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The Uncertain Future of Global Supply Chains

September 08, 2021
Etel Solingen

Talking Policy Podcast

From U.S.-China trade wars and the COVID-19 pandemic, to the mounting effects of climate change, global supply chains are under severe strain. In this episode of Talking Policy, host Lindsay Morgan sits down with Etel Solingen, a distinguished professor and the Thomas T. and Elizabeth C. Tierney chair in Peace and Conflict Studies at UC Irvine. Solingen weighs in on what’s at stake, and shares lessons from her new volume, Geopolitics, Supply Chains, and International Relations in East Asia. You can also read the edited transcript below.

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We depend on global supply chains for everything from phones to medicine to clothes and cars. Yet supply chains aren’t something most of us know much about. Can you give us a sense of the breadth and complexity of global supply chains?

Global supply chains are not a new phenomenon. The big growth spurt took place from about 1998 to 2008 in a period of hyper-globalization, at which point supply chains accounted for two-thirds of total gross trade.

So, what are global supply chains? In economics they’re known as global value chains (GVCs), where the “value” part comes from value added in the production of a final good. GVCs spread a range of tasks—design, production, marketing—over several countries. Inputs crisscross borders often several times to be assembled into a final product somewhere. Each stage, or task, contributes some value to the final product.

Samsung for instance relies on something like 2,500 suppliers across the globe to produce a mobile phone. The iPhone 12 has more than 1,600 parts. The camera and display come from Japan, the ram from South Korea, and so on. An electronic commuter bike that is sold in the United States is another example. The tires come from Indonesia, and Indonesia contributes 1.7 percent of the total value added. The motor is from Germany, which contributes 27 percent of value added. The brakes are from China—1.8 percent. The gears are from Japan, the seat is from Italy, and so on.

There have been several big shocks to global supply chains over the last couple of years. What are they and how have they affected supply chains?

GVCs captured little public attention until the Trump administration made them a centerpiece of his “America First,” inward-looking anti-globalization campaign. Trump targeted GVCs in an effort to dismantle them and presumably bring them back to the U.S. That’s the concept of reshoring. His policy was to basically to decouple—separate—the U.S. economy from China’s. Then came COVID-19. Demand for things skyrocketed, supplies of medical equipment and other basic items became scarce, and the trade war aggravated these bottlenecks.

Many commentators predicted severe damage to global supply chains—were those fears overblown?

Economists and many others were concerned that trade tensions would inflict high costs on the global economy as a whole. And that decoupling would mean lower exports, fewer jobs, and the erosion of U.S. global technological leadership.

Here’s the thing: we’re at an inflection point. There are few signs so far of reshoring. And there are very few signs of U.S.-China decoupling. The IMF’s [International Monetary Fund] latest economic outlook of the Asia Pacific actually finds little evidence of this bifurcation. And amazingly China’s global share of exports—which in large proportion is parts and components—actually grew over the last year. But of course, that could change as concern with China’s behavior in many areas rises around the world. And if it does, it will be slow change because it’s very costly—and some say impossible—to find replacements for China’s inputs in such a wide range of goods.

So there’s a disconnect between the hyper-nationalist rhetoric and what’s actually happening.

I think the gap between the policy concerns and what’s actually happening is narrowing. There is some resilience on the part of these global value chains. But some people think that resilience requires that your entire supply chain remain at home. That’s not only unrealistic—it actually undermines resilience. The name of the game in resilience is diversification—diversification within and across countries, not absolute self-reliance.

Can you give an example of what diversification looks like in the real world?

Absolutely. Resilient firms should and are diversifying their suppliers. So, if a supplier cannot provide a particular component, alternative suppliers should be online that are able to fill that vacuum quickly. The firms also build resilience by expanding the inventory stocks of raw materials or intermediate inputs and finished goods. Previously, inventories were not part of the toolkit. It was “just in time” production. Now, the idea that you have to encourage redundancies to avoid bottlenecks is sinking in. Another component is automation and digitalization, which help firms map their suppliers’ networks more effectively to prevent bottlenecks and to maximize timely substitution.

In a recent survey about 87 percent of 1,346 firms reported that they are investing in resilience over the next two years and a big proportion of U.S. leaders expect a fully digital ecosystem by 2025. But—and here’s the caveat—firms are still at the mercy of government. If you look at the surveys, firms also confirm that the U.S.-China trade and technology war heightens uncertainty and almost 90 percent of members in the U.S.-China Business Council report that bilateral trade tensions have impacted their business with China.

Yet, only about 30 percent of firms in one important survey reported that they slowed or delayed or canceled investment in the U.S. or China because of geopolitical tensions. Are firms leaving China? Not really. Most still build on China’s comparative advantage and huge domestic market.

How is the tug between hyper-nationalism and global interconnectedness playing out in China?

Techno-nationalism in China is nothing new. But it was somewhat subdued under hyper-globalization. Then around 2013, China began breaking more sharply from earlier goals of just maximizing economic growth, and it has continued to break more and more sharply from that view. For instance, in 2015, China launched its “China 2025” industrial policy plan that was supposed to achieve self-reliance in a number of sectors. In 2016 and 2017 China launched other programs to enhance self-sufficiency in a wide range of high-tech sectors.

In 2018, the Trump administration, reacting to all this, unleashed tariffs to counter a number of things that China was engaged in, like forced technology transfers and subsidies to state-owned firms, and failures to enforce intellectual property. Then China doubled down. You see the ping pong here. Then the Biden administration came in and responded with proposals for building resilience. In response, China issued new procurement guidelines imposing very high levels of local content, meaning items that have to be produced at home, on something like 315 items. And on top of it, they haven’t made those rules transparent, which violates China’s commitments to the WTO. You can see the spiral, which could leave everybody worse off.

