Alejandro Reyes wrote . . . . . . . . .
Supply-chain disruptions have gotten worse in because of the increase in Covid-19 cases in Chinese port cities and elsewhere at the end of 2021 and in the first weeks of 2022. The bottlenecks due to the pandemic and the shortages of products they have caused is a difficult topic to address because there are many factors involved – proverbial and literal moving parts – that, as a matter of public policy, it cannot be dealt with adequately by specialists or single-sector experts.
The typical news report on the crisis tends to focus on the difficulties getting finished goods from the production location to retail outlets, from point A to point B. But the issue is not just about manufacturers getting their items to ports and then on ships and then these articles getting transported across the ocean to a port in the destination market, offloaded, and transported to a distributor or retailer. The problems are at every point of a value chain, from the sourcing of raw materials and components necessary to make a product to the very last-mile delivery to the end-user.
A smartphone assembled in China is not all made there and includes components (e.g. memory chips, screens) and raw materials (e.g., rare earths) from several countries. This applies not just to consumer goods such as electronics, a gentleman’s suit or an automobile that has many parts (an iPhone has over 30, a suit about 40, and a car over 30,000). The sourcing challenges also affect highly complex industrial goods such as precision machinery or a bulk carrier merchant ship and energy sources including petroleum.
While the focus of reports on the supply-chain bottlenecks has mainly been on shipping, which accounts for 80 percent of global trade by volume and 70 percent by value, the aviation and trucking industries are also affected. And there are labor issues, too, with the pandemic affecting agricultural, energy and natural resources, and manufacturing workers, as well as others down the line including port operators and workers, truckers, logistics and delivery personnel.
It is also important to appreciate the sophistication and efficiency of global supply chains. A buyer in New York who goes online to buy an iPhone with particular specifications (model, memory, color and even engraving on the casing) can receive it direct from Zhengzhou in central China, where it was manufactured, within days.
Disruptions at various points of the supply chain can, therefore, have a significant, if not debilitating, impact that, if the interruptions are prolonged, would have serious commercial implications that would likely prompt each actor (whether a business such as a shipping line or an individual such as a longshoreman) along the line to assess their economic and strategic positions. Factory workers may refuse to return to work, the sailor may stay the course despite the hardships and stress from social-distancing rules and quarantine, or a shipper may do little, praying quietly that the huge profits it is raking in will last as long as possible.
The pandemic and the supply-chain crisis
The supply-chain crisis started soon after the Covid-19 outbreak in 2020 but was not easily discerned by the public. This was because it took time for consumers to feel the pinch, and the media were slow to pick up on the broader issue, as reporters focused on specific products needed during the pandemic including face masks and other personal protective equipment (PPEs), medical supplies such as ventilators and oxygen, and then vaccines once they became available.
This underscores two points about supply chains: First, the motivation for them and how they are laid out are straightforward: costs and efficiency. The lowering of tariffs over the years of regionalization and multilateral trade liberalization and the lowering of transport costs meant that a complex supply chain – more than likely with China in the loop somewhere, typically for final assembly – makes commercial sense. It may even be the only way for a company to make a profit, given the labor costs and skills in its main markets.
Second, some goods are more necessary or more sought after than others – depending on context and changing circumstances. One does not think about how important it is to have a mask unless there is a coronavirus on the loose. But this also applies to simple sundries such as toilet paper and to strategically important items such as semiconductors and rare earths and mineral, energy and food. The goals of energy and food security are about ensuring there are safe, secure – and (applying the goal of sustainability) environmentally sound – supply chains for these essentials at any time.
Another important aspect of the supply-chain problem is that this is not just a developed-world issue, though the global media only started reporting on it more closely because it began affecting retailers and consumers in the West, who noticed delivery delays and shortages of items from plastic utensils to men’s suits, as well as goods such as toys that are traditionally in greater demand as Christmas approaches. It was roughly only in the late summer of 2021 that more thorough and thoughtful reports of the extent and causes of the disruptions in supply emerged.
