When Germany took over the G7 presidency in January, supply chain resilience was identified as a key priority, and now – ahead of the G7 leaders’ summit – the goal of ‘creating open, fair, resilient and sustainable supply chains’ has gained even greater urgency.
Russia’s invasion of Ukraine has challenged global supply chains on top of ongoing disruptions stemming from the COVID-19 pandemic. But although these extraordinary shocks sent potentially long-term ripples through global production and transportation networks, strategic competition with China and climate change present gradual risks for supply chains over a much longer timescale. Against this backdrop, G7 leaders need to strike a careful balance of responding to short-term fragilities without losing sight of the long-term objectives.
Supply chain conditions have improved somewhat since port congestions and shipping costs reached record highs at the end of 2021, but they are unlikely to recover to pre-COVID days by 2023. If left unaddressed, supply chain disruptions will continue to add to inflation which reached a four-decade high among G7 countries when it hit seven per cent year-on-year in March.
But there are five priorities which offer a path for G7 countries to build resilient and secure supply chains and prevent disruption from hampering the global economic recovery and clouding the long-term growth outlook.
1. Take joint action, starting with an early warning mechanism
Over the past two years, G7 leaders have called for greater supply chain resilience and committed to open and rules-based trade to support this approach. Although members have started to build consensus and implemented some steps at the national level, now is the time to focus on tangible deliverables as a group.
As a first step towards joint action, G7 leaders should develop a common early warning and monitoring system to share information about potential disruptions – starting with a focus on semiconductor supply chains. More ambitious efforts can then follow, such as setting up common stockpiles and developing stress-tests for their management.
2. Focus on strategically important sectors
Supply chain resilience has become a buzz phrase across all industries, but initiatives to strengthen resilience should focus on critical sectors or products. Tackling fragile supply chains in public health, food production, and energy have risen to the top of the agenda given the compounding crises of the last two years.
But advancing the resilience of supply chains in sectors for the green and digital economic transition is also critically important in the long run. A particular emphasis should be put on supply chains for critical minerals and raw materials for renewable energy, solar panels and products, and semiconductors.
3. Work with the private sector
Supply chain resilience is ultimately strengthened at the level of individual businesses, and therefore greater cooperation between the public and private sector is needed. But policymakers and business leaders have different concerns and approaches as the former needs to take many different sectors and the entire economy into consideration.
One area for public-private action is designing efficient stockpiling systems or agreements to boost the production capacity of essential goods. Such bold long-term efforts could build on recent initiatives. For instance, G7 governments are already working with global food and agriculture businesses to improve the environmental and social impact of global food supply chains.
As a forum of the world’s leading democracies, G7 is well-placed to work closely with the private sector to ensure supply chains reflect the values contained in environmental and human rights standards.
4. Coordinate with other forums and partners
Although G7 countries account for 33 per cent of global exports and 36 per cent of global imports, they cannot build resilient supply chains alone, so fostering cooperation with like-minded partners beyond the grouping is essential for a more global solution.
Forums such as G20 can support supply chain resilience but, with Russia’s participation in the G20 summit in Indonesia still a possibility, it is far from certain that steps towards food security and the rolling back of trade restrictions will happen.
Instead, better linking up the different supply chain resilience efforts among G7 countries and key allies could be low-hanging fruit. The US-EU Trade and Technology Council has a working group dedicated to secure supply chains and has already identified some recommendations such as an early warning system for semiconductor supply chains. For greater impact, this effort should be extended to other G7 members – namely, Japan, Canada, and the UK.
The Indo-Pacific Economic Framework for Prosperity (IPEF) also contains a focus on supply chain resilience and aims to develop an early warning system. Launched by the US, it comprises a dozen countries including the 2023 G7 president Japan, South Korea, Australia, and New Zealand.
In this formation of variable geometry, the G7 is uniquely positioned to create synergies between the supply chain resilience efforts of its members and leverage their engagement with like-minded countries.
5. Create an enabling environment
By reinforcing an open and rules-based global trading system, G7 governments will encourage supply chain resilience. In particular, continued efforts to reform the World Trade Organization (WTO) might stand a better chance of success since members agreed to limited deals at the recent Ministerial Conference – the first such event since 2017.