Congressional Research Service

• We analyse the macroeconomic
  effects of supply chain reorientation through localisation policies, using a global dynamic
  general equilibrium model.
• While arguments about comparative advantage, the potential forgone benefits of international specialisation and industry- and product-specific disruptions are familiar, there is less
  analysis on the macroeconomic effects of supply chain changes resulting from localisation policies.
• The large sensitivity of the global economy to the recent supply chain shocks suggests that
  the international trade reconfiguration implied by localisation policies could also have sizable
  impacts on key macroeconomic variables such as output, employment and inflation.
• Thus, localisation focuses on the
  goods in our model most closely related to global supply chains.
• Retaliation also attenuates any positive effects from
  reshoring on output and implies a reduction in the volume of overall international trade.
• This finding calls for limiting the scope of reshoring, such as by focusing on vital goods that are
  most susceptible to supply chain disruptions.
• Either that, or the economic costs are considered a worthwhile trade-off for an increase
  in security of supply, for example.
• While arguments about comparative advantage, the potential forgone benefits of international specialisation and industry- and product-specific disruptions are familiar, there is less
  analysis on the macroeconomic effects of supply chain changes resulting from localisation policies.
• Recent supply chain shocks have had large effects, with disruptions in 2021 estimated
  to have reduced euro area GDP by around two percent and doubled the rate of manufacturing producer inflation (Celasun et al., 2022).
• To analyse this issue, we simulate a (partial) reshoring of production back to Europe in
  a global dynamic general equilibrium framework.
• Thus,
  localisation focuses on the goods in our model most closely related to global supply chains.3 We
  model reshoring through a direct change to the export goods? production-function parameters.
• Since reshoring
  effectively shortens the supply chain, the sum of markups along the chain falls.
• This means that imports that are at the end of the supply chain (i.e.
• In particular, our work relates to papers examining the potential for countries to reduce
  their exposure to global supply chains.
• (2021) demonstrate that reduced reliance on foreign inputs does not mitigate pandemicinduced contractions in labour supply.
• (2021) find no evidence of a relationship
  between global value chain integration and macroeconomic volatility.
• This dynamic, along with factors such as natural disasters, climate-change
  induced volatility and terrorism mean that supply chain disruptions could be a new normal
  (Grossman et al., 2021).
• Our work contributes to the literature providing dynamic general equilibrium analyses of
  protectionist policies, in particular those using global macroeconomic models to quantify trade
  policy changes.
• (2008) analyse the effect of a rise in protectionism in response
  to rising global trade imbalances.
• Linde? and Pescatori (2019) find that although the macroeconomic costs of a
  trade war are substantial, a fully symmetric retaliation is the best response.
• (2020) consider a rich input-output structure and demonstrate that closer integration amplifies
  the adverse effects of protectionist trade policies.
• Several recent studies have also examined the economic effects of a global trade fragmentation.
• First, we modify a dynamic general
  equilibrium model of the global economy in order to analyse the transmission of localisation
  policies.
• This allows for a comprehensive treatment of cross-border macroeconomic interdependences and spillovers between the different regions.
• 4

  There is, however, substantial cross-country heterogeneity in terms of impact, with small open economies
  (SOEs) reliant on global supply chains more affected.

• ECB Working Paper Series No 2903

  7

  Second, we are able to assess both long-run effects and the transition dynamics of localisation
  policies.

• Our model contains a detailed monetary block and captures inflation dynamics, which is a key
  concern for supply chain reorientation.
• Overall, our paper contains a careful analysis of the key aspects of the localisation debate,
  including effects of localisation on domestic competition and efficiency.
• Section 2 provides a brief overview of the model, the modifications to examine
  global supply chain reorientation, some key details on the calibration and a brief discussion of
  the nature of our exercise.
• (2020) for discussions of the relative strengths and weaknesses of
  trade and macroeconomic models in assessing large economic shocks.
• 2.1

  Supply chain reorientation

  Our analysis focuses on imported inputs used to produce goods for export, as the introduction
  of localisation policies is in response to recent disruptions to global supply chains.

• Since reshoring
  effectively shortens the supply chain, the sum of markups along the chain falls.
• Further to
  these effects, engagement with global firms provides an opportunity for knowledge spillovers to
  local firms (Criscuolo et al., 2017).
• This finding calls for limiting the scope of reshoring, such as by focusing on vital goods that are
  most susceptible to supply chain disruptions.
• (B12)

  Adjusting the share of local inputs in export goods, of course, affects prices and quantities all
  along the supply chain.

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• In fact, a 2016 Gallup Poll found that almost 74% of people say that governing a state provides excellent or good preparation for someone to be an effective president.
• But as the former executive director of the National Governors Association for 27 years, I have worked with well over 300 governors.
• During that time I have been part of many conversations with governors regarding other governors running for president.

A dominant position

• That experience often creates a false impression that what they did in their states they can do for the nation.
• These are not exactly issues important to citizens of most other states and thus not useful as a foundation for a presidential campaign.
• This is clearly reflected in a recent New York Times poll of Republicans, where only 17% supported an anti-woke campaign, while 65% supported a law-and-order campaign.

Significant power

• Governors traditionally have more constitutional and legal powers than do presidents, particularly in terms of budgets and in cases of emergency.
• Often, I heard these comments during discussions with governors at National Governors Association meetings.
• Similarly, many governors can cut previously enacted state budgets by up to 5% without consent from the legislature.
• Governors also typically have more power than presidents during emergencies.

Political prominence

• Governors often are the dominant political force in their states.
• They particularly tend to overshadow the legislative and judicial branches – which significantly limit the power of the president at the federal level.
• Governors dominate the legislature, in part, because state lawmakers tend to have very few staff to help them – if any at all.
• In addition, most state legislators are part time and may only be in session a few weeks per year.

A matter of timing

• The last governor that I remember who reached imperial status was Scott Walker, Wisconsin’s governor from 2011 to 2019.
• He ran for president in 2016 but withdrew after only two months because of his poor showing in the polls.
• This year, in addition to DeSantis, five other former or current governors have declared they are running for president.
• But most of them are not imperial governors nor at risk of becoming one.
• In addition, many in his party believe he would have had difficulty in his bid for reelection.

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