Although necessary, domestic efforts to strengthen supply-chain resilience are not sufficient. International cooperation can help the US and Europe reduce global dependencies in strategic sectors without sliding into protectionism.
Based on this paper’s analysis of existing vulnerabilities in global supply chains (Chapter Three), the public policy ‘toolbox’ described in Chapter Four, and building on the existing range of efforts for strengthening supply-chain resilience as detailed above, this chapter will outline some guiding principles and concrete recommendations for action by the US and Europe at three levels: domestic; bilateral/with groups of regional allies; and global.
This chapter also offers concluding observations. An important insight is that domestic policy is necessary, but not sufficient, to strengthen supply-chain resilience. Transatlantic cooperation, the leveraging of regional alliances, and efforts at the global level are key to success.
Domestic level: principles for supply-chain resilience
The following broad guidelines can help policymakers in the US and Europe adopt policies that promote supply-chain resilience. Although the recommendations are aimed at the domestic level, policymakers on both sides of the Atlantic could cooperate to exchange information and share best practice in developing and implementing these principles.
- Government action to strengthen supply-chain resilience should be targeted at critical industries and products – such as health, energy, defence, infrastructure, and key digital technologies and related raw materials. The list of targeted sectors needs to be revised on a regular basis. Because of evolving technologies, market developments, and future crises, what is considered a critical good or service could change significantly over time.
- Support for supply-chain resilience in these specific industries should not be given in the form of general industrial policies. Not only would this potentially violate WTO rules, it also risks bringing about a ‘cycle of competitive subsidization’. Moreover, it could make any efforts by the transatlantic partners to persuade China to make meaningful reform on state-owned enterprises or government subsidies more challenging: for instance, by prompting accusations of hypocrisy. Thus, any policies aimed at strengthening supply-chain resilience should be compatible with WTO rules. Competition law and commitments contained in FTAs should also be respected.
Working with the private sector is of particular importance for policymakers in the US and Europe in the light of the high proportion of transatlantic trade taking place on an ‘intra-firm’ basis.
- There can be no one-size-fits-all government policy for fostering supply-chain resilience. The toolbox detailed in Chapter Four includes a mix of policies, including limited reshoring and the strengthening of domestic production for essential products and sectors, the diversification of sources of supply, and stockpiling.
- Public policy efforts should recognize that supply chains are ultimately strengthened at the level of firms, as it is companies along the supply chain which ultimately make the relevant decisions on sourcing and production. What works best will differ between firms and industries. Working with the private sector is of particular importance for policymakers in the US and Europe in the light of the high proportion of transatlantic trade taking place on an ‘intra-firm’ basis. At the same time, cooperation with the private sector should not be limited to domestic firms in the US and Europe, but should involve all companies along a supply chain. Greater international cooperation, discussed below, can play a role in this regard.
- At a time when global trade and supply chains have come under pressure – and have also been subjected to increased scrutiny – transparency and consultations with relevant stakeholders are critical. These include not only the firms along the supply chain, but also national and regional governments, trade unions and research organizations, as well as civil society.
- Different stakeholders on both sides of the Atlantic should collectively assess what supply-chain resilience actually means, and looks like, for specific sectors. Without a common definition, and without pre-identified criteria by which to judge what is a resilient as opposed to a fragile supply chain, it is difficult to develop actionable strategies to achieve greater supply-chain resilience. As a starting point, a resilient supply chain is one that is visible, agile, and sustainable.
Bilateral and regional level: working with allies
Increased cooperation between the US and Europe, and greater collaboration between the transatlantic partners and other like-minded countries, could strengthen supply-chain resilience. It could also help to foster greater policy coherence and to address shared concerns regarding China’s concentration of production in critical areas. At the same time, increasing cooperation on supply-chain resilience would require a high degree of shared ambition among the supply-chain partner countries, involving delicate issues such as trust, solidarity and collective decision-making across borders.
The following areas offer an opportunity for US and European policymakers – as well as other partners – to work jointly and with the private sector:
- Greater cooperation is needed to identify existing and potential supply-chain risks – particularly in the context of strategic dependence on China. This involves mapping the key players involved in critical supply chains, as well as collecting and sharing information concerning any vulnerabilities and potential bottlenecks in supply chains. Stress tests can play a critical role, especially for essential supply chains. As a next step, the transatlantic partners could then determine where they have the capacity to supply goods and services.
