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Supply chain pain points will heal, observers forecast

Global cargo shipping system will survive pandemic despite logjams, disruptions: experts
Rob Kruyt/BIV files

Ongoing global supply chain disruptions caused by the COVID-19 pandemic, global geopolitical tensions, labour shortages and other factors underscore the need for improvements in goods movement rather than any need to “decouple” or reduce foreign trade.

That is the observation of a number of international trade experts, who noted that the impact of current disruptions on consumer prices and stock shortages demonstrates just how deeply interdependent and intertwined the global trade network has become.

The observations fly in the face of rising fears of a massive global economic “decoupling” between Washington and Beijing as the world’s two largest economies become increasingly antagonistic toward each other’s business interests, leading some analysts to fear that countries like Canada would be stuck in the middle of an increasingly protectionist environment.

Such a massive decoupling, however, is not realistic because it’s neither cheap nor easy, experts say.

“Can it happen overnight? No,” said Simon Fraser University (SFU) professor of economics David Jacks, noting that a complete decoupling would be much worse than the current logistics logjam disruption. “You can get a sense of why this is so by thinking about the problems we have right now coming from the ports of the world in getting products out of China and onto factory floor and shelves in Canada.”

The issue, experts said, is the fundamentals of the current value-chain system that started forming in the 1980s.

Werner Antweiler, an associate professor at the University of British Columbia’s Sauder School of Business, said that was when Japanese automakers – among the first to explore what would become today’s supply-chain system – realized that their parts suppliers were close enough that keeping an inventory of parts became undesirable because of storage costs.

With that in mind, today’s “lean supply chain” was born. It keeps inventory low to reduce storage costs while suppliers around the world deliver parts almost on demand.

“The model worked initially because the supply routes were short,” Antweiler said. “Then, as supply routes got longer, what changed was the flexibility of transportation and containerization. That allowed companies to stay lean in their chains, and that allows businesses to be more competitive on pricing. But the system is not meant to buffer shocks.”

Another factor contributing to the exponential growth in supply chain complexity was that multinational companies scaled up their production efficiencies by moving manufacturing in geographically dispersed locations.

Jacks said that technological advances allowed companies to manage this spread-out web of production and establish it as the norm.

“This came into full view by the 2000s with the rise of China,” Jacks said. “The drivers of this fragmentation of production or global supply chains are mainly changes in IT affecting the cost and speed of communication and monitoring production overseas. As this process took decades to develop, we probably cannot expect a major shift in global trade overnight as modern production processes are exceedingly complex and rely on a very long chain of suppliers.”

Andreas Schotter, associate professor of international business at the University of Western Ontario’s Ivey Business School, agreed. Schotter also noted that – as these specialized production operations became concentrated in different regions, the problem of bringing supply chains back to North America (“re-shoring”) become not only one of finding locations for producing goods but also having the right people in these locations.

Schotter noted that the current supply-chain system now extends beyond traditional manufacturing into fields like knowledge creation. Moving specialized production that is now embedded in certain regions – semiconductors in Taiwan or 5G technologies in Shenzhen, China, for example, – would essentially stifle innovation in these specialized fields.

“In the current trade system, it’s not enough to succeed through scaling efficiency,” Schotter said. “Companies have to scale learning … and you need the people and the environment to develop something faster than your competitors. For 5G, for example, if you need the best people, you need to be in Shenzhen. Without that talent base and environment, you are not going to be able to learn about the technology in an exponential way.”

What may change, all three experts say, is a regional reconfiguration of trade links and supply chains to shorten some routes and to add redundancies to insulate against shocks. Those types of changes – rather than full-scale re-shoring and decoupling – would improve the global trade system’s resilience to unexpected shocks while maintaining the advantages of lower consumer costs, accelerated innovation and improved quality of life worldwide.

“The key question should be: What can we do to shorten supply chains?” Schotter said. “Transportation costs have been artificially low. Instead of re-shoring from a supply-security perspective only, you have look at economic implications of long logistic chains.”

Jacks agreed.

He predicts that the private sector will move in that direction – even without political directives from governments.

“I am reasonably optimistic that this [current] strain will fade into 2022. Container rates are already coming down,” Jacks said. “But in the long run, COVID is likely to put more pressure on firms to regionalize and not globalize their production networks.

“I do think firms outside [national security interests] areas will also be recalibrating plans over the medium-run of five to 10 years. For them, it will be an issue of identifying domestic or least more regional sources of inputs and potentially replicating production facilities in multiple theatres of the global economy.”

But ultimately, shifts towards regional trade networks and shortened trade routes present more of an evolution of global supply chains, rather than a complete upheaval, Antweiler said, and that’s why it will be the most likely scenario to play out in the next five to 10 years.

“The comparative advantages [of global supply chains] will not go away,” Antweiler said. “This notion of bringing production home and making things locally, that simply does not work because of the costs. In business, who can produce at a lower cost will win the market. Right now, there’s a lot of talk about re-shoring, but talk is cheap. The fact is [that] businesses make business decisions based on what is profitable. And the truth remains that the supply chains that we have are very cost-effective.”•