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Perspectives: On resilience

‘Resilient supply chains’ is the dominant trade policy phrase of 2023. Yet the term has multiple meanings including protectionist ones. Governments lack good information on supply chains: gathering information should be a greater focus than introducing policies that could increase fragility.

In 2023 it has been hard to escape the word ‘resilient’. Almost every summit outcome document seems to contain references typically associated with supply chains and the need to strengthen their resilience.

In May there was the ‘G7 Leaders’ Statement on Economic Resilience and Economic Security’. There also are formal agreements such as the recently signed US-led ‘Indo-Pacific Economic Framework for Prosperity Supply Chain Agreement’, whose stated headline objective is to make supply chains more resilient.

Resilience is a comfortable word, hard to argue against. Defined as the ability to withstand difficulties, it seems obvious that should welcome this for an economy, trade policy, or supply chain.

There are however reasons to be more cautious.

First, the references to resilience do not typically say exactly what does not currently meet that definition.

Second, relatedly, resilience appears to have a number of completely different, often largely unspoken, meanings. These include reducing dependencies, increasing self-sufficiency through protectionist measures, and reducing the role of China in international trade.

In the already highly politicised area of international trade relations such loose and hidden definitions are a path to more trade disputes. Worse, governments are discussing with limited knowledge how to change supply chains operated almost entirely by companies.

Resilience seems to be seen by governments as a harmless framework allowing for action. They need to be aware of the risks, and seek more information before acting.

Trade has increased resilience in the modern economy

Logically, analysis on how trade has affected economic resilience should look at recent events and consider how these could have been handled better. Most obviously, Covid-19 and the need to change EU energy supply after Russia’s invasion of Ukraine were clearly drivers for this debate.

Neither, in retrospect, justify fundamental change.

While there were supply problems during the pandemic, these were resolved quickly across Europe through global supply and domestic adaptation. Similarly, the undoubted energy supply shock was handled much more efficiently than initially expected, if at some cost.

Subsequently, as if searching for supply chain problems, some suggest that occasional shortages of different products in different countries prove the need for more resilience. This rather overlooks that there are currently more products reliably available in more countries than ever before.

Far less considered is what would happen in the most likely alternate scenario of greater domestic production and higher barriers to international trade. While this could address some vulnerabilities such as international transportation, others would be introduced such as if local production was damaged.

Supply shortages have been a recurrent feature of economies. By historic standards, these are much rarer in today’s advanced economies.

There is little basis for saying that modern supply chains are not resilient.

Alternate meanings of resilience

Given that the majority of trade does take place within supply chains, it is reasonable to examine their operations.

There are however several different ways in which resilience is now being used in a trade context.

Most obviously, there are risks tied to any supply chain involving China. Concerns include dependencies for key inputs, security worries such as those over Huawei, and most of all what would happen if there was to be an invasion of Taiwan.

Relatedly, there is the concern over the supply of raw materials needed for the net zero transition. In particular, that China and other source countries may introduce restrictions that inhibit industrial production.

Then there is the wider idea that modern economies are inherently vulnerable because of dependencies for certain products on one or more third countries.

In the most protectionist version, in the US in particular, this has developed into a belief that resilience must mean greater domestic production. Some for example see IPEF as a win for US industrial policy.

All of these meanings may be worth investigating. Governments may well have become too relaxed about their economic security being almost entirely in the hands of private sector supply chains of which they know little.

There is a danger however of going too far the other way, of assuming that resilience means that imports must be reduced particularly from China and replaced with domestic production or at least shorter supply chains.

Such action would reduce overall supply of goods, at obvious economic cost.

Supply chain information is good, any action should be carefully chosen

Today’s supply chains have been mostly created in the last thirty years as perhaps the most fundamental economic transformation since the industrial revolution. Public and political perception has not kept up, and trade policy discussions remain too focused on final goods.

Arguably, there cannot be resilience without a better general understanding of the modern economy. In that sense, the actual content of the supply chain part of IPEF, of information gathering and exchange, make sense.

Understanding vulnerabilities, whether for example for common drugs or food, is a natural follow-on. This is not least in assessing the impact of government actions in areas like regulation or logistics.

All of this must however be separated from any idea that the natural state of affairs is domestic production of all goods. Supply chains have grown up around government interventions in the economy as an organic business-led process that cannot simply be reversed.

Politicians are naturally concerned that such globalisation means that everything will be imported, and that this would not be resilient. Such worries should not be ignored.

There is a role for trade economists in demonstrating how modern European economies have in fact benefitted from supply chains. Demonstrating that many consumers also place a premium on local production, to which companies will respond, is a part of this.

Overall though, if there is one major vulnerability of modern trade, it is governments lacking information on how their economies operate. Taking hasty action could make things worse.

While resilience could mean many things, it would be best if it started with improving general understanding of modern trade.

 

 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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