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Diane Coyle shows how many of today's global production problems have been decades in the making

Business / opinion
Diane Coyle shows how many of today's global production problems have been decades in the making
factory workers

Starting in the 1980s, transnational production enabled the expansion of global trade and low prices for goods, contributing significantly to economic growth. But the shocks caused by the COVID-19 pandemic and the Ukraine war have shown firms that the efficiency gains implied by the global division of labour – and just-in-time production – come at the cost of resilience. With global supply-chain bottlenecks unlikely to resolve themselves soon, firms have turned their attention to reshoring or at least “friend-shoring,” which seeks to combine closer geographic proximity with greater geopolitical peace of mind.

But turning re-establishing the shorter and more national (or regional) supply chains of a generation ago will be costly in terms of growth. For a hint of just how costly, look no further than post-Brexit Britain’s lack of any post-pandemic trade recovery. The United Kingdom’s independent Office for Budget Responsibility estimates that productivity will be 4% lower in the long run than it would have been had the UK retained its deep trading links with the European Union. The specialisation enabled by globalisation has brought significant benefits, as many economists (including me) have long argued.

Businesses will adjust to supply-chain shocks in different ways. Some will reshore. Some will find subcontractors in diverse locations. And some may opt for increased automation. The latter two strategies will carry a lower productivity penalty than reshoring, but will involve adjustment costs and new investment. All three options will roll back some of the globalisation of the past four decades.

Other firms, however, will not be able to take any of these steps, given the scale and nature of the upstream activities they have outsourced over the years. In some sectors, such as pharmaceuticals and chemicals, outsourced production accounts for as much as 15-20% of total output.

After 1980, there was a substantial shift among companies toward buying components, rather than making them in-house. This reflected the spread of information and communication technologies that made it possible to send instructions and receive feedback instantaneously, along with a management philosophy that emphasised cost efficiency and lean production. Many multinational firms kept high-value activities such as research and development or design in the headquarters’ countries, and sent formulae or blueprints to factories in lower-cost locations such as Malaysia and China. After an initial learning period, these facilities could produce goods at a far lower cost than at home, and often with more consistent quality.

Over time, however, this pattern has generated another hidden cost: the loss of what is often termed tacit knowledge, or know-how, in manufacturing. This refers to the kind of tweaking and learning from experience that never gets written down but happens on every production line. Such insights can provide vital feedback to researchers and engineers, but the feedback is lost when production takes place thousands of miles away.

Rich-country firms have allowed these capabilities to erode for decades and cannot reshore them quickly. East Asian manufacturing centers such as China, Malaysia, and Singapore have developed sustainable, hard-to-replicate advantages in specific sectors and also in areas such as logistics.

This presents problems for policymakers, too. Secure supplies for key commodities such as food and microchips are now at the top of most governments’ agendas. Some advanced economies have launched initiatives aimed at rebuilding their manufacturing capability, such as the EU’s ambitious €43 billion ($45.5 billion) semiconductor plan or California’s $100 million proposal to manufacture insulin and other generic drugs.

Such plans may be a good idea, but they will need considerable time and money to succeed. Meanwhile, strategic stockpiles are another possibility. Some countries already hold oil or gas stocks, and many have food reserves such as the cheese and butter stocks in the United States – albeit aimed at supporting farm incomes rather than ensuring security of supply. (The UK, however, ran down its strategic food stockpiles in the mid-1990s.)

Current supply-chain bottlenecks have also highlighted a generally unnoticed reduction in competition. Although economists have been pointing to increasing concentration in many markets, the focus has generally been on the large “superstar” companies at the end of production chains. But today’s shortages are a reminder that the more specialised each link in the chain becomes, the less competition there can be at each stage.

At least until recently, competition policy had shown little concern about vertically integrated companies so long as the retail market remained competitive. The presumption was that pressure at the downstream end would flow upstream. Some had already started to question this consensus amid growing evidence of large firms’ market power. But the shortage of carbon dioxide (a fertiliser byproduct) in UK food production and the huge impact of one factory closure on supplies of baby formula in the US make the same point forcefully.

These supply-chain challenges are a consequence of forgetting that other considerations besides economic efficiency matter, and that hands-on craft knowledge cannot be transmitted online. Unfortunately, problems that have been four decades in the making cannot be solved overnight, and the best course of action for policymakers is not obvious. That is all the more reason to start rethinking the model now.

Diane Coyle, Professor of Public Policy at the University of Cambridge, is the author, most recently, of Cogs and Monsters: What Economics Is, and What It Should Be (Princeton University Press, 2021). This content is © Project Syndicate, 2022, and is here with permission.

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On shoring will continue driven by supply chain unreliability due to transport or political issues. I believe you are correct in that it will take a while to accomplish given many industries need to reinvent themselves. Many free trade agreements will be rewritten as countries realize that they can't risk supply of critical items like food and medicines being exposed to the vagaries of climate and political risks . One would have to wonder where that leaves a country like nz with its reliance on trade and a very narrow trading base .


Due to issues with scale and competition, NZ doesnt have many options than to focus on its core strengths as a food basket. 

An hour of our minimum wage is a couple days work in a lot of places that manufacture, so it'll be more affordable for a while yet to buy cheap items from overseas. The alternative is we import more of these workers to produce goods for us here, but that is horrendously unpalatable for the existing citizens.

Maybe there are other markets we might be competitive enough in, but it probably requires quite a lot of capital.


Just vote for National and every foreign worker will be deemed as a skilled worker just like the good old John Key days. At those days nobody wondered why Phillipine dairy workers were classed as skilled workers despite the fact that in the whole of the Phillipines there were only 24512 dairy cows. ( 


From employing hundreds of people, turning up to work every day, not bitching, not throwing a sickie, not being a druggo, and working solid is a considerable skill. More so than being a citizen.

Most of our prosperity only exists because our forebears held a significant technological advantage over the majority of the planet. India, a country at the time of hundreds of millions of people, was lorded over by 10,000 poms. 

Now that is all falling apart, and some of us just haven't realised it yet.


NZ's current prosperity relies on our country being too young to have fallen into the Malthusian trap: population growth outpacing agricultural production, causing famine or war, resulting in poverty and depopulation.

India's population doubled under British rule and it has done so twice since independence. China is another example but they took extreme measures to reduce population growth so are now twice as wealthy as India. There are no exceptions - population exceeding resources leads to disaster. 



Fair call on the knowledge loss. A skills shortage by another name perhaps? Mmm. And when combined with the decline in life & work skills & ''real knowledge'' teaching from our now (in many cases) appalling educational institutions, it all adds up to Ooops! Mix in a pandemic & piss poor leadership for decades, & bingo we have all the ingredients for the fall of the once mighty western world. Sigh.