Needless to say, the various players in the affected industries and sectors were well aware of the supply-chain challenges for some time before they became a major news story. How could they not? Manufacturers in different parts of the world, including of course Asia (the source of 42 percent of global exports) – especially powerhouse production platforms such as China and Vietnam, as well as niche players including some other ASEAN countries, India and Bangladesh – had to deal with illness, closures, lockdowns, social distancing, labor issues such as worker suspensions and reluctance, and commercial disruptions including cancelled orders, backlogs and sudden increased costs.
The alerts swept along the value chains – not all were alarming to every actor along the line. Consider the rise in shipping costs. The average cost of moving goods across the world increased by 500 percent during the pandemic (through to the end of September 2021). Delays of goods for various reasons including the limited supply of the right containers where they are needed, onloading and offloading delays, and the lack of personnel and storage space all contributed to higher costs for users – and significantly higher revenues for transport companies and port operators. As one trade specialist who researched the problems asked, why would a port operator or shipping line wish the raining profits to stop?
Public-health reasons – the wellbeing of employees – should have been one motivation. Take the plight of transport workers, particularly ship crews, integral players in the global supply chains. In March 2020, just weeks into the pandemic, the global maritime trade industry wrote an open joint letter to UN agencies stressing how vital it is “that all governments keep maritime trade moving by continuing to allow commercial ships access to ports worldwide and by facilitating the movement and rapid changeover of ships’ crews.”
In September 2021, the joint heads of the International Road Transport Union (IRU), the International Air Transport Association (IATA), the International Chamber of Shipping (ICS), and the International Transport Workers’ Federation (ITF) issued an open letter to world leaders on securing global supply chains, demanding “freedom of movement for transport workers and priority for transport workers to receive vaccinations.” Over a year into the pandemic, they wrote, “heads of government have failed to listen, to end the blame-shifting within and between governments and take the decisive and coordinated action needed to resolve this crisis.”
The search for resilience – decoupling by any other name
Remedying the supply-chain problems is cast as the need to make them more “resilient”. In the context of the pandemic, the priority has to be to address the pandemic-related problems that are impinging on costs and efficiency, particularly those challenges identified by the two open letters referred to earlier.
But doing so will entail a level of cooperation across sectors and governments that is probably unattainable for several reasons. Do certain actors along the supply chain have the incentive to resolve swiftly a problem that is actually making them huge profits, especially as trade volumes increase not just because of seasonal demand but also because of the economic recovery? And because supply-chain management has become so weaponized in the context of the US-China trade war, the prospects of effective multilateral cooperation in this area of economic and commercial interest, however necessary they may be, are slim.
Indeed, the quest for supply-chain “resilience” has become not just a matter of managing commercial or business hedging but of also mitigating geopolitical and strategic risks. The need to diversify supply chains is not a new issue. The so-called global supply chain might more accurately be described as “China-dominant”. But as businesses and policy makers in Southeast and South Asia know well, so-called “plus one” strategies that have been implemented over the years – as costs in China have risen, particularly in the industrial hubs in the coastal areas – alternative manufacturing and assembly platforms such as Vietnam, Bangladesh, India, Indonesia, Malaysia, Thailand and the Philippines have benefitted. Major natural disasters and climate change (e.g., the impact of extreme weather) have also inspired diversification.
Plus-one shifts have gone into overdrive because of geopolitical tensions, largely between the US and China but also other bilateral and regional stresses – China’s disputes and clashes with its neighbors, for example. The impact of the diplomatic heat can be exaggerated. For example, while Canadian trade in certain products, notably canola, may have dipped in the aftermath of Beijing’s decision to suspend specific imports in response to Canada arresting the chief financial officer of the Chinese technology group Huawei on an extradition request from the US, in fact, Canada’s exports to China soon recovered.
