By David Lawder

WASHINGTON, (Reuters) – The COVID-19 Pandemic caused havoc in global supply chains. But new research by the International Monetary Fund shows that diversification of sources and inputs can reduce supply disruptions’ economic impact.

IMF analysts found that the declines in goods imports and GDP were greater for countries whose trading partners had imposed COVID-19 restrictions.

These declines have exposed the weaknesses of value chains that are optimized for efficiency maximum and have led governments to demand more production.

The solution isn’t in dismantling the global value chain. “More diversification than ever improves resilience,” researchers said in a blog article that was published with the chapter.

The researchers created a simulation of a lockdown similar to the one in China at the beginning 2020. They found that by reducing labor supply 25% by one large supplier, intermediate components, the average economy saw an increase in output of 0.8%.

However, if there was greater diversification between source countries, this decline could be cut by half to 0.4%.

In the event of multiple shocks, high source diversification decreases GDP by approximately 5%.

High diversification is not a good option in an environment of global lockdown, such as that experienced by the COVID-19 pandemic. It can only be used to diversify against downside risks.

IMF research revealed that increased geographic diversification has raised questions over national policies to “reshoring” production to domestic resources, including the Made In-China 2025 programme, Make in India initiative, and U.S. Innovation and Competition Act of 2021.

The IMF stated that modeling evidence suggests that cross-border supply shock resilience can be improved with more input source diversification (using more international inputs), and greater input substitutability. However, the IMF noted that the benefits of these measures are less if the shocks are greater and more correlated between countries.

The IMF also said that substitutions could be made through increased production flexibility. For example, Tesla (NASDAQ) responded to the shortage of semiconductors by changing its software to make use of alternative chips. General Motors (NYSE) also highlighted its efforts to replace 95% unique chips by more standardized microcontrollers.

To end pandemics as quickly as possible, the IMF advised governments to prioritize vaccine access. They also recommended that trade logistics be improved through infrastructure improvements and trade barriers.