Trade Efficiency for Resilience? The Effects of the U.S. Supply Chain Reshaping Policies

Can you trade economic efficiency for resilience? We answer this question by constructing a multi-country, multi-sector general equilibrium model that separates trade of intermediate and final products, and introduces stochastic productivity shocks. It is used to analyze U.S. policies after the COVID-19 pandemic to de-Sinicize, friend-shore and reshore its supply chains. Our results show that such policies will lay significant disruption and diversion effects on trade of intermediate products, and reduce outputs of most sectors in China, while increasing local outputs of some U.S. sectors. They will hinder China’s participation and lower its position in the global value chain, and cause welfare losses in both countries. Moreover, such policies will not improve U.S. economic resilience, for they reduce neither the negative shock of the COVID-19 pandemic, nor the aggregate volatility of the U.S. economy. Therefore, economic efficiency and resilience are not necessarily substitutes for each other regarding supply chain policies