Globalization significantly affected international trade through the global supply chains. Multinational corporations from advanced economies started to produce goods in different developing countries through offshoring of manufacturing and were interested in global market liberalization. Many studies show that this pattern of trade leads to lower consumer prices, higher investment from developed to developing countries, knowledge and technology transfer, and, as a result, significant gains for receiving countries. A good example is the case of China, which became not only a major source of final goods but also a hub of global supply chains. The recent global health crisis shows that this scheme of international trade put the majority of countries at risk. Therefore, many politicians, in particular in the United States (US), started to reverse their attitude towards supply chains. Thus, this commentary aims to show global supply chains related risks and their future perspectives.
In his remarks at the extraordinary G20 leaders’ summit, President of China Xi Jinping noted that the outbreak has disrupted production and demand across the globe and proposed to maintain the global industrial and supply chains. He mentioned that China would increase its supply of active pharmaceutical ingredients (APIs), daily necessities, and other essential products [Xinhua, 2020]. In fact, China’s export restrictions can lead to disruption of global markets. Data shows that this opinion is justified. Many countries are over-dependent on pharmaceutical supplies from China in terms of both final goods and components. According to Taylor (2020), China is among the top providers of active pharmaceutical ingredients, which are the basic components for antibiotics and other prescription drugs consumed by Americans. It accounted for 95% of the US imports of ibuprofen, 91% of hydrocortisone, 70% of acetaminophen, 40% to 45% of penicillin and 40% of heparin. In sum, China makes 80% of antibiotics for the United States. The author also notes that China’s role in global supply chains is being considered as political leverage by its media.
According to Swanson (2020), 72% of manufacturing facilities making active pharmaceutical ingredients for American drugs were overseas. The author mentions that when the United States imports finished drugs from Europe and India, they often contain Chinese components as well. Kurian and Kapur (2020) show that India supplies up to 50% of the United States’ generic drug needs. At the same time, India itself highly depends on supply chains as it imports more than two-thirds of components for the production of the APIs from China. According to the authors, the current crisis is also a good opportunity for India to reassess its dependencies and plans for the future. It should be noted that India imposed export restrictions on pharmaceutical products, which increased risks for American consumers but recently decided to lift them with the exclusion of some drugs.
Europe is also highly dependent on China’s supplies and there is a concern connected with drug and other medical equipment shortages. Health ministers of the European Union recognize high risks of supply chains and call for strategic change in approach with incentives to bring production back to Europe. According to them, this policy must be a part of national security [Wheaton and Paun, 2020].
All these offshoring related concerns were unsuccessfully raised long before the recent crisis. Harris (2009) described all risks connected with healthcare and national security. The author shows that the last plant in the United States, manufacturing the key ingredients for crucial antibiotics like penicillin announced its closure in 2004. The author notes that in that time US politicians concerned about offshoring and lack of its regulation as they could lead to supply disruptions, counterfeit medicines, and even bioterrorism. Therefore, during a pandemic, the US would not be able to rely on vaccines because of possible border closures and supply shortages. In 2007, of the 1154 pharmaceutical plants mentioned in generic drug applications to the Food and Drug Administration, only 13% were in the United States, 43% in China, and 39% in India.
According to Marin (2020), a share of the global value chains in international trade reached 60% during the era of hyper-globalization, which lasted from early 1990-s and up to the global financial crisis. In 2011, crisis-related high uncertainty stopped expansion of the global value chains. The author argues that the recent crisis will accelerate the process of reshoring of production through higher investment in robot adoption. Germany, South Korea, Singapore and other developed countries lead this tendency, which will negatively affect growth models of many developing countries with high dependence on low-cost manufacturing and exports of intermediate inputs.
Thus, all the above-mentioned evidence shows that offshoring of production by multinational corporations substantially contributed to the monopolization of global supply chains with all monopoly-related risks, including higher prices, manipulation of production, low quality and uncertainty. Indeed, recently, many countries accused China for supplying low quality personal protective equipment and testing kits [BBC, 2020]. Therefore, advanced countries started the process of reshoring using fiscal stimulus. For instance, according to Reynolds and Urabe (2020), Japan prepares to pay its manufacturers to shift production out of China. For this purpose, it designated $2.2 billion of its economic stimulus package, of which $2 billion will be directed to companies shifting production back to Japan and the rest of the funds to those manufacturers seeking to move production to other countries. The authors indicate that 37% of the more than 2600 surveyed companies of Japan were diversifying procurement to places other than China. This process will be accelerated not only in advanced economies, but also in developing countries, where public pressure to industrialize will be increased substantially.
