Development of the global supply chains gained importance following the pandemic-related disruptions, which caused negative consequences such as inflation. Economists and policy experts are debating about the future of the global supply chains as policy responses from advanced and developing economies were different. Therefore, this commentary aims to review recent changes and policy proposals to transform global supply chains and make them sustainable.
The supply chain shocks are recognized as one of the main causes of the recent surge in inflation in the United States (US) and the European Union (EU). Transport costs, in particular, by sea, have rocketed in the past year and significantly contributed to the growth in prices. For instance, the Drewry world container index measuring the cost of moving a 40ft container is 170% higher than it was a year ago. The price on some particularly in-demand routes such as Shanghai to Rotterdam has increased by almost 200%, while in the case of the Dutch port to New York, the cost has risen by 212%. Prices of lumber, cotton, wheat, and palm oil have increased by more than 30% [Farrer, 2021]. Households, experts, and firm managers perceive causes of inflation differently. Academic experts distinguish three main factors, causing inflation, including supply chain issues, government spending, and monetary policy. Households explain the recent surge in inflation by labor shortages, supply chain issues, and politics. Managers also emphasize labor shortages, supply chain issues, and generic references to the pandemic [Andre et al., 2021]. Therefore, supply chain disruptions became one of the top concerns of all economic agents.
Due to the negative impact of supply chain disruptions on production, international trade, and inflation, policymakers started to raise a concern about this problem. The US administration recognized supply chains as future economic security. In February 2021, President Joe Biden issued an executive order to secure and strengthen the American supply chain, while in June, the White House published a 100-day review on “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth”. The review shows that the US policy, which prioritized efficiency and low costs over security, sustainability, and resilience, has resulted in supply chain risks. Moreover, a fragmented supply chain may also make it more difficult for workers to organize for collective bargaining, while companies may benefit from lower-tax jurisdictions. The report proposes keeping more of the supply chain in the US, especially in manufacturing [Acemoglu, 2021]. Earlier, the US administration also reconsidered its industrial policy and allocated $1.2 billion in the form of subsidies to directly expand domestic personal protective equipment (PPE) production capacity. It started by subsidizing domestic facilities producing N95 respirators. In 2020, the US government made nearly $800 million of publicly funded investments in American PPE production capacity expansion, as well as for inputs along the PPE supply chain. In May and June of 2021, the US government spent over $400 million on a half dozen companies to expand capacity for nitrile glove production. These subsidies combined with the demand shock, induced entry by American firms and changed the domestic industry landscape [Bown, 2021].
High dependence on intermediate input imports put many advanced economies at risk. For instance, Germany imports 8% of its intermediate products from low-wage countries, while this indicator for the US amounts to 4.6%. Understanding supply-chain-related vulnerabilities, governments and firms from developed countries adopted special support measures and deepened their cooperation. For instance, the EU has designated part of its €750 billion Next Generation EU recovery fund to bolster Europe’s semiconductor design and manufacturing capabilities. The US chipmaker Intel plans to invest in several European countries and to open a semiconductor factory in the region with EU help, while Bosch recently opened a chip-manufacturing plant in Dresden with the help of European subsidies. These investments from the government and business will reduce Europe’s dependence on Asian suppliers. Therefore, it is important to note that the pandemic accelerated the reshoring trend. Given these facts and to minimize risks from supply chain disruptions, firms may reshore production from developing countries, build up inventories and rely on suppliers from different continents to hedge the risk of natural disasters or other regional disruptions [Marin, 2021].
Experts believed that the decentralization of markets could ensure a diversity of alternative supplies. Despite the high specialization of the global production system delivered substantial benefits, the pandemic-related crisis revealed its weaknesses. To address them, policymakers should have better data and business intelligence in government as even after 30 years of globalization, there is a lack of detailed, publicly available information on product flows in global supply chains. Moreover, governments should play a more active role in the short term using different support instruments such as providing production subsidies to mitigate some of the shortages [Coyle, 2021]. It is expected that the shortages, backlogs, and imbalances between supply and demand will persist well into 2022, and perhaps longer. To overcome these issues, it is important to develop better models using Artificial intelligence for predicting how supply chains will evolve, including their likely responses to shocks. These forecasts need to be publicly available. At the same time, international cooperation, with countries sharing real-time data generated by supply-chain networks, would also be needed [Spence, 2021]. Despite the importance of global cooperation seems obvious, it will be difficult to achieve it given the fact of trade and other conflicts such as US-China contradictions.
