supply chains global may trade governments cost

Six trends shaping the future of global trade## 1. Governments seeking more control over critical suppliesThere are multiple factors prompting firms and governments to reassess theinherent risks of over-reliance on one country or region. Chief among them isthe need to exercise more control over the provision of public health relatedsupplies like medicines and medical equipment.China supplied about 42 per cent of the world’s exports of personal protectiveequipment in 2018, for example, as well as almost three-quarters of Italy’simported blood thinners and 60 per cent of the ingredients for antibioticsimported by Japan, according to a briefing from the Economist4. This is likelyto lead governments to shore up industries that are deemed to be of nationalimportance.The difficulty global air freight has faced during the pandemic is anotherreason for caution. With much cargo transported in the hold of passenger jets,the reduction of flights caused a spike in the cost of air freight5, withrates between China and the US more than doubling to $7/kilogram during Apriland May. This then had a knock-on impact on shipping rates, too6.## 2. Reducing risk through diversification of supply chainsThese difficulties may lead both firms and governments to change their mindsetfrom the “just-in-time” supply chains that were largely driven by the desirefor lean inventories, efficiency and cost savings.One alternative is the “just-in-case” approach, where supply chains arediversified to protect against future risks such as trade wars, hefty tariffs,punitive regulations, or a second wave of the pandemic. This may result in ashift in the favour of a broader range of emerging manufacturing hubs withinAsia, such as Vietnam, Indonesia or Malaysia. India is also positioning itselfto be a beneficiary of more diverse supply chains and has the added advantagesof time zone and world-class IT infrastructure.Re-shoring or nearshoring is another option, and there was a pre-existingtrend among US manufacturers to rely less on imports from China as a result ofthe trade war. In its annual Reshoring Index7, consulting firm Kearneyhighlighted a “sharp reversal” of US manufacturer sourcing from Asia todomestic suppliers in 2019. However, in case of most countries, this is morelikely to be led by government incentives rather than nationalism.## 3. Weighing up the cost benefitsOf course, it is hugely complicated and expensive to relocate whole factories,or even R&D facilities which rely on people as their primary resource, so theimmediate impact may be limited. Indeed, a Standard Chartered poll suggeststhat just 10 per cent of firms are looking at moving their supply chains,while 6 per cent are considering shortening them.## 4. Move towards digitisationOver the longer term, however, automation and robotics may alter the costequation, partly offsetting the relatively higher labour costs of westernmarkets. Similarly, digitisation may help to cut the costs associated withglobal trade, as the shift online experienced during the lockdown becomes moreingrained. The rise of digital trade platforms, e-signatures, and digitalcustoms clearance will all help keep goods moving more efficiently.And as companies embrace digitisation, they can also use technology to helpmanage increasingly diverse supply chains, for example by using real-timevisibility of inventory or machine learning to forecast purchasing patterns.## 5. Geopolitical pressuresIt is also important to consider changes in the broader business andgeopolitical landscape, as cost is only one driver of behaviour.Companies will need to strategically map their own vulnerabilities, looking atany areas which could lead to interruptions. This could include decisions bygovernments to stipulate more local purchases; limit the flow of data or denyentry visas to international executives.There may also be domestic pressure to protect workers against mass lay-offsprompted by the recession. Pre-crisis, the rise of protectionism from populistgovernments was already undermining the WTO’s rulebook that has helpedfacilitate global economic growth over the past 20 years.There is also a shift in favour of services as they become an increasinglyimportant part of global trade over the next decade, with trade in servicesgrowing 60 per cent faster than the trade in goods in the past decade and nowaccounting for $5.1 trillion out of the $17.3 trillion which makes up globaltrade.8At the same time, China is transforming itself from a low-cost manufacturinghub to a final demand destination, redefining the dynamics between global andregional supply chains and cementing the trend towards more intra-regionaltrading.## 6. Creating RESILIENCE in supply chainsCompanies will always be partially motivated by the need to create shareholdervalue – and some may be quick to forget the drastic disruption of 2020.However, I believe there will be a greater emphasis on making supply chainsless vulnerable, even if there is some financial cost involved.Businesses across the world are reassessing their supply chain risks and willbe helped by data and artificial intelligence as they weigh up the evolvingrisks and new opportunities. It’s fair to say that the role of CTO or CIO hasnever been more important.It is my hope that the changes adopted will build more resilient supply chainswith the strength to future-proof global trade.This article contains insights from the ‘Unravelling Uncertainty’ webinarseries in partnership with The Economist.