Strategic Diversification: How Supply Chains Can Withstand Global Trade Shocks

The IMF paper by Ahn and Tan shows that diversifying import sources enhances supply chain resilience, especially against geopolitical and trade shocks, though it involves minor efficiency trade-offs. Targeted diversification focused on high-risk, rigid, or upstream goods yields the greatest welfare benefits with minimal costs.

In their May 2025 working paper published by the International Monetary Fund (IMF), economists JaeBin Ahn and Brandon Joel Tan, affiliated with the IMF’s Western Hemisphere Department, delve into the growing need for resilient supply chains in an era of escalating global shocks. Their study leverages data from leading institutions, including the OECD, UNIDO, CEPII, and the World Bank’s WITS, to assess how diversifying import sources can mitigate the impact of adverse trade shocks. The authors offer a new lens on the trade-off between efficiency and resilience in international supply chains through a robust multi-country, multi-sector general equilibrium model. At a time when pandemics, protectionism, and geopolitical fragmentation are disrupting global commerce, their work provides a timely and analytically rigorous framework for policy intervention.

From Efficiency to Resilience: A New Economic Imperative

The paper begins by outlining the real-world consequences of concentrated trade relationships. Analyzing U.S. import data between 2013 and 2024, the authors find that products sourced from a narrow set of countries are more vulnerable to exporter-specific shocks, such as those arising from tariffs or logistical disruptions. In contrast, diversified sourcing patterns act like a portfolio hedge, distributing risk across multiple partners and improving the overall stability of import flows. Empirical evidence from the 2018–2019 U.S.–China trade war demonstrates this vividly: U.S. imports of goods with more diversified supply chains weathered the tariff hikes far better than those overly reliant on Chinese sources. The conclusion is clear: resilience does not emerge by chance but through deliberate diversification.

A Dynamic Model of Trade Network Rigidity

To go beyond empirical correlations and test policy outcomes, Ahn and Tan construct a dynamic, multi-country trade model that accounts for the frictions that slow down supply chain adjustments. The model introduces three realistic constraints: sticky importer-exporter relationships, limited short-run labor mobility across sectors, and sluggish reallocation of local factors such as buildings and infrastructure. These frictions mean that after a disruption, countries cannot immediately reconfigure supply chains or production structures. Instead, economies undergo a costly transition toward a new equilibrium. By capturing this transition period, the model departs from traditional trade models that assume immediate adjustments and thereby understate the true costs of disruption and the value of diversification.

Quantifying Trade-Offs in Shock Scenarios

The authors simulate two high-stakes shock scenarios to measure the welfare impact on the United States, with and without pre-emptive diversification. The first scenario involves a geopolitical split between blocs aligned with either the U.S. or China, echoing real-world concerns over growing economic decoupling. A simulated 50% non-tariff barrier is imposed on imports between the two blocs. In this case, diversification in advance, focused on goods where more than one-third of U.S. imports come from China, cuts the cumulative five-year welfare losses by 12%, even though it imposes a small one-time cost of just 0.02% of GDP. The second scenario models a universal 40% tariff on all U.S. imports, with reciprocal retaliation. Here too, diversification, especially if targeted at products with high contractual rigidity, reduces long-run welfare losses by about 5%. These results show that the modest costs of pre-emptive diversification are far outweighed by the benefits if a disruption occurs.

Targeting Matters: Smarter Diversification Strategies

Not all diversification is equally effective. The paper underscores the importance of targeting sectors that are most at risk, those upstream in production chains, exposed to severe shocks, or featuring high levels of importer-exporter stickiness. Diversifying all products indiscriminately increases costs by 2.5 times while only boosting benefits by 40%. However, narrowing the strategy to high-rigidity sectors slashes costs by 88% with only an 8% drop in benefits. Similarly, focusing on upstream industries also delivers high returns on resilience. According to a social planner model with standard assumptions about risk aversion, these targeted strategies are optimal if the probability of a disruptive shock exceeds just 1%, compared to 7–9% for broader approaches. In essence, precision beats breadth.

A Strategic Blueprint for Policymakers

Ahn and Tan’s findings offer a nuanced blueprint for policymakers. They show that diversification is not merely a buzzword but a quantifiable risk management strategy. By building flexibility into supply chains now, especially for goods that are critical, rigid, or geopolitically sensitive, governments can better cushion future shocks. The model also opens new pathways for evaluating trade, tariff, and industrial policies with resilience in mind. As the global economy navigates an increasingly fragmented landscape, this paper makes a strong case for replacing fragile efficiency with adaptive strength. It is a call to future-proof globalization, not by retreating from trade, but by reshaping its architecture with resilience at its core.