We tend to consistently underestimate the complexity of supply chains, but that doesn’t mean that changes are not happening.
Politicians and businesses promised to strengthen and diversify global supply chains in the wake of recent disruptions — yet even if that was possible or desirable, it would be a costly reorganisation of trade lanes that were built off efficient logistics.
The Ever Given’s unscheduled Suez Canal stop in 2021 flagged the fragility of just-in-time freight to a population hooked on cheap and immediate access to just about anything. The Covid-induced supply chain crisis and the rapid reorganisation of trade in the wake of Russia’s invasion of Ukraine only served to compound the chaos.
Supply chain resilience became a political imperative as bottlenecks wiped a conservative 1% off global GDP. Businesses moved from ‘just-in-time’ to ‘just-in-case’ procurement, stockpiling billions of dollars’ worth of inventories as a form of insurance in an increasingly uncertain world. Globalisation itself, it seemed, was shifting - and the perennial prediction of near-shoring or reshoring re-emerged in the political narratives.
Yet how much of this was a serious reappraisal of supply chain efficiency being weighed against security, resilience, and costly redundancies; and how much was just a hiccup in the context of longer-term trends?
Systemic change or softening statistics?
Amid all the justifiable superlatives being used during the recent box boom, one telling statistic that did not receive too much attention from shipping lines came from the World Bank, which stated that as a percentage of the world economy, international trade last year was less than it was back in 2008 (Source: World Bank national accounts data Trade % GDP). The longer-term pattern for almost 15 years now has seen international trade in goods grow more slowly than the world economy — and that is a pattern to which we are already reverting as the container congestion unwinds.
That does not mean trade in international supply chains is going away; it simply serves as a timely reminder that the past few years were an anomaly rather than a trend. It also does not mean production is moving ‘back home’, as the populist wing of political voices never tire of claiming.
According to Unctad research, there is no data-based evidence to indicate systemic changes in the arrangement of global production. Near- or reshoring remains a political myth. On the contrary, the early success in the economies of east Asia in mitigating the financial impact of the pandemic may have resulted in increased reliance in global value chains on manufacturing and production originating from that region.
Low costs brought low reliability
Much of the discussion on reshoring grossly underestimates the complexity of global value chains and is preoccupied with the location of final assembly plants. While it is possible that more of the value of finished products could potentially be added locally should sufficient incentives be put in place, the upstream supply chains through which components and sub-assemblies are sourced remain stubbornly global regardless of national policy or short-term disruption.
What is true is that these global supply chains have evolved in a way that was driven almost entirely by production costs that were reliant on cheap, efficient transport. That has been exposed as a fundamental under-pricing of risk — and, regardless of how temporary the supply chain crisis proves to be, the disruption has prompted a reconsideration of redundancies and resilience.
Beyond high freight rates, the crisis also led to historically low schedule reliability, congestion, delays, additional surcharges and vessel redeployment. Some smaller economies, including small island developing states, have seen their connectivity decline as ships were redeployed to more lucrative markets. That has rung alarm bells in board rooms and at the highest level of national governments, particularly those desperately searching for non-Russian energy supplies.
The clamour for resilience in response to these shocks could take the form of redundancy or greater inventories. Either way, cost is increasing in exchange for greater insurance against perceived risk. Global trade is getting more expensive. The latest survey of global chief executives published by consultants EY found that 40% are reconfiguring their company’s supply chains. (Source: EY Jenner and Dharmani; Why global industrial supply chains are decoupling). However, much of this is likely to be short-term shifts to dual sourcing, rather than any fundamental restructuring of global value chains.
Resilience has a higher price
The suggestion that companies are shifting from efficiency to resilience is based partly on the vast build-up in precautionary inventories seen in the wake of the supply chain crisis. The Economist cited reports in July claiming that for the biggest 3,000 firms globally, these have risen from 6% to 9% of world GDP since 2016. (The Return of the Inventory Cycle, The Economist, July 2022)
However, these are likely to be temporary changes. The only times in history when inventories reached a similar level were in 1989 and in the late 1970s. In both instances, a deep recession followed as businesses ran down their stockpiles.
Leaning, not lurching, towards stability
Politicians consistently underestimate the complexity of supply chains in their rhetoric, but that does not mean changes are not happening. While it takes time for trade flows to adjust to price changes, the impact of higher shipping costs on prices can be seen relatively quickly. Research from both Unctad and the International Monetary Fund in early 2022 concurred that consumer prices increased by about 1.5% as a result of higher container shipping costs. For low-value, high-volume goods, significantly higher, long-distance freight rates can make a difference — and, in the longer term, if freight rates remain elevated, such trade may not remain commercially viable, implying a production shift.
There is no doubt that businesses will be trying to find the right compromise between supply chain efficiency and resilience in the longer term while reacting to rising material prices with cost-cutting in the shorter term. There are bound to be changes in the demands that they place on shipping as a result. Far short of a grand transformation in trade that some have predicted, a shift to a more comfortable position within the long-practiced model of international supply chains is the most likely outcome.