In addition, it discusses two options for building supply chain resilience: diversifying inputs across countries and pursuing greater input substitution.

Promoting trade resilience

The effects of shocks to a global economic model were simulated and the results compared assuming higher levels of diversification, or greater substitution (the ease with which a producer can switch inputs, moving from a supplier in one country to a supplier in another country). Two scenarios were considered: a supply shock in a single large input-supplying country and supply shocks in several countries.

The analysis shows that diversification significantly reduces global economic losses caused by supply shocks. In the case of a major contraction (25%) of labor supply at a single major supplier, the gross domestic product of an average economy declines by 0.8% in the baseline scenario. In the high diversification scenario, this decline is reduced by almost half.

Higher diversification also reduces volatility in the event that several countries are affected by supply shocks. According to our estimates, the volatility of economic growth in the average country decreases by about 5% in this scenario. But the protection provided by diversification is weak if all economies are hit by a major shock at the same time, as was the case in the first four months of the pandemic.