Recent global events have highlighted the importance of transparency and security in supply chains and the reliability firms that we do business with, say Mark Coates and David S. Lieberman of Bentley Systems.
Apple, the world’s most valuable company, prides itself on the simple elegance of its products. Just as you don’t see the swan’s legs paddling furiously under the surface – only the body making its serene way across the surface of the water – so, too, does an Apple product buyer never see the effort that goes into making each one. They just see the end product in all its functional glory.
In fact, a great deal of furious effort goes into Apple production, all around the globe. The company’s 2020 supplier list contained 204 enterprises that are spread across 43 countries and six continents. And Apple is hardly alone.
Global supply chains have been a key part of the world’s economic growth over the past decades, enabled by free trade agreements, advances in technology and transport and the rise of Asia epitomised by China’s entry to the World Trade Organisation in 2001. And it isn’t just the giants – medium and small enterprises often have surprisingly long supply chains too.
Supply chain vulnerability
For the first time, though, there is a sense that the tide might be turning, if only a little. Even before Russia invaded Ukraine, the vulnerabilities of global supply chains were becoming painfully apparent.
During the Covid-19 pandemic, it wasn’t only essential medical supplies that ran short around the world. Semiconductors and various other goods and materials were also hard to come by as global movements became restricted, production was hit by stay-at-home orders and demand patterns changed in line with working from home. The need for personal computers and other technology soared; unspent savings, generous state subsidies, and no outlet for spending on travel and entertainment led to rocketing consumption of goods.
For an increasingly global, free-trade oriented economy, it was something of a shock. And it, combined with the need to stimulate growth in the wake of expensive Covid-relief measures, has sparked a wave of new interest in beefing up domestic supply chains.
As usual, the eyes of the world are on the United States, the world’s biggest importer. Covid-19 caused the US trade deficit in goods and services to rise sharply – from just under $600bn in 2019 to $653bn in 2020 and $845bn in 2021. In truth, however, the US has long bought more than it sold. Not since the mid-1970s has the US had a trade surplus, even during an export boom in the late 1980s. This situation is despite selling more services than it buys from the rest of the world. The US trade deficit is caused solely by its reliance on foreign goods.
There is also the matter of where the US gets its imports. China is at the top of that list. In 2021, according to data from the US Census Bureau, the US imported £526bn worth of goods and services from its only real rival as the world’s leader, while exporting just £192bn in return. That gap alone accounts for more than a third of the US’s total trade deficit.
Mexico and Canada are second and third on the list of largest exporters to the US. But the rest of the top ten are all in Europe – Germany, the United Kingdom, and Ireland – or Asia-Japan, South Korea, Vietnam and India.
Put simply, the US’s biggest trade partners are a long way away and the biggest of all is a global rival with whom relations have become decided frosty.
Anyone who doubted that politics would be allowed to interrupt an internationalist economic consensus got a rude awakening with the Russian invasion of Ukraine and subsequent crisis of energy in Europe and cereal crops – in Africa in particular, but also everywhere, as two countries supply about 12% of all calories consumed in the world.
Tackling fragile supply chains
The US is changing, though. Last summer, the White House published a comprehensive plan to boost production at home to tackle the problem of fragile supply chains.
Covid-19 recovery spending has included huge sums to stimulate growth and boost research and development, with this summer’s technology bill alone putting $52bn into semi-conductors to lower dependency on Asian suppliers. Neither is the money for purely theoretical research, as $39bn has been set aside as subsidies for factories and equipment.
The Chips Act is not unique. Indeed, other legislation – such as the Renewing Investment in American Workers and Supply Chains Act – would improve the tax treatment of investments in structures, such as factories and warehouses that face punitive US tax penalties, as another way to boost US competitiveness. Lastly, the recent Inflation Reduction Act included $369bn of climate and energy spending, including up to $20bn to support new electric-vehicle factories.
Such interventionist industrial policy has been seen as anathema by previous US presidents; however, the world has changed. Policymakers in the US now believe that given the current geopolitical trends, the lingering and unstable Covid-19 pandemic (and different countries’ response to it), and global inflation, there is a greater need to invest in US manufacturing and research to diversify dependency on foreign supply lines.
It is notable too that this effort is bipartisan. With the US Congress set to partially change parties come January, the policy to shore up its supply chain security will likely continue be in the spotlight for some time.
The results of such spending will take time to filter through, but it is notable that the latest US Census Bureau figures show that, in August, the US trade deficit fell for a fifth successive month.
In addition, during president Joe Biden’s first year in office, the economy added 367,000 manufacturing jobs – the most in nearly 30 years.
Neither have the UK and the European Union been sitting on their hands. Prior to the Covid-19 pandemic, both have been aware of potential weaknesses in global supply chains.
Creating strong supply chains
In the UK, the emphasis on national supply chains has become even more important since Brexit. Balfour Beatty’s Future Ready report highlighted the need to create strong local supply chains. Its seven-point plan for developing a strong local supply chain includes: –
- The requirement for robust data on the current landscape; the setting of stretching targets for improvement; and effective measurement against those targets.
- Commitment to ambitious spending pledges with subject-matter experts, and to collect accurate data on the size and location of businesses it is spending with.
- Visibility of future pipelines of work for the supply chains from tier one contractors as well as from the public sector, to give them the confidence to invest in skills, innovation, and new equipment.
Public sector bodies and large contractors working together to improve the overly bureaucratic procurement processes, which can be a barrier to SMEs winning work.
- Framework arrangements to increase opportunities for SMEs, either directly or via the supply chain, if those operating the framework make it a requirement to prioritise buying locally and the contractors involved deliver on their commitments.
Earlier in 2022, Balfour Beatty published its Greening the Supply Chain report in partnership with the Supply Chain Sustainability School. The report highlighted the importance of bringing in supply chain partners earlier to put in place the best, low carbon solutions and create robust measurement and up-to-date reporting standards to help drive progress.
The European Union is pursuing a policy of “open strategic autonomy,” according to which it will continue to promote multilateralism and open trade “wherever possible,” while increasing its capacity to act independently. It has identified several “important projects of common European interest” (IPCEIs) around critical goods, such as batteries and microelectronics, to expand domestic production.
There have been moves to incentivise nearshoring and shortening supply chains, too. The considerations aren’t purely economic, either, as transport accounts for a significant chunk of global emissions.
History plays out over decades and centuries, not years, and the recent disruptions to supply chains may come to be seen as blips rather than the portent of a major reorganisation of trade.
If nothing else, however, they have forced countries to think seriously about what they do, and what they make; about the importance of transparency and security in their supply chains; and about the reliability of those with whom they choose to do business.
Those have to be good things. Global trade may be here to stay, but that doesn’t mean that it can’t be done better.
Mark Coates is international director of public policy and advocacy and David S. Lieberman is director US government relations, both at Bentley Systems.