Perspectives

Perspectives: The challenge of delivering ‘resilient’ supply chains

Talk by European Union, United States and United Kingdom governments of changing supply chains run into fundamental difficulties not least the level of modern trade complexity, which few fully understand.

The first anniversary of Covid-19 lockdowns has arrived across Europe, with many restrictions having been lifted and restored in that time. Similarly the commentary on the effects on trade has varied.

Within days of the medical impacts of Covid-19 becoming evident across Europe the end of globalisation had been proclaimed on the basis of shortages of all sorts of medical goods. Since then the global market response of increased supply and rapidly developed vaccines suggested trade wasn’t necessarily a problem, and declaring the end of globalisation premature.

Despite this response a degree of consensus has formed that supply chains must become more resilient. In February President Joe Biden took action ordering a review of the systemic risks of multiple industries, quickly for those deemed crucial including semiconductors and pharmaceuticals, more slowly for the wider industrial base.

There are varying reasons for the new consensus. In part there is a fear that international supply may not have responded, though individual countries would then have faced the same issue of increasing supplies. There is a China dimension, a fear that they could exploit supply chain dominance.

More practically there also seems to be a real vulnerability exemplified by various shipping issues. Stories of ships unable to dock, rising costs, and ports unable to handle any more cargo including Felixstowe in the UK and Los Angeles in the US, suggest fragility and possibly that we do not understand enough of the way trade operates in the 21st century.

Trade experts may not have helped by seeing only a trend towards protectionism. It is time we do consider supply chain resilience more seriously.

Trade policy practitioners often know little of trade operations

The consideration of resilience seems problematic for trade policy. Such a focus goes against many years of working predominantly on removing trade barriers, taking us into the realms of competition and industrial policy. It doesn’t obviously fit well with WTO and other texts.

A bigger problem is that trade policy and trade operations have been such different worlds. Trade policy experts haven’t really focused on the logistics side of how goods cross borders, though Brexit forced some attention at least in the UK. Similarly export financing remains a mystery to many, even though its role in facilitating trade is crucial.

We often think of trade policy as preparing the ground on which commerce functions, in terms of laying down the general framework of rules. That obviously involves an element of talking to business representatives, but often not to the extent of getting into the details of how their companies operate. Even then it often feels like we are slightly outdated, concentrating on final goods trade rather than the far greater intermediate goods and services trade in global value chains.

Modern trade operations are highly complex

Shipping and export finance are just two operational considerations of companies engaged in global value chains. As has been shown with the supply of vaccines to the EU there are many factors to consider including regulatory approvals of particular parts of supply chains, supply of relevant ingredients or components, and distribution of final products.

In the modern economy, what we see in the case of vaccines is replicated across numerous sectors such as automotive, pharmaceutical, chemicals, consumer goods including food and drink, and many other products. The management and logistics of the companies running such supply chains is highly sophisticated, with a McKinsey estimate that that the average large company has more than 5,000 suppliers.

Multiply the complexity of individual supply chains with the number of products concerned and we have a modern economy and trade that is probably too large even for a government to fully comprehend. This isn’t a new challenge. It was something many command economies attempted and largely failed before 1990. But the scale of the challenge, given much more fragmented supply chains and sophisticated products, would now be even greater.

Given such a context the task of increasing national resilience in supply chains is a daunting one. It requires considerable advance thought not least as to detailed objectives. Even the EU’s discussions on supply chain due diligence, with the emphasis placed on suppliers, may not have comprehended the scale of the challenge.

Government attempts to influence trade operations must be considered carefully

All countries have directly influenced business operations in their countries to a degree. Even in those with governments apparently fully committed to free markets, like the US and UK, some business decisions such as the location of major facilities are directed to a degree. It is hard to know exactly how much this has happened, but creating the right incentives for particular investments is common.

However such government efforts have not fundamentally changed the global complexity of supply chains, or the vulnerability of national governments to global corporate decisions. It feels like politicians want huge domestic production of everything, plus the full global choice they have at the moment, at the same prices, which just isn’t going to be possible.

Resilient supply chains may then be a classic modern political concept, something that sounds simple but is actually going to be difficult to define and implement successfully. It isn’t yet clear we even have a definition, still less one shared by companies and governments.

This all adds up to a suggestion of a lot of new work, not least in understanding more about how modern trade functions across an economy. Perhaps resilience will soon be dropped once the complexity becomes obvious, saved for only a few sensitive sectors, or left to companies, but we can’t be sure.

Just as some were too quick to call the end of globalisation a year ago, so it is premature today to say exactly what will happen to supply chains in the coming years.

 

 David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

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