Global supply chains are still a source of strength, not weakness

FOR THE best part of a week, the Suez canal was blocked by a 200,000-tonne metaphor. The Ever Given is not just one of the world’s biggest container ships, it is also the emblem of a backlash that accuses globalisation of going too far. Since the early 1990s supply chains have been run to maximise efficiency. Firms have sought to specialise and to concentrate particular tasks in places that offer economies of scale. Now, however, there are growing worries that, like a ship which is too big to steer, supply chains have become a source of vulnerability.

A semiconductor shortage is forcing car firms to idle plants all over the world. China has imposed a digital boycott of H&M, a Western retailer that appears unwilling to source cotton from Xinjiang, where the Communist Party is locking up Uyghurs and pressing them into forced labour. The European Union and India have clamped down on vaccine exports, disrupting the world’s efforts to get jabs into arms. As they battle the pandemic and face up to rising geopolitical tensions, governments everywhere are switching from the pursuit of efficiency to a new mantra of resilience and self-reliance.

It makes sense for supply chains to be more robust. When national security is at stake, governments have a role in making supplies more secure. Yet the world must avoid a stampede back from globalisation that would not only cause great harm, but also create unforeseen new vulnerabilities.

One complaint against globalisation is that it concentrates production and eliminates buffer stocks. Supply chains encompass some of the most sophisticated forms of human endeavour. The iPhone relies on Apple’s manufacturing network, straddling 49 countries; Pfizer, a vaccine champion, has over 5,000 suppliers. But the relentless pursuit of efficiency has led to low inventories and choke-points. At the start of the pandemic, voters and politicians were horrified by the scramble for foreign-made face masks and testing-kits. Over half of advanced semiconductors are made in a few plants in Taiwan and South Korea. China processes 72% of the world’s cobalt, used in electric-car batteries. McKinsey, a consulting firm, reckons that a single country has monopolised the export of about 180 products.

Such dependence is particularly threatening when geopolitics is becoming more confrontational. The decay of international trading rules makes countries more wary of relying on each other. During the pandemic, countries have passed over 140 special trade restrictions and many have quietly tightened their screening of foreign investment. Following the neglect of problems such as how to tax tech giants abroad and whether to impose levies on carbon-intensive imports, countries are tempted to take matters into their own hands. As the contest between America and China intensifies, there is a growing threat of embargoes, or even military conflict. Under Donald Trump, America undermined the global trade regime and President Joe Biden is unlikely to expend much political capital on rebuilding it.

Against such a backdrop, governments have a role in securing supplies—but it is a limited one. They can support research and development, including for new energy sources. Beyond this, subsidies and domestic preference are justified only when a vital input relies on a monopoly supplier that is subject to potential interference by a hostile government. Some rare minerals fall into this category, hand-sanitiser does not.

The risk is that countries go beyond minimal intervention—that, in the slogan of Narendra Modi, India’s increasingly protectionist prime minister, they get “vocal for local”. On February 24th Mr Biden ordered a 100-day security review of America’s supply chains. On March 9th the EU said it would double its share of world chipmaking by 2030, to 20%, which followed a pledge to be self-sufficient in batteries by 2025. Last year Xi Jinping launched “dual circulation”, aimed at insulating China’s economy from outside pressure. Such pledges are vague, but the preference for domestic jobs and manufacturing and promise of subsidies could mark a point at which the world shifts away from free trade and open markets.

Such a lurch towards autarky would not be justified. One reason is that government-administered, domestic supply chains are even less resilient than global ones. For all its drama, the saga of the Ever Given will be only a blip in the trade statistics. As demand surged in the pandemic, China’s mask output rose by ten times. After the panic buying of beans and pasta, the $8trn global food supply-chain rapidly adapted, keeping most supermarkets stocked. While arguments rage over how to allocate doses, global networks stand to supply 10bn shots of brand new vaccines this year. Self-reliance sounds safe, but politicians and voters must remember that their meals, phones, clothes and jabs are all the product of global supply chains.

The call for self-reliance also misconstrues the balance between the costs of interdependence, which are brief and visible, and its benefits, which trickle in month after month unheralded. The lost efficiencies and expense of duplicating shared production chains would be ruinous: firms have $36trn invested abroad. The build-up of costs, as domestic firms were protected from competition by subsidies or tariffs, would be a hidden tax on consumers. And after all that, a policy of self-reliance would end up penalising countries too small or poor to host advanced industries. If manufacturing ends up concentrated at home, even big economies would be exposed to local shocks, lobbying and the shortcomings of their own producers, as America may discover with Intel.

Strength in numbers

Resilience comes not from autarky but from diverse sources of supply and constant private-sector adaptation to shocks. Over time, global firms will adjust to even long-term threats, including tension between America and China and the effects of climate change, by gradually altering where they make fresh investments. This is a perilous moment for trade. Just as globalisation begets openness, so protection and subsidies in one country spread to the next. Globalisation is the work of decades. Do not let it run aground. ■

Dig deeper

Consumer boycotts warn of trouble ahead for Western firms in China (Apr 2021)
Intel should beware of becoming a national champion (Apr 2021)
Governments have identified commodities essential to economic and military security (Apr 2021)