The current pandemic is accelerating the geo-economic, technological, and environmental drivers behind supply chain reconfiguration. Even before coronavirus struck, global supply chains were under stress, and not just because of two years of rising tariffs and trade uncertainty in the wake of ongoing US-China tensions.
Technology developments such as automation and 3D printing which enable cheaper production closer to the final consumer, as well as an increasing preference for greener supply chains have already been spurring companies to reduce their exposure to cross-border supply chain disruptions and to shorten their supply chains.
This has understandably led to increased calls for ‘just in case’ or ‘just at home’ supply chains, but thinking that choosing between globalization and national self-sufficiency is the only way to develop greater resilience of supply chains is, in reality, a false dichotomy.
It is perfectly possible to strike a new balance between openness and autonomy for the strategic sectors – those most important for a country’s economy, national security or public safety. And four key steps can help achieve it.
1. Navigate the new era of supply chains as a political tool
The global pandemic is transforming the future of supply chains as a tool for policymakers. A new era of government policy that inextricably links supply chains with wider industrial policy and strategic competitiveness is already upon us.
The US government has called for the re-shoring of global supply chains or even decoupling from China. And, in a rare bipartisan move, US lawmakers want to subsidize domestic semiconductor production in order to counter the tech competition from China.
However, such efforts are not limited to the US. French president Emmanuel Macron called for greater industrial sovereignty of Europe in light of economic vulnerabilities created by the pandemic, and the European Commission recently adopted the concept of ‘open strategic autonomy’ which seeks a new balance between open trade and efforts to ‘reduce dependency and strengthen security of supply.’
As part of this move, the Commission is exploring a future legal instrument to address foreign subsidies that undermine the level-playing field in the EU single market. Alongside domestic subsidies being used to fight the economic COVID-19 crisis, and the temporary relaxation of EU state aid rules, this all raises the prospects for a wave of disputes as many countries consider these subsidies to be ‘trade distorting’.
2. Create a common definition and measure of resilience
Supply chain resilience is becoming a new buzz-phrase, but the apparent vagueness of the term, and with no consensus on what resilience truly means, leaves open a lot of room for interpretation.
To avoid the slippery slope leading to greater protectionism, there should be a collective effort by governments, industry, and other stakeholders to develop a common definition and measure of resilience.
This requires a sober analysis of supply chain vulnerabilities as well as deciding which sectors are to be considered strategic – such as defence, telecommunications, transportation, food, pharmaceuticals and medical equipment as well as raw materials needed to meet climate goals. Without such a step, supply chain challenges could emerge for lithium and cobalt, which are critical to developing a low-carbon economy.
3. Deploy multiple strategies to strengthen supply chains
Many approaches to increase supply chain resilience exist, but each of them alone carries both advantages and disadvantages. Finding the right blend can help boost national self-sufficiency without turning away from globalization.
Reshoring – returning production back to a business’s host country – tends to focus on subsidies or tax incentives to encourage domestic companies to bring their operations back home. While reshoring does usually shorten supply chains, it does not reduce supply chain risks, often simply exposing companies and consumers to the concentrated risks at home, alongside a likely increase in costs.
Companies are also unlikely to rush to leave places with good markets, such as China, because they want to maintain a presence to access domestic consumers. Therefore reshoring is limited, and driven more by market forces rather than government policy.
Diversifying supply chains is also popular but, as global trade and economic growth have been severely hit around the world, where to diversify is tricky. Despite economic woes, China’s growth remains key to the global economic recovery so totally diversifying away from China is unlikely. Instead, diversification will probably go hand-in-hand with greater regionalization of supply chains.
Introducing additional supply sources and increasing the inventory comes at a cost for companies, but greater supply chain resilience is the result. And governments can also play a role in building stockpiles or strategic reserves. The US has both the Strategic Petroleum Reserve and the Strategic National Stockpile to deal with public health emergencies, but it is key to review existing stockpiles and identify which critical resources, such as materials for advanced technologies, require additions.
4. Strengthen transatlantic cooperation to boost supply chain resilience
The US and EU remain each other’s largest trade partners and primary source of foreign direct investment. Further strengthening transatlantic supply chains by reinvigorating the US-EU relationship and bolstering US-UK trade talks can diversify supply chains away from China and bolster regional supply chains closer to home.
The US and EU should also explore creating a joint strategic reserve to respond to any supply disruptions in strategic sectors, especially medical goods. The Agreement on an International Energy Program provides precedent for this as it led to the creation of the International Energy Agency in the wake of the 1973-1974 oil crisis. Now, in the case of a severe shock, participating countries agree to hold emergency oil stocks and release them as part of a collective action.
The EU seems open to the idea of joint reserves of medical supplies but, as the US administration regards imports of steel and aluminium from the EU as a national security threat, increasing transatlantic cooperation to strengthen supply chains in strategic sectors might be unrealistic.
Yet the US government is considering creating an Economic Prosperity Network as an alliance of trustworthy countries, companies and others, so there does appear to be a shared desire to reduce dependency on China-heavy supply chains. For both the US and the EU, it is certainly true that reducing global dependencies while maintaining economic openness can co-exist if they so wish.
This article is part of the Chatham House Global Trade Policy Forum, promoting research and policy recommendations on the future of global trade.