The pursuit of supply-chain resilience will go on beyond the pandemic. It is a crucial part of the discussions of the revived Quadrilateral Security Dialogue that brings together the US, Australia, India and Japan. The US has significantly upgraded the Quad’s standing, with President Joe Biden convening first a virtual summit and then an in-person gathering of leaders in 2021. Reorganizing supply chains to include only trusted partners (i.e., not including China) is a key item on the agenda (and US strategy in the Indo-Pacific), along with efforts to counter Beijing’s vaccine diplomacy.
The pandemic certainly highlighted the necessity of ensuring secure supplies of crucial PPEs and medical equipment. But the central question going forward is what “supply-chain resilience” really means: Is it merely a politically correct term for “decoupling”? The decoupling debate may be beyond the scope of this paper as it entails delving into the realm of technology and the digital economy, but it is of course a necessary one to have in the context of the management of global supply chains.
A kind of absolute decoupling would seem to be impossible. The Biden administration appears to accept this, though US Trade Representative Katherine Tai’s assertion in October 2021 that what Washington is aiming to do is a “recoupling” has only raised further questions. She defined the goal of recoupling as having “a trade relationship with China where we [the US] are occupying strong and robust positions within the supply chain and that there is a trade that’s happening as opposed to a dependency.”
Clouding the picture was US Commerce Secretary Gina Raimondo’s assertion in an interview in November 2021 with Bloomberg that, in lieu of joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), from which the US withdrew in 2017, Washington plans early in 2022 to launch a “proper economic framework” for the Indo-Pacific region that would help the US and its allies maintain a secure supply chain without China. She cast this as a “coalition of democracies” for trade. Raimondo also referred to the need not just for onshoring production back to the US but also for “friendshoring”, as she put it. “Take semiconductors – it is a global, complex supply chain. That won’t change and that is okay. We don’t think everything can be domestically produced so we want to work with our allies and friends.”
Pursuing a value-based trade strategy would seem to be more an initiative for show and shaming than viable policy. As Biden’s Summit for Democracy, convened in December 2021, demonstrated, determining who is in the camp of democracies can be tricky. While major semiconductor supplier Taiwan attended, key nodes of the global-ex-China supply chain were not invited, including in Asia, Singapore and Vietnam. Concluding progressive high-standard regional trade pacts with dispute-settlement mechanisms such as the CPTPP (which China has applied to join) and promoting social audit and compliance initiatives might be more effective ways to use trade to promote human rights, labor standards and environmental responsibility across all supply chains. Yet, Washington seems set on casting the world – even global trade – in Manichaean terms.
Vaccine rollouts have underscored how supply-chain shifts have become not just a commercial risk-management necessity but also a geopolitically-loaded challenge. Many countries motivated by vaccine nationalism have prioritized the development of domestic capabilities at the expense of global supply chains. Vaccine supply has also become a tool of diplomatic competition, with the US (with its Quad partners) trying to match or surpass Chinese and Russian donations.
This highlights how economic fragmentation has accelerated along national and regional lines, including through trade pacts (e.g., the CPTPP and the Regional Comprehensive Economic Partnership, or RCEP, led by China and ASEAN, which came into force at the beginning of 2022) and various esoteric foreign economic policy programs (e.g., the Belt and Road Initiative, Biden’s Build Back Better World, and the Supply Chain Resilience Initiative, grouping Australia, India and Japan). Overcoming pressing global challenges such as Covid-19 and indeed the global supply-chain disruptions and bottlenecks demand pragmatic multilateral cooperation driven by complementary national interests. The sum of exclusionary initiatives, sometimes with nationalist sentiment underpinning them, under the guise of “resilience” only serves to hinder what could otherwise be more expeditiously achieved by the global community acting in coordination, especially with the prospect of a broadening of the post-pandemic economic recovery and a continuation of the robust rebound in the global trade.
Source : Asia Global