chains, Globalization, Imports, International trade

Keywords: Asia and Pacific, De-risking, Export bans, Exports, Fragmentation, Friend-shoring, GIMF model, Global, Global value chains, Imports, OECD economy, OECD member, Quality downgrading, Quality downgrading., Reshoring, Southeast Asia, Trade diversion benefit

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/122
Stock No:

WPIEA2024122
ISBN:

9798400269646
ISSN:

1018-5941

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