The global restructuring of supply chains is driven by multiple factors, including COVID-19, climate change action, geopolitical tensions and changes in domestic political visions. US–China tensions, an increased focus on domestic production and supply, reliance on specific countries for essential resources and changing trade patterns have caused significant shifts in global supply chains. The global response to this paradigm change needs to become more cooperative and coherent.
The restructuring of global supply chain has multifaceted and complex origins. The COVID-19 pandemic, climate change, automation and geopolitical tensions have all contributed to reshaping companies’ international distribution and trading patterns. Each of these issues alone would make the prospect of improving supply chain resilience daunting. No country alone can easily fix all of them.
Making matters even more complex are the underlying political factors that shape supply chain restructuring. Governments say they want to make supply chains more resilient and sustainable. But they are less clear about whether this means addressing environmental shortcomings and labour abuses, ensuring supplies of critical materials and components are not controlled by adversaries or whether it reveals a desire to shift jobs onshore. Often, it means all of them.
What is clear is that trading patterns — the best indicator of supply networks — are changing substantially. In a 2023 survey, 67 per cent of global retailers and manufacturers said they had shifted to other suppliers, while two-thirds said that further shifts were likely. This often means sourcing from a different country or shifting to domestic suppliers. According to the Kearney 2024 reshoring index report, North American companies are moving rapidly to reshore operations away from lower-cost Asian countries. US imports from 14 Asian countries fell by US$143 billion in 2023 to US$878 billion.
Global COVID-19 lockdowns severed entrenched channels of product sourcing and laid bare weaknesses in the once-hallowed just-in-time supply chain approach. In 2021 the European Central Bank estimated that from November 2020 to September 2021, world trade would have been 2.7 per cent higher and global manufacturing output 1.4 per cent greater had global supply chains not been derailed by the pandemic.
Crises often induce panic and the initial response to COVID-19 was a classic case of what not to do in such circumstances. Governments’ border closures —made it more difficult to obtain the vital medicines, medical products and care needed to fight the pandemic.
Russia’s 2022 invasion of Ukraine and the subsequent response from NATO and its allies further ignited a desperate search for new sources of oil and gas, grains, fertilisers, iron, steel and critical minerals. With traditional markets slammed shut due to sanctions, Russian producers redirected exports to China, India, Brazil and other emerging countries where their commodities were snapped up quickly.
These shifts largely centred on commodities that are relatively easy to find elsewhere. When Europe turned off the tap on Russian gas, it swiftly turned to liquefied natural gas imports from the United States and elsewhere. But as countries climb the technology ladder, onshoring and friendshoring become more complicated. Vast, US taxpayer-financed measures like the Inflation Reduction Act and the CHIPS and Science Act were designed in no small part to address what US President Joe Biden’s administration sees as supply chain vulnerabilities.
At the heart of the Biden administration’s anxiety is the world’s dependence on TSMC, which supplies 61.2 per cent of the market for high-end semiconductors. Other examples abound. The drive towards electric vehicles (EVs) has been complicated by the fact that supply chains producing EVs—and especially the batteries that power them—are firmly rooted in China.
Of all the factors pushing companies to shift production and supply, growing geopolitical tensions top the list. Writing for the World Economic Forum, Simon Evenett points out that 2023 filings to the US Securities and Exchange Commission, indicate that 75 per cent of internationally active companies believe geopolitical tensions are the most pressing consideration when making business decisions or assessing risk.
These bilateral tensions between the United States and China are particularly vexing for businesses because the economies of the two countries are intertwined, and anticipating the next wave of economic sanctions is challenging. The United States’ disregard of WTO rules also deprives entrepreneurs of the transparency and predictability those rules were designed to provide. The United States has slapped restrictions on exports to China of artificial intelligence, high-end chips and quantum computers while applying import curbs on China’s exports of steel, EVs and solar panels. Washington is also leaning on its allies to follow suit, badgering EU countries to buy less from China and the Netherlands and Japan to cease shipments to China of high-end lithography equipment.
Unsurprisingly, China’s trade with the United States has taken a tumble. US exports to China fell to US$148 billion in 2023 from US$154 billion in 2022. Chinese exports to the United States shrank even more, plunging to US$427 billion from US$536 billion in 2022. But many of the goods previously shipped from China now come from Mexico, Thailand or Vietnam.
The commercial partnership between China and Russia, meanwhile, is burgeoning. Since 2020, Russia has risen from China’s ninth largest trading partner to its fifth largest. In 2023, trade between the two was up 26 per cent to US$240 billion.
Underpinning the drive for the reconfiguration of supply chains is the ill-defined notion of national security. As the global economy fragments, resorting to the national security rationale provides governments with a relatively straightforward explanation for contravening international obligations. But lumping government responses under one umbrella does little to address the underlying problems that require changes to supply chains. Each factor warrants a tailored policy response. Unfortunately, what we have seen is a myriad of ad hoc policies driven by nationalist politics.
The OECD has proposed sound advice to its 38 member countries—keep markets open and enhance the tools, like e-commerce, that can facilitate more efficient movement of goods and services. But striking multilateral trade agreements has never been more difficult. The WTO failed to dissuade big players like the United States, India and the European Union from hoarding vaccines during the pandemic. Then in March 2023, India and Indonesia forced the near-term termination of a 25-year-old WTO prohibition on duties on e-commerce transmissions.
International organizations have likewise proven ill-equipped at addressing the question of national security. The handshake agreement at the WTO not to invoke national security when creating barriers to trade, nor to challenge such measures when they were invoked, is in tatters. The UN Security Council is frequently paralyzed by its permanent members’ vetoes.
In an era when international cooperation is viewed with deep suspicion, uneasiness about global supply chains is understandable.
Improving and strengthening supply chains depends first and foremost on identifying and explaining why restructuring is required. If the motivation is greater environmental protection, then many developing countries providing raw materials that have woeful environmental and labour standards would be unlikely partners. If the issue is geopolitics, then heavy reliance on China is problematic. If the real objective is to bring production and supply inside a country to generate jobs, governments must ensure that the domestic workforce is sufficiently trained and the infrastructure adequate for these new demands.
Some countries, notably the United States, say they want all of these things. What is undeniable is that the only way these diverse and sometimes conflicting objectives can be met is through a cooperative approach. Organizations like the World Bank, the WTO and the OECD can provide such frameworks. But a broader policy alignment is not yet evident. No single nation—no matter how powerful—can prevent the next pandemic, combat climate change or ease rising geopolitical tensions. Restructuring supply chains in isolation is a fool’s errand.
Keith Rockwell is a Senior Research Fellow at the Hinrich Foundation and a Global Fellow at the Wilson Center.
To read the full analysis as it was published on East Asia Forum, click here.