So we’re seeing conflict between the U.S. and China play out in the economic domain. Does this counter the idea that being economically interconnected reduces the risk of conflict?

There’s a theory known as neo-realism that holds that economic interdependence does not and cannot prevent major armed conflict. And they offer as evidence the presumed failure of the first wave of interdependence, which was before World War I, to prevent World War I. But interdependence back then was radically different from interdependence today. And GVCs have everything to do with it.

A second theory in the field of international relations assumes that greater economic interdependence raises the costs of major armed conflict, and in so doing, lowers the probability of conflict and enhances the likelihood of cooperation. In this view, the gains from trade are substantial enough that they take primacy, even though other ambitions are never completely eliminated. Following this logic, GVCs tighten economic interdependence, which in this theory is a positive thing because it reduces the likelihood of conflict.

From the vantage point of populist groups, it’s taken for granted that bringing manufacturing home would be helpful to them—would be helpful to workers. From the point of view of business, it’s taken for granted that it won’t help. Who is the system of global supply chains good for?

GVCs are predicated on a division of labor that maximizes efficiency. Increasing returns, diminishing costs, economies of scale—all of these terms describe the advantages of large-scale global production.

And all GVC participant firms are presumed to gain in this division of labor. Many studies by the World Trade Organization (WTO) and the World Bank and the Asian Development Bank document the huge gains, especially for developing countries. So, for instance, East Asian countries, which have the highest levels of GVC participation in the industrialized world, have very high levels of economic growth, employment, income, technological development, and export diversification. But developed countries also benefit through lower consumer prices, a wide range of goods, and huge proceeds from selling intellectual property and other knowledge-intensive goods, including services.

There’s a lot of literature on the role of economic anxiety, inequality, the loss of manufacturing jobs to China, and the rise of populism. Other experts think technological change including automation was a far more significant shock to workers than trade or globalization. Paul Krugman, for instance, finds only modest detrimental economic effects on U.S. manufacturing labor.

Others find the rise of populism to have less to do with the presumed evils of globalization and more to do with social and psychological considerations, especially hyper-nationalism, tribal biases, and prejudice against immigrants and minorities. Diana Mutz found that there is growing support for trade in the U.S.—it just depends on who you trade with. The more like the U.S. the country is in terms of language, religion, form of government, or cultural values, the more positive some people are towards that trading partner.

When you look out over the next five years, what worries you most?

There are a number of things related to GVCs that are concerning. Let me start with the fact that trade wars are not as effective tools as people make them out to be. They can lead to decreased investment, declining exports, rising unemployment, and costly victories that sometimes hurt the senders more, or as much as, the target. Trade wars also have a nasty tendency to escalate the antagonism among states and cause it to spill over from economics into other areas, especially security. In addition, the fact that many firms are going digital to build resilience increases the potential for cyber-attacks, already a huge problem reaching new heights.

Another concern is climate change. GVCs increase energy consumption and CO2 emissions, precisely because they’re spread all over the world, they overuse resources, and are less subject to environmental and labor regulations. But a rising number of firms not only support, but also lobby in favor of enhanced regulations, lower carbon emissions, sustainable reusable packaging, zero waste—both because it’s of growing importance to consumers and because it’s in GVC’s interest to help prevent future shocks.

All these concerns go back to what I would call the original sin: hyper-nationalist populism. They all stem from extreme inward-looking politics within countries that fuel trade wars, cold wars, cyber wars, real wars, and impair international cooperation on climate change.

How can governments and policymakers address these challenges—what sorts of policies can ensure the benefits of globalization are shared and the efficiencies of global value chains are preserved?

I think those would be policies, number one, that are more sensitive to domestic distributional considerations—who gains and who doesn’t gain as much from GVC participation. We need policies that can enhance equity, improve labor standards, and educate and train well-remunerated workers, as well as foster environmental protections.

We also need to understand that global interdependence via global supply chains entails complex compromises, and international institutions like the WTO must once again become central to making those compromises possible, especially by bolstering compliance and transparency.

And, by the way, we are still in COVID times. We need to scale up pandemic preparedness through, for instance, geographically diversified GVCs for diagnostic tools, therapeutics, and vaccines. Over the last year, dozens of companies and a hundred-plus facilities around the world have created the global supply chains that now underpin COVID-19 vaccine production and distribution. You started the interview off by saying that supply chains are very complex. They are complex, which is why we shouldn’t fall into simplistic understandings of what it takes to advance international cooperation.

What do you think the Biden administration should do?

Biden is dramatically different from Trump. He has surrounded himself with very respected economists, academics, and practitioners that share the goals of addressing social change, income inequality, inclusion, and environmental sustainability. Trump had a very aggressive, inward looking, self-reliant public policy, not just against China, but against Canada, Europe, and other allies. He was equal opportunity about “America First,” where that meant something like: to hell with the rest. Biden, by contrast, highlights cooperation with allies and sensible partners in bolstering GVC resilience.

The big debate is whether we’re headed to an even more intensive trade war or just more competition in a broader context, where GVC policies cater neither to the extreme right-wing chauvinism nor to far-left protectionist fantasies. In fact, I don’t think Biden’s policies reflect either of these extremes. His team reflects a genuine effort to carve the right balance that benefits Americans without extricating the U.S. from the world.

The music featured in the IGCC podcast is courtesy of Gato Loco de Bajo.

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