In the midst of the Covid-19 pandemic, politicians are calling for a rethinking of global supply chains. If they are serious, they’ll need to proceed carefully
Following the global COVID-19 pandemic, a wave of politicians have railed against the supposed vulnerabilities of global supply chains and promised to bring production of critical goods back home.
In the United States, the Trump administration is reportedly "turbocharging" its plans to disconnect supply chains from China and debating a new $25 billion "reshoring fund" to encourage U.S. firms to bring manufacturing back to the states. Not to be outdone, presidential candidate Joe Biden's campaign has outlined how his administration would tackle supply chain vulnerabilities. He's placed the topic alongside trade, taxes, and immigration as key planks for managing globalization. Meanwhile, European Union Trade Commissioner Phil Hogan has argued that Europe needs to diversify its supply chains in order to promote "strategic autonomy," while also noting that autonomy doesn't necessarily mean full self-sufficiency. Japan has perhaps acted the most decisively so far, announcing a new fund to subsidize Japanese firms moving production out of China; to date 87 companies have taken the government up on the offer. South Korea is exploring similar ideas.
Many outside analysts are skeptical that such plans for deglobalization will succeed. They rightly note that contemporary global supply chains are extremely complex, the outcome of millions of individual uncoordinated firm decisions. Any attempts to unwind these processes will be cumbersome and costly. Although COVID-19 has prompted firms to revisit the trade-offs between efficiency and resiliency in their own supplier relationships, this does not mean that they'll welcome government interference in such assessments. In fact, early reports suggest that firms around the world have been cool to their governments' efforts to woo them away from China.
The skeptics are correct that rewiring supply chains will be difficult, and that firms are unlikely to simply fall in line with the wishes of politicians, particularly when doing so cuts against their bottom lines. Yet governments have more power to shift supply chains than may be obvious at first glance: Yes, it's true that global supply chains reflect individual firm decisions. But these decisions are made within a policy environment set by governments. The current form of globalization is a policy choice; other worlds are still possible.
And it might be worth pursuing them. Although some politicians' rhetoric on supply chains may drift into old-fashioned protectionism, there are genuine concerns about the risks and vulnerabilities that have developed through deep globalization. Complex global supply chains have undoubtedly improved efficiency and increased consumer choice, but they have also limited states' abilities to manage, regulate, and, when necessary, direct the flow of critical goods. Governments should take the threats of supply chain disruptions seriously, whether from natural disasters, economic crises, or the deliberate weaponization of interdependencies in the global economy. And they should realize that firms' individual private interests may not always align with broader public interests, suggesting greater government intervention may be needed.
What is clear, however, is that political exhortations alone won't shift supply chains: Governments need concrete policy proposals, not vague directives, if they want to see real change. Moreover, restructuring supply chains should be done carefully and strategically, not through ad hoc, piecemeal policy announcements. In short, governments need to do their homework before acting. Rushing to dole out untargeted subsidies or implement new export controls will be both costly and ineffective: Governments will end up not only wasting money but also failing to address the vulnerabilities that worried them in the first place. Here are some practical steps to get started.
First, governments need better information on the existing structure of supply chains. Modern supply chains are intricate webs of purchasing relationships linking hundreds of firms across dozens of countries; while many individual firms map their direct suppliers to assess potential vulnerabilities, it is difficult to piece together the bigger picture of backward and forward linkages both within and across industry groups. In general, governments do a good job tracking when products move across borders (in part because they want to tax them, through tariffs), but they do a far worse job measuring how various intermediate inputs are integrated into supply chains, or how domestic and foreign production processes interact.
This dearth of data means that governments not only are blind to potential vulnerabilities and bottlenecks in supply chains but also lack the maps they need to guide their interventions and avoid unintended consequences. In the United States, the government has previously carried out supply chain mapping exercises for a handful of so-called strategic industries, such as critical minerals. In the wake of COVID-19, it has announced plans to do the same for medical products. But much more can and should be done: Rather than waiting until key shortages begin upending supply chains, governments should proactively map the linkages across a wide range of industries. Doing so, however, will first require a debate on which industries are most critical to national security and prosperity.
