This article was first published on December 23rd on the OECD Forum Network, a space for experts and thought leaders—from around the world and all parts of society— to discuss and develop solutions now and for the future.
A few weeks ago, I had the honour of moderating the OECD Forum Virtual Event How to Make Resilient Supply Chains Happen. International trade has historically been a central vector of innovation, productivity and welfare gains worldwide, thanks to shared trust in well-governed, open and integrated global markets. The COVID-19 pandemic and geopolitical tensions as well as extreme weather events have shown the vulnerabilities of global supply chains, and led to various strategies intended to boost the resilience of often quite complex, interconnected global supply chains.
I had expected the session to focus on these strategies, increasing resilience through more reliance on national and regional trade, near- and re-shoring, friend-shoring and decoupling. But instead, I was pleased that the discussion emphasised that improved resilience in facing these challenges is dependent on keeping markets open, facilitating diversification, innovation, exchange of knowledge and increased international collaboration in facing major common challenges together.
Opening: Mathias Cormann, Secretary-General of the OECD
Moderator: Ulrik Knudsen, Deputy Secretary- General, OECD
Scene setting: Marion Jansen, Director of the Trade and Agriculture Directorate, OECD
Marie-France Paquet, Chief Economist and Director General at the Trade Analysis Bureau Global Affairs Canada
Kathy Wengel, Chief Global Supply Chain Officer, Johnson & Johnson
Linda Yueh, Adjunct Professor of Economics, University of Oxford, and the London School of Economics
Xiangchen Zhang, Deputy Director-General, World Trade Organization
As Mathias Cormann, OECD Secretary-General, explained in his opening remarks, “We should not minimise concerns about ungoverned globalisation, unfair practices and national security vulnerabilities”. Supply chains already under strain in the aftermath of the pandemic have taken a further beating in the past year, this time due to the consequences of Russia’s war of aggression against Ukraine. This is increasing the pressure on trade choke points, adding more tension, more uncertainty and more disruption to global supply chains. It cannot simply be “business as usual”—but it can be an opportunity to rethink and re-evaluate how we build resilience into supply chains.
What steps should we take in re-evaluating supply-chain resilience? The OECD proposes a framework for building and bolstering sustainable and resilient global supply chains: anticipate risk, minimise exposure, keep markets open and build trust. The framework aims to support governments in their efforts to put in place policies that reinforce the capacity of supply chains to resist, absorb, adapt or recover from economic shocks.
The OECD’s four principles to bolster supply chain resilience
These four principles provide a framework to improve policy approaches to supply chains and increase resilience:
Some may argue that anticipating risk and minimising exposure to shocks are perhaps easier said than done. Many chokepoints have yet to be identified. However, Marie-France Paquet of Global Affairs Canada, highlighted how many events in recent years, whether a ship stuck on the Suez Canal or floods in Thailand and in British Columbia, had a common strand.
“There has been lots of talk about the pandemic’s impact on supply chains, but what does not receive enough attention is the potential risk that climate change poses to the trading system”, said Marie-France Paquet. To head off these risks, she believes governments should promote knowledge, diversification and innovation: knowledge through shedding light on an issue and ensuring policymakers and companies are aware of potential chokepoints; diversification through nurturing geographical and market diversification, and therefore bolstering trade and business opportunities; and innovation through supply chain management and production techniques.
Maintaining diversified global and regional supply chains is important to be able to have a consistent response when the world faces challenging disruptions.
— Kathy Wengel, Chief Global Supply Chain Officer, Johnson & Johnson
The exposure of supply chains to conflict and geopolitical instability is a risk that has recently come into the limelight—and the greater the concentration of supply chains, the more acute the risk. A poll of the audience also indicated that over 50% were most concerned about general geopolitical instability.
“There is concern that certain items and resources are important for our daily needs but are produced and exported only by a few countries, including items like critical raw materials”, said the OECD’s Marion Jansen. A natural reaction is to reshore the production of those items, “But the answer to concentration is not less openness, but greater diversification—more openness and more trade with more partners. No country, no region would win from decoupling”.
The WTO’s Xiangchen Zhang agreed, pointing to how global trading rules have been an anchor for a transparent and predictable business environment. “Decoupling means less efficiency in the allocation of resources and higher production costs—it would not bolster resilience, but just create higher costs and risks, in particular for small and medium-sized enterprises”, he said.