To benefit from the global supply chain participation, governments of developing countries should develop industrial policies based on the following recommendations. Firstly, it is important to bargain with foreign investors for the purpose of domestic industrialization. Secondly, the industrial policy should focus on both export promotion and import substitution. Finally, it is necessary to link up to the value chains of transnational corporations, and, at the same time, successful industrialization needs a degree of competition with transnational corporations. Governments may initially rely on the resources of state-owned enterprises [Hauge, 2020].
Thus, the pandemic revealed all weaknesses of the global supply chains. It also accelerated the process of reshoring, which started after the global financial crisis. Governments and firms from developed countries responded by higher investments and by reconsideration of the role of industrial policy. Key tools to support domestic production were subsidies. These changes in the economic policy of developed countries will affect the structure of international trade, as many production facilities located in Asian countries will be reshored. As a result, trade between advanced economies may increase substantially following the transformation of the supply chains.
Many developing countries, including Central Asian states, aim to become a part of global supply chains. Taking into consideration the above mentioned changes, the plans of those countries will be difficult to achieve. Instead of that policy, developing countries should focus on their industrialization to provide their economies with full-scale production. This policy will require careful analysis of their trade policies, export capabilities, import dependence, input availability, and technological development. Like in the case of advanced economies, developing countries should step in by providing substantial support through subsidies or other tools for organization and further development of certain sectors. This kind of industrialization will provide economic security for these countries and reduce risks from economic or other shocks. This kind of industrialization may attract foreign investments in developing countries manufacturing sectors and involve these countries in the global production systems.
References
Acemoglu, Daron (2021). The Supply-chain mess. Retrieved from https://www.project-syndicate.org/commentary/us-supply-chain-mess-incentives-for-offshoring-by-daron-acemoglu-2021-12. Accessed on 27.12.2021.
Andre, Peter, Haaland, Ingar, Roth, Chris, and Johannes Wohlfart (2021). Inflation narratives. Retrieved from https://voxeu.org/article/inflation-narratives. Accessed on 27.12.2021.
Bown, Chad (2021). How COVID-19 medical supply shortages led to extraordinary trade and industrial policy. Retrieved from https://www.piie.com/sites/default/files/documents/wp21-11.pdf. Accessed on 20.12.2021.
Coyle, Diane (2021). The great supply-chain massacre. Retrieved from https://www.project-syndicate.org/commentary/current-supply-shocks-and-2008-global-financial-crisis-by-diane-coyle-2021-10?barrier=accesspaylog. Accessed on 25.12.2021.
Marin, Dalia (2021). Making supply chains more resilient. Retrieved from https://www.project-syndicate.org/commentary/should-governments-help-to-boost-supply-chain-resilience-by-dalia-marin-2021-07?barrier=accesspaylog. Accessed on 25.12.2021.
Farrer, Martin (2021). Global supply chain crisis could last another two years, warn experts. Retrieved from https://www.theguardian.com/business/2021/dec/18/global-supply-chain-crisis-could-last-another-two-years-warn-experts. Accessed on 22.12.2021.
Hauge, Jostein (2020). Industrial policy in the era of global value chains: towards a developmentalist framework drawing on the industrialization experiences of South Korea and Taiwan. The World Economy, 43 (8), pp. 2070-2092.
Spence, Michael (2021). Why are supply chains blocked? Retrieved from https://www.project-syndicate.org/commentary/prevent-future-supply-chain-disruptions-using-ai-models-by-michael-spence-2021-11. Accessed on 25.12.2021.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.