Economics

Here is the discussion board prompt:

Comparative advantage and transportation costs shape global supply chains. The classic example of this reality is Apple’s iPhone: designed a few miles from our campus, in Cupertino, assembled in China, with parts coming from a variety of Countries (Taiwan and Japan, for example).

Microchip and software design is executed in the US, a country with a comparative advantage in “creation of ideas & technology”. The labor-intensive phase of production takes place in China, while the creation of parts (think RAM memory, microchips, motherboards, etc.) is done in Countries with comparative advantage at high-tech manufacturing.

Covid-19 is creating significant disruption to existing supply chains and may lead to important relocations of economic activity in the medium term. Some large companies may decide to diversify their suppliers: for example, Apple may decide to split the assembly of iPhones between factories in China, Vietnam, and Bangladesh, rather than China alone, to mitigate the risk of disruptions connected to potential factory shutdowns in the event of Covid-19 local outbreaks. Some companies may even decide to cut foreign producers entirely from their supply chain and find local suppliers. These risk mitigation initiatives are not free: the cost is lower production efficiency (i.e. higher costs). In addition, political tensions between Countries are accentuating (think for example to the US-China trade war), putting pressure on international institutions like the WTO, who has regulated international trade relationships after WWII.

What do you think is the most likely outlook for Global Supply Chains? Do you think that many large companies will choose suppliers closer to home in response to the pandemic? Or do you think that existing international business relationships will be kept unchanged and Covid-19 will be just a temporary slow-down? Express your opinion in a post of at least 200 words, in which you show that you can think like an economist (think about the cost-opportunity of companies changing suppliers). Note: there is no right or wrong answer in this discussion!

Some interesting links related to the discussion:

“Post Covid-19 reconfiguration of the Global Value Chains and China”, by Hamming Fang (University of Pennsylvania) and Bernard Yeung (National University of Singapore Business School); available at http://www.voxchina.org/show-52-182.html
An interview to Ragu Rajan (Professor at University of Chicago, Booth School of Business, and former Chief Economist at the International Monetary Fund, and Governor of the Reserve Bank of India) https://review.chicagobooth.edu/economics/2020/video/how-will-covid-19-shake-global-economy

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