- In order to create buffers, the transatlantic partners should develop strategies for joint stockpiles or strategic reserves of essential goods. A natural starting point, in the context of the COVID-19 pandemic, is medical supplies: the EU has already suggested the stockpiling of key medical equipment as an area for increased transatlantic cooperation.
- In the future, greater transatlantic cooperation will be needed in the area of critical raw materials. Securing supply and working with allied nations – in particular Australia and Canada, which have vast reserves and resources of rare-earth minerals – will be vital for the US and Europe. Japan, South Korea and especially Taiwan are also key partners, and play an important role in securing the supply chains of strategically significant products that rely on rare-earth elements, such as semiconductors and electric vehicle batteries. One approach could be to offer financial support (for example in the form of subsidized storage) to encourage firms in a partner country to hold larger inventories of rare-earth elements. Another approach could be the establishment of national stockpiles which are shared, and for which stress tests are developed. In particular, collaboration among the members of ‘Five Eyes’ – the intelligence alliance comprising Australia, Canada, New Zealand, the UK and the US – could be a launching pad to advance supply-chain resilience. The group could become a platform for the development of a strategic economic relationship for critical raw materials, such as rare earths, in the light of China’s dominance in this area. Indeed, Australian Prime Minister Scott Morrison has stated that the Five Eyes alliance will be used to create ‘trusted supply chains’. Moreover, cooperation could be extended to other like-minded countries. Proposals have been made for Japan’s integration into an extended version of the Five Eyes alliance. Furthermore, it would make sense for the US to join the trilateral SCRI established in April 2021 by Australia, India and Japan (see Chapter Five), both to strengthen supply-chain resilience and to align the SCRI more closely with the formation and efforts of the Quad.
- For the US and Europe (specifically, the EU and UK), expanding their respective trade agreements with third countries could help diversify markets and reduce dependencies. Removing tariff and non-tariff barriers, as well as improving cooperation on standards and regulation, could help facilitate trade in essential products. As each other’s most important trading partners, all relevant parties should also revisit and intensify efforts for bilateral US–EU and US–UK trade deals. While the rationale for such efforts to deepen the bilateral transatlantic trade relationships remains strong, the time will not be ripe for comprehensive agreements in the short term. President Biden has vowed to focus on domestic issues first, and Trade Promotion Authority (TPA) – the legislative procedures and conditions under which Congress allows the Executive Branch to pursue new trade agreements – expired on 1 July 2021.
- Concerning technology, efforts to strengthen digital supply-chain security are another potential focus for intensified transatlantic cooperation. Specifically, information exchange and coordination regarding risk-based assessments could be a first step. The US and EU have already identified ‘key policies on technology, digital issues and supply chains’ as an area for increased cooperation under the Trade and Technology Council (TTC), which was launched in April 2021. Moreover, the TTC could become a transatlantic mechanism to review and develop a joint initiative which would set global standards for the regulation of the key technologies and sectors of the Fourth Industrial Revolution (also known as Industry 4.0): these include, for example, artificial intelligence, machine learning, advanced robotics, quantum computing and synthetic biology.
The US and EU have already identified ‘key policies on technology, digital issues and supply chains’ as an area for increased cooperation under the Trade and Technology Council, which was launched in April 2021.
- The current focus on reorganizing supply chains offers an opportunity to further strengthen human rights and environmental due diligence. Tackling these issues is not only a matter of values, but is also related to the creation of a level playing field between domestic firms and companies from third countries, as well as building a more sustainable and resilient future. More broadly, the transatlantic partners should also take steps to address the underlying issue of resource use by scaling up the circular use of resources. Promoting circular supply chains would not only support supply-chain resilience, but would also strengthen governments’ efforts to meet sustainability targets.
Global level: the importance of WTO reform
In order to shape discussions at the highest levels of government on the topic of supply-chain resilience, existing mechanisms (such as the G7 or G20) could be enhanced. Nascent platforms among like-minded democracies, such as the UK’s D10 initiative (which would add Australia, India and South Korea to the existing G7 format, to create a club of 10 democratic partners) could offer an obvious opportunity to strengthen supply chains among allies.
