David Ramirez | 7 October 2020
Global supply chain security after Covid-19: Potential outlook
David Ramirez took part in an expert panel discussion in August 2020 as part of The Azure Forum for Contemporary Security Strategy 2020 series on ‘Peace, security and defence during and beyond the Covid-19 Crisis: Lessons for future global crises’, with support from University College Dublin. Covid-19 has brought about dramatic changes for global trade and international supply chains. As some countries seek to decouple from China to reduce their supply chain risks, this alternative seems unrealistic, both in economic and geopolitical terms.
Covid-19 brought dramatic changes for global trade and international supply chains. The impact of the pandemic is unprecedented: world trade is expected to fall by 13 per cent to 32 per cent in 2020, according to World Trade Organisation forecasts, a figure not seen even during the Great Recession of the late 2000s.
Meanwhile, supply and demand shocks prompted by the Covid-19 outbreak created temporary strains on global supply chains as business closed to comply with lockdown orders, and as consumers increased panic purchases to increase their provisions of foods, cleaning supplies and personal protection equipment (PPE). Although these temporary restraints had been somewhat overcome by the end of the first half of 2020, there is the risk that new waves of Covid-19 contagions could boost panic purchases again, thus reviving pressures on supply chains. Further, some changes in consumer habits (such as working or dining from home) are deemed to have permanent effects on production processes and supply chain configurations.
Government calls to relocate supply chains: Time consuming and costly
While many firms have responded to the impact of Covid-19 on supply chains by finding alternative suppliers and by accelerating previously ongoing digitalisation efforts, some other corporations are attending government calls for the relocation of their production process, either domestically or regionally. This is a difficult process that takes time and requires considerable costs. In the meantime, governments – most prominently the U.S. administration, but also key manufacturers in Asia such as Japan and South Korea – appear keen to reduce their dependence from other nations, particularly China and more specifically in relation to pharmaceutical products and medical equipment.
In this context, for example, the U.S. has announced an Economic Prosperity Network (EPN), which targets Australia, Japan, New Zealand, South Korea and Vietnam as potential new sources of manufacturers from Asia. The U.S. has also announced measures to force U.S. government entities to buy pharmaceuticals and medical products made only in the United States. Japan, too, has launched a US$2 billion plan to subsidise Japanese manufacturers that relocate to their home country, and a US$230 million programme to foster relocation from China to other nations in Southeast Asia. Finally, South Korea has launched a US$95 billion “New Deal” to improve its infrastructure for the relocation of firms in their homeland.
The above said, decoupling from China, the world’s factory, seems impractical and, for the most part, unviable. Although China has lost some competitive edge to a number of “rising stars” in Asia and other parts of the world—including India, Indonesia, Thailand, Vietnam and Mexico—it still offers very attractive conditions for manufacturing such as its state of the art physical and technological infrastructure, as well as access to its domestic market of nearly 1.4 billion consumers. Further, even if final manufacturing were to be relocated out of China, the country will still play a key role as second and third tier supplier of inputs and parts for the aforementioned “rising stars”.
Geopolitics will limit full decoupling from China
Geopolitics also plays a role in limiting a potential full decoupling from China. None of the rising stars in Southeast Asia, or even Japan and South Korea, can afford to fully align with the U.S. and risk upsetting the most influential economy in their own region. Moreover, China is clearly displaying a strategy to strengthen its political and economic influence in the region. On the diplomatic side, it has recently been sending medical aid and doctors to support the fight against Covid-19 in countries such as Indonesia, one of these rising Southeast Asian stars. Furthermore, for the past several years China has been developing its Belt and Road Initiative (BRI), seen by many as a modern Silk Road to increase its influence across Asia and some parts of Northern Africa and Eastern Europe. Notably, China itself is aiming to reduce its dependence from other countries like the U.S., as evident from its “Made in China 2025” strategy which seeks to increase domestic production of high-tech products.
In sum, firms will have to be creative and invest significantly to re-design their supply chains if they want to increase product reliability, rather than only reduce costs. Countries such as the U.S. will have to provide significant fiscal incentives if they want U.S. firms to relocate to domestic soil, as the economic rationale says that China basically remains the best option for manufacturing.
Relocation, in this context, will probably work only for highly “strategic” industries, such as pharmaceuticals and medical equipment, but the cost of the incentives will likely end up being borne by consumers. Likewise, there is the risk that governments decide to increase protectionism to promote manufacturing relocation, which will also end up deterring consumer welfare.
ABOUT THE AUTHOR
David Ramirez is a consultant for socio-political and economic affairs. He holds a MSc in Economics and PGDip in International Relations. Mr Ramirez regularly writes for outlets, such as The Economist Intelligence Unit and Latin Trade magazine.