The economic costs of supply chain decoupling

Abstract As countries and firms increasingly seek ways to strengthen the resilience of their supply chains, this paper studies the global economic costs of a decoupling of global supply chains along geopolitical lines as well as in strategic sectors. We explore not only the long‐run effects but also the short‐run costs stemming from rigid wages and low substitutability across factors of production and input goods. We find that, in terms of welfare losses, the costs of decoupling are roughly five times higher in the short‐run compared with the long‐run, while country losses are heterogeneous. A reshaping of global supply chains increases the level of consumer prices in most countries, as well as producer prices, especially for trade‐intensive manufacturing sectors. Global supply chain decoupling entails also a reallocation of labour across skill levels. Finally, global trade would decrease substantially, driven by lower trade in intermediate inputs and a higher reliance of countries on domestic production.