Another important problem with the global supply chains is their politicization with high competition of political systems and ideologies. For instance, the US proposes democratic values, rule of law and free market economy, while China is a proponent of strong state model with state capitalism. If in the former international trade is determined by market forces, in the latter it is affected by state and political decisions. Using supply chains and other trade means, including export restrictions and market access bans, great powers propose their political and economic interests, influence global development institutions and compete for a new global economic order. Unfortunately, economists rarely consider this issue, mainly focusing on tariffs and evaluating their impact. It is well known that gains from trade are mainly positive. However, gains from monopolized and politicized global supply chains are questionable and put many countries at risk. Therefore, free trade can maintain its positions, but global supply chains will be transformed significantly.
There are important implications of the current crisis. Firstly, advanced countries will accelerate robot adoption and increase investment in robotics and new technologies. Investments in research and development will increase the competitiveness of new goods and services and widen the variety of new products. Such policy changes will require transformation of existing regulations. Secondly, developing countries will also revise their economic policies in order to make them self-sufficient in strategic production, such as pharmaceutical goods and equipment. They will reassess the role of industrial policies and adopt new measures to develop new sectors and support existing manufacturing. Thirdly, global supply chains will be diversified in order to escape politicization and monopolization. As a result, many advanced and developing countries can form new preferential trade agreements, which will capture not only tariffs, but also many regulation issues. For instance, currently the US negotiates a new trade agreement with India, which will have a significant impact on bilateral trade and global supply chains. These changes in global economic and trade policies will need appropriate regulation and will require a revision of the role and norms of the World Trade Organization.
References:
BBC (2020). Coronavirus: Countries Reject Chinese-made Equipment. Retrieved from https://www.bbc.com/news/world-europe-52092395. Accessed on 10.04.2020.
Harris, Gardiner (2009). Drug Making’s Move Abroad Stirs Concerns. Retrieved from https://www.nytimes.com/2009/01/20/health/policy/20drug.html. Accessed on 21.03.2020.
Kurian, Oommen, and Kriti Kapur (2020). Covid-19 Outbreak Could be Indian Pharma’s Big Opportunity in Africa. Retrieved from https://qz.com/india/1830849/coronavirus-could-be-indian-pharmas-big-opportunity-in-africa/. Accessed on 07.04.2020.
Marin, Dalia (2020). How COVID-19 is Transforming Manufacturing. Retrieved from https://www.project-syndicate.org/commentary/covid19-and-robots-drive-manufacturing-reshoring-by-dalia-marin-2020-04. Accessed on 07.04.2020.
Reynolds, Isabel, and Emi Urabe (2020). Japan to Fund Firms to Shift Production out of China. Retrieved from https://www.bloomberg.com/news/articles/2020-04-08/japan-to-fund-firms-to-shift-production-out-of-china. Accessed on 09.04.2020.
Swanson, Ana (2020). Coronavirus Spurs U.S. Efforts to End China’s Chokehold on Drugs. Retrieved from https://www.nytimes.com/2020/03/11/business/economy/coronavirus-china-trump-drugs.html. Accessed on 07.04.2020.
Taylor, Guy (2020). ‘Wake-Up Call’: Chinese Control of U.S. Pharmaceutical Supplies Sparks Growing Concern. Retrieved from https://www.washingtontimes.com/news/2020/mar/17/china-threatens-restrict-critical-drug-exports-us/. Accessed on 07.04.2020.
Wheaton, Sarah, and Carmen Paun (2020). Europe Braces for Coronavirus-Induced Drug Shortages. Retrieved from https://www.politico.eu/article/europe-braces-for-coronavirus-induced-drug-shortages/. Accessed on 09.04.2020.
Xinhua (2020). Full Text of Xi’s Remarks at Extraordinary G20 Leaders’ Summit. Retrieved from http://www.xinhuanet.com/english/2020-03/26/c_138920685.htm. Accessed on 29.03.2020.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.