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Sustainable trade

Traducing cross-border supply chains: Who benefits?

Published 01 December 2020

The coronavirus pandemic has subjected cross border supply chains – the arteries of the global economy – to intense scrutiny. Claims of overdependency on China, especially in essential goods, have led to policy interventions that are, in effect, reheated import substitution policies informed by populist and nationalist sentiment.

That nations can trade reduces the risk that they are tied to local firms for supplies. Greater choice, lower prices, and flexibility in sourcing were supposed to be distinct advantages of an open trading system. The build-up and evolution of supply chains over recent decades were a key building block and much research has been devoted to this corporate form, the challenges it faces, and its developmental, economic, and societal impact.

The Covid-19 pandemic could have been the moment when firms operating cross-supply chains meaningfully contributed to tackling a major societal threat. That countries witnessed surges in infection at different times implies that smoothly functioning supply chains could ramp up production and ship medical supplies and medicines to destinations where demand was surging. No such luck.

Instead, senior policymakers in many of the world’s leading economies, and not just those from governments associated with populist policies and economic nationalism, have drawn negative conclusions about this prominent corporate organizational form. Not only that, many policymakers have made statements consistent with the proposition that globalization had gone too far before the pandemic. Numerous governments have taken steps to encourage the repatriation of production or to stimulate domestic production to displace imports. All of this I document in my recently published paper, titled Chinese Whispers.

Analysts can respond to these statements by policymakers in at least four ways. First, some might aver “talk is cheap.” This may not be the appropriate conclusion as governments have begun backing up their critique with policy intervention, although the sums of money involved are trivial compared to the size of the overseas investments at issue. Time will tell if these interventions are sustained.

Second, some might dismiss these statements as blame shifting. Given it was often the same policymakers that disrupted supply chains in the medical goods and medicines sector once the coronavirus spread by resorting to over 200 export controls, there may be something to this. The wrinkle with this argument is that the Japanese government which did not impose any export bans has also joined the critique of cross-border supply chains and is financially supporting Japanese firms that move production facilities out of China.

Third, analysts may decide to critically evaluate the policymakers’ critique. That was the purpose of a large part of my paper and, by any reasonable standard of logic and evidence, the case made against cross-border supply chains is unconvincing. No objective standard by which cross-border supply chains were to be judged was enunciated by policymakers, although thinking through what such a standard should be in the context of a pandemic is worthwhile. In extremis, how should cross-border supply chains be judged?

A fourth reaction of analysts to the apparent shift in policymakers’ attitudes towards cross-border supply chains might be to ask “what’s really going on here?” Future research could generate powerful insights into the factors that influence when and how policymakers gauge the performance of international business. Potentially important pieces of the puzzle include the pandemic’s attendant demand surge and high-profile media reports of shortages which likely reflect the limited incentives that firms have to maintain excess production capacity during normal times. That few stockpiles were maintained by the public or private sectors in many countries may be another element.

But surely the changing geopolitical context must be considered as well. There are now important business, national security, non-governmental, and religious constituencies in the largest economies of the world that are alarmed by China’s rise for a variety of reasons. Did the pandemic create the opportunity to traduce cross-border supply chains with an eye to redrawing the terms upon which international business is enjoined to operate? Who benefits from this game of Chinese whispers?

Should the proponents of supply chain repatriation and of renewed emphasis on import substitution retain the upper hand in the highest counsels of government then analysts may want to reflect on the fragility of extant cross-border supply chains in sensitive sectors. How such fragility came to pass despite the presence of global trade rules, an international organization to oversee them, and hundreds of regional trade agreements is worth further thought. Indeed, it begs the question which international business models can thrive in the face of such fragility and intensifying geopolitical rivalry. 

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Simon J. Evenett is the Professor of International Trade and Economic Development, University of St Gallen, and Founder, Global Trade Alert.

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