With a better grasp of the structure of supply chains, the next step would be using these maps to identify potential vulnerabilities. Much of the recent political rhetoric around supply chain vulnerability has either implicitly or explicitly assumed that sourcing inputs from foreign suppliers—and particularly Chinese suppliers—is risky, while domestic sourcing would be safer and more stable. But the truth is more complicated: A diversified network of foreign suppliers may be more resilient and better able to respond to shocks than a concentrated network of domestic suppliers, for instance. And the risk of relying heavily on Chinese suppliers will not only vary by product and industry but also depend on the course of future geopolitical relations, which may be difficult to predict. More generally, given the complexities involved, it may not always be obvious where vulnerabilities lie until confronted with a crisis. Governments, working in partnership with private firms, can help mitigate these difficulties by running stress tests and war games playing out various scenarios, anticipating how they would respond to possible failures in their supply networks. This will not only help policymakers assess sources of supply chain fragility but also identify information and knowledge gaps in their existing understanding.
The third step in restructuring global supply chains will be evaluating the policy toolkit for addressing any vulnerabilities. This toolkit is much broader than may appear at first sight, as multiple policy interventions can shape the location, complexity, robustness, and resilience of supply chains. These include stockpiling key inputs and final goods; subsidies and tax breaks to private firms producing in specific locations, particularly for research and development activities; public investments in education and training to develop workforces prepared for particular production activities; procurement policies to encourage local production and a diversity of suppliers; direct production by state-owned enterprises; tariffs and free trade agreements that incentivize production at home or among friendly allies; export controls to cut risky or hazardous suppliers out of supply chains; and competition policies to deter dominance by a few firms in key input markets. The range of possibilities gives policymakers flexibility to match interventions to the particular vulnerability they are trying to remedy.
The final step in preparing to restructure global supply chains is strengthening international coordination. Many of the recent calls for rethinking supply chains have stressed the importance of increasing national autonomy and self-sufficiency. Yet paradoxically, if governments want to assert greater control over global markets, in many instances they will need to coordinate to do so effectively. Sharing information on efforts to restructure supply chains, particularly among trusted allies, will allow governments to better match supply and demand of critical goods, and to learn from one another's experiences. Since government interventions to shift supply chains will necessarily have spillover effects on other economies, coordination can help avoid unforeseen shocks and inefficiencies.
Ultimately, if governments are serious about restructuring supply chains, they will need to invest in the bureaucratic capacity to do so. Even the basic work of gathering better information will be costly. The toolkit for influencing supply chains is frequently spread across many different departments and ministries, making policy coherence difficult to achieve. Moreover, supply chain questions require policymaking processes that integrate economic and security concerns, something governments have struggled to do effectively. Before rushing to restructure supply chains, many governments may want to consider restructuring their own bureaucracies.
Advocates of greater government oversight of supply chains should take the worries and warnings of skeptics seriously: Restructuring supply chains is likely to be difficult and demanding, and it's not clear that policymakers appreciate the scope of such an endeavor. Current supply chain networks developed over decades and will not be unwound overnight.
Yet this is not a reason to give up, but rather to make the necessary investments in state capacity that will allow governments to better manage global supply chains over the long run. This will likely be a slow and difficult process; after decades of a light-touch, broadly neoliberal approach to globalization, many governments (and particularly that of the United States) are out of practice when it comes to implementing industrial policy and other hands-on regulatory measures. Expect a learning curve, with some missteps along the way. But with caution and care, governments can shape supply chains to be more robust and resilient, and better prepared for the next crisis.
Geoffrey Gertz is a fellow in the Global Economy and Development Program at the Brookings Institution. Twitter: @geoffreygertz.
Disclaimer: This article first appeared on foreignpolicy.com, and is published by special syndication arrangement.