Evidence during the COVID-19 pandemic has pointed to a need for companies to be agile in how they manage their supply chains. Johnson & Johnson, a United States multinational that makes medical devices, pharmaceuticals and other health products, has had to actively monitor its local and global supply chains to maintain business continuity.
“When floods [in 2021] disrupted one of our facilities in Germany, operations in nearby France allowed us to adjust and respond rapidly”, explained Johnson & Johnson’s Kathy Wengel. “Maintaining diversified global and regional supply chains is important to be able to have a consistent response when the world faces challenging disruptions. Fundamentally, a regulatory environment that encourages global harmonisation of standards, transparency on full supply chains, incentives for innovation and a free flow of goods is key”.
Decoupling would not bolster resilience, but just create higher costs and risks, in particular for small and medium-sized enterprises.
— Xiangchen Zhang, Deputy Director-General, World Trade Organization
Towards a more robust global supply chain framework?
Linda Yueh of the University of Oxford and LSE spoke of the need for a globally co-ordinated stress-testing regime, something akin to the Financial Stability Board (FSB) that emerged after the Global Financial Crisis of 2007-2008 (and whose precursor, the Financial Stability Forum, took shape in the aftermath of the Asian Financial Crisis of the late 1990s). A global system for supply chain resilience could draw a lesson from how banking became a globally co-ordinated sector in terms of stress testing for resilience. The key is a recognition of the systemically important economic activities, with the FSB’s role being to ensure banks can withstand the stresses triggered by another housing or financial crisis. It is there to provide confidence in the event of a liquidity crunch. A similar framework to support the global system of trade may help.
“The value of thinking globally is quite clear as supply chains are mostly spread across borders”, said Linda Yueh. “Uncertainty can be reduced by becoming more transparent about which supply chains are critical in terms of national security, food security and health emergencies. Those supply chains should then be designated as systematically important, with a common agreement that they should be placed under greater scrutiny and stress-tested to a standard and level that is agreed globally, so that everyone knows which sectors are facing this additional pressure”.
More on the Forum Network: Learning from Basel: Stress Testing Supply Chain by Linda Yueh, Professor, St Edmund Hall, Oxford University
The private sector would have a key role to play. In the financial sector, banks and financial institutions provide input to the FSB because they understand the technical requirements for stress testing. But as Linda Yueh mentioned, having public input is also important to build trust. The philosophical underpinnings of such a regulatory framework for supply chains must also recognise the dynamic nature of international trade and advances in technology. For example, consumer preferences for lower carbon emissions and the possibilities of additive manufacturing through 3D printing are leading to shorter supply chains, but they are not, explained Linda Yueh, the same as deglobalisation because digitalisation is connecting the world even more.
Systematically important supply chains could be stress-tested to a standard that is agreed globally, so that everyone knows which sectors are facing this additional pressure.
— Linda Yueh, Adjunct Professor of Economics, University of Oxford, and the London School of Economics
Fine-tuning, not retreating
In a world seemingly beset by crises, it may appear that trade and open global markets are in retreat. Yet we must remind ourselves that resilience is the essence of trade and open global markets: trade has been the foundation of economic prosperity, lifting countless millions of lives out of poverty in recent decades. As Mathias Cormann reminded us in his opening remarks at our event, it has powered the diversification of supply and demand, and is driving forward the immense opportunities of the 21st century—notably, in the digital and green transformations of the world economy. Trade can also make a key contribution to social and environmental sustainability, particularly in the areas of technology transfer and the circular economy.
If we recall those first weeks at the beginning of the pandemic, life as we knew it ground to a halt: the world economy shut down, people feared for their lives and demand for medical items and other protective items such as masks suddenly skyrocketed. It should come as no surprise that many countries faced a sudden supply shortage for items that became essential overnight. The way trade adjusted to this sudden supply-and-demand dislocation attests to the strength of the global trading system: open markets allowed economies to adjust to an existential crisis and gear themselves up to supply masks, COVID tests and, ultimately, vaccines. How the world overcame COVID-19 is the story of the triumph of trade.
How we go about building resilience in global supply chains is therefore not to retreat from trade, but to fine-tune how it works. And if it is a matter of building a globally co-ordinated stress testing regime, it must be dynamic and sufficiently nimble to tackle future crises.
Find out more about our interactive web tool Keys to resilient supply chains for ongoing OECD analysis from a trade policy perspective
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