Supply Chain Diversification and Resilience

This paper develops a new multi-country and multi-sector general equilibrium trade model to analyze extent to which the diversification of sources of imports mitigates the impact of adverse trade shocks. The model incorporates trade network rigidities arising from frictions in goods, labor, and local factor markets. Because countries cannot immediately reconfigure supply chains in response to shocks, supply chain diversification can potentially improve resilience, at the cost of efficiency. Quantifying the resilience-efficiency trade-off suggests that diversifying the sources of targeted imports—those more exposed to shocks, positioned upstream in the supply chain, and subject to greater rigidities—can enhance expected welfare when the probability of a large trade shock is sufficiently high.