More broadly, there is a need to advance international governance frameworks for new technologies which can facilitate transparency and visibility along the supply chain (such as blockchain) or help firms adjust production swiftly (such as 3D printing).
At the level of multilateral institutions, the WTO is the key forum for the US and Europe to boost supply-chain resilience by focusing on the following aspects:
- The WTO and its rules were crafted to facilitate traditional trade (i.e. the import and export of final products and commodities). However, the current rules are not fit for purpose in terms of dealing adequately with today’s supply chains (which are characterized by trade in intermediate inputs and the fragmentation of production across multiple countries). Reforming the WTO would be an important step in this regard.
- The WTO provides an important forum for coordination to avoid the introduction of export controls in times of emergency. As a first step, WTO members should discuss if and how the existing WTO rules concerning the use of export restrictions need strengthening. Further enhancing the trade-policy monitoring function of the WTO would also be an important step, especially during times of crisis.
- Looking forward, the WTO’s negotiation agenda is packed, but meaningful progress on sustainability issues and, in the wake of the COVID-19 pandemic, on trade in medical goods is necessary if the organization wants to demonstrate its continued relevance. In other words, by negotiating an agreement on environmental products and medical goods, governments could take concrete steps to bolster supply chains in these critical areas, while also helping to address the global challenges wrought by climate change and the COVID-19 pandemic. In this regard, cooperation between the WTO and other international organizations can be enhanced. In the context of both the current and any future pandemics, there is a strong case for the WTO and World Health Organization to work together and support countries’ constructive engagement on the question of how strategic stockpiles of medical supplies should best be used in the event of a health crisis.
- Moreover, as the COVID-19 pandemic has shown, digital technologies are an important aspect of supporting supply-chain resilience. However, at the same time, the crisis has revealed enduring challenges for digital trade and the broader digital governance space. The US, UK, EU and over 80 like-minded WTO partners should therefore continue to push forward with ongoing e-commerce negotiations.
The bottom line: balancing multiple dimensions
The reconfiguration of supply chains is not a new phenomenon. However, new challenges have arisen from the current context, with the confluence of the COVID-19 pandemic and rising protectionism, as well as ongoing structural drivers – such as the digital transformation and the transition to green economies. This has not only given added impetus to efforts to strengthen supply-chain resilience, but will also lead to long-lasting shifts in the global economy.
US and European strategies to boost supply-chain resilience are set against a backdrop of competition between the world’s largest economies. Despite common concerns and the shared ambition to diversify supply chains away from China, the US and Europe are also competing for global markets and access. The focus on shoring up domestic economies which has been a consequence of the COVID-19 pandemic has given rise to a new era of industrial policy. Therefore, at the same time as the US and Europe are cooperating on strengthening supply chains, the transatlantic partners’ differing approaches to industrial policy, competition policy and regulatory issues could drive a wedge between them. These potential points of friction need to be carefully managed.
At the same time as the US and Europe are cooperating on strengthening supply chains, there are potential points of friction that need to be carefully managed.
Efforts to bolster the rules-based trading system and modernize competition policy can contribute towards the goal of a level global ‘playing field’. Such steps would not only reduce some of the tensions between the US and Europe, but would help tackle some joint concerns regarding China’s policies and practices, and would also help to ensure that the US and Europe strengthen supply-chain resilience in strategic sectors without sliding into protectionism.
In order to increase resilience, the US and Europe have to take measures both internally and externally. The most successful strategy will comprise a mix of encouraging domestic production of essential goods (for instance, by securing a minimum production capacity), diversifying sources of supply, and holding strategic reserves. Together – and in tandem with other allies – the US and Europe should be focused not only on the current vulnerabilities, but also on any that might arise in future. In this regard, increasing investment aimed at making global supply chains more sustainable and tackling governance issues related to emerging technologies can both contribute to increasing resilience in the long term.
Resilient supply chains can be built nationally and in partnership with trusted allies. For the US and Europe, reducing global dependencies and promoting self-sufficiency do not have to mean abandoning economic openness and international cooperation.
