ARE TRADE BARRIERS GOING TO SHAPE THE GLOBAL SUPPLY CHAIN?

August 21, 2020

Submitted by:  Devendra Mishra, Executive Director, BSMA

The nation appears to be pre-occupied with trade barriers in addressing the challenges of the COVID-19 pandemic. The noise to cutoff global trade is drowning the primary issues of enhancing supply chain resilience and agility, risk mitigation, and expanded economic considerations. A few vociferous, narrow-minded politicians have demanded that Made in AMERICA is our future for all industries.

One positive outcome of the global pandemic is the necessity to reinvigorate the global supply chain to minimize disruptions which have proved to be catastrophic. Recent events have exposed how a determined competitor like China can weaponize interdependence. The COVID-19 outbreak has highlighted this challenge and forced us to acknowledge the potency of long-threatened, but never imminent, dangers. The pandemic has also exposed the vulnerability of global supply chains and previously unquestioned business practices that outsourced the production of critical goods.

In the overall optimization of the configuration of the supply chain, trading barriers represent a cost of doing business and may even lead to potential elimination of certain countries. The concept of understanding the playing field as concentric circles emanating from the market to be served deserves to be explored. When the European Union (EU) was formed, an ideal supply chain network emerged where the adjacent regions and others became an extension of the core. Supply chains become shorter and more reliant, leading to a greater range of suppliers for similar products and increased regionalization of production. Diversification was aimed to reduce reliance on any single supplier, whether a single producer or a group of producers from the same country, while localization was aimed to relocate production close to home markets. The extent of supply chain shifts depended also on the overarching consideration of security of supply, particularly of strategic value in pharmaceuticals.

Over a century, America has built a regional supply chain with Canada and Mexico, primarily in the areas of automotive, consumer electronics and agriculture. This regional powerhouse of North Americas served by other suppliers from Asia and Europe. The coronavirus pandemic is forcing some U.S. companies to rethink their far-flung supply chains, the Mexican government is recommending a “relocation strategy”, a campaign to convince companies that they would be safer bringing production closer to the U.S. market. Further, Mexico has newly signed the North American trade deal. Since the implementation of the North American Free Trade Agreement in 1994, Mexico’s role in the U.S. supply chain has grown, evolving from an exporter of textiles to a leading automobile and aerospace manufacturer. But its growth has been nowhere near as impressive as China’s. By 2015, China owned 20 percent of global manufacturing; Mexico’s share was 2 percent. U.S. companies were beginning to shift some production away from China before anyone had heard of covid-19 because of intellectual property concerns, rising labor costs and political instability. In February, the consulting firm Gartner found that 33 percent of global supply-chain leaders had either shifted sourcing and manufacturing activities out of China or planned to in the next three years. On the other hand, it makes strategic sense for American businesses to go to China’s huge market with a population of 1.4 billion, a well-established industrial supporting system and an improving business environment. It is also being noticed that like-minded governments of USA and Japan are trying to blunt China’s ability to bend them to its will. A strategy of “collective resilience” is being explored to reorganize sectors of their economic relationship with China. The need for new thinking about national security appears to be an over-riding objective.  In the final analysis, it makes sense for certain global value chains to be reconfigured to become regional chains for reasons of efficiency, profitability and security.

The multiple forces on the supply chain are beginning to unleash a more holistic view of a prosperous and resilient economy and a confrontation of traditional principles and practices. Human health is the central focus for governments and people alike.

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