Supply Chain Disruptions, the Structure of Production Networks, and the Impact of Globalization

Abstract

We introduce a parsimonious multi-sector model of international production and use it to study the impact of a disruption in the production of some goods propagates to other goods and consumers, and how that impact depends on the goods' positions in, and overall structure of, the production network. We show that the short-run impact of a disruption can be dramatically larger than the long-run impact. The short-run disruption depends on the value of all of the final goods whose supply chains involve a disrupted good, while by contrast the long-run disruption depends only on the cost of the disrupted goods. We use the model to show how increased complexity of supply chains leads to increased fragility in terms of the probability and expected short-run size of a disruption. We also show how decreased transportation costs can lead to increased specialization in production, lowering the chances for disruption but increasing the impact conditional upon disruption.  We use the model to characterize the power that a country has over others via diversions of its production as well as quotas on imports and exports.

Keywords: Supply Chains, Globalization, Fragility, Production Networks, International Trade

JEL Classification: D85, E23, E32, F44, F60, L14