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Production is moving closer to global demand, but there is still little sign of reshoring, the WTO's chief economist tells MNI.
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Mexico and countries in Eastern Europe are getting a boost as importers in the U.S. and western Europe look to source goods from locations closer to home, but efforts by governments to encourage reshoring of production in response to the pandemic have so far led to little, World Trade Organization chief economist Robert Koopman told MNI.
Companies around the world are moving to reduce supply dependence on China, as Chinese firms seek to minimise the effects of rising domestic labour costs and to mitigate their exposure to tariffs, Robert Koopman said in an interview.
“China's still at the center of global production, but it's clear that there's increasing diversification of sourcing, and that probably means more sourcing from Central and Eastern Europe for some European firms,” he said. “For the North American market, Mexico is benefiting from being a closer source of diversification from, say, China. But we also see Vietnam, Cambodia, Laos, Malaysia, Indonesia, India and Bangladesh.”
So far, however, talk of bringing production back to major importing nations has led to little, Koopman said.
“The data doesn't show a lot of reshoring,” he said. “There's lots of talk about it, there are efforts by governments to bring that about, but so far those efforts have not really translated into reshoring, though there has been some nearshoring.”
Greater capacity to respond quickly to changes in consumer demand are also pushing production near-shore, Koopman said. “It helps diversify your risk portfolio, so that not all of your production is disrupted. But there are still significant economic incentives to economies of scale and efficiency from large-scale production.”
The big driver of current global supply shortages is demand, Koopman said, in comments made shortly before news of the omicron variant of the Covid virus was first reported. Additional lockdowns will lead to greater accumulated savings and eventually to a further increase in demand for tradable goods, he said.
Governments and markets should adjust their approaches to sourcing and product design to better fit a more uncertain health, climate and policy environment future, Koopman said. Consumers too may need to adjust their expectations, to allow for increased standardisation or interchangeability of parts and products - particularly in the electronics and auto industries – as the focus on just-in-time inventory shifts to just-in-case stockpiling, he said.
“In some countries there's a strong populist desire, and maybe even a mistaken economic perspective, that somehow if you localise everything you insulate yourself from those shocks. But having things just domestic is not an insulator,” he said.
While Koopman praised the “very aggressive” pandemic response adopted by fiscal and monetary authorities, these policies are now helping to feed growing global trade imbalances, he warned.
“When global imbalances build because finance ministries and central banks are doing the right kinds of thing to support economic activity, then sometimes then trade ministers come in and say we need to impose trade measures to stop this imbalance, whether it's anti dumping at a very product specific level, or something like we saw with the previous U.S. administration, trying to raise tariffs and change its imbalance with China,” he said.