The onset of the third decade of the 21st century has brought about significant transformations catalyzed by the pandemic. The outbreak of corona virus has exposed the vulnerabilities inherent in globalization. Governments were compelled to implement border closures and adopt a more regional and de-globalized approach. However, attributing these changes solely to the pandemic would be unjust. In recent years, the geopolitical landscape has been marked by the escalating rivalry between the United States and China, along with the persistent conflict between Russia and Ukraine.
Consequently, a paradigm shift emerged, one favoring self-sufficiency and an independent approach rather than an interdependent one. In terms of the supply chain, both businesses and governments alike have sought to re-evaluate and restructure their supply chains to enhance resilience and strength. To achieve this, firms strategically adopted the practices of on-shoring, reshoring, and near-shoring, moving away from the conventional path of offshoring. To respond to
uncertainty posed by regional and geopolitical conflicts, governments are moving towards the policy of friend-shoring.
The pandemic compelled countries to enforce border closures, halting international trade and economies being subjected to lockdowns. In the aftermath of this global crisis, the world faced the daunting challenge of high inflation as economies grappled to recover from its profound impact. While certain economies displayed signs of revival, others faced sluggish progress. Take China for instance. Due to its government’s Zero Covid policy, its manufacturing sector bore a significant blow to its recovery. Consequently, businesses relying on Chinese manufacturing or raw materials encountered either exponential cost increases or encountered difficulties in operations and procurement. Moreover, the slowdown of the dragon caused a domino effect in the world, making the global supply chain vulnerable. The pandemic made businesses realize the supply chain’s strategic importance, which once was overlooked. It has accelerated many existing trends. Businesses are today focusing on enhancing their supply chain to leverage them and gain a competitive advantage.
Regional and Geopolitical Conflicts
Regional and geopolitical conflicts which have arisen recently such as the US-China trade war and Russia-Ukraine conflict pose severe challenges to the supply chain. To battle these, friend-shoring was introduced. It is when a country reroutes its supply chains to countries which are politically and ideologically like-minded. Unlike globalization which involves setting facilities in countries which provide the maximum cost benefit, friend-shoring is looking for long-term stability with likeminded countries which ensures resilient supply chains and poses a lower risk of hostility.
This perspective on global trade and production was heralded by Janet Yellen, the Treasury Secretary of the United States. In her speech delivered at the Atlantic Council in 2022 regarding the Way forward for the Global Economy. She stated
“Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers… Friend-shoring means… that we have a group of countries that have strong adherence to a set of norms and values… and we need to deepen our ties with those partners and work together to make sure that we can supply our needs of critical materials.”
Increasing weaponization and politicization of supply chains have necessitated its restructuring. It can be said to be the major reason causing supply chain disruptions. Tracing our recent past, there have arisen numerous occasions where supply chains were used for geopolitical gains.
For instance, the US increased tariffs on Chinese products in 2018. This led to tariff retaliation by China, starting a trade war between the two. These had repercussions on other countries as well. Similarly, China too has leveraged its position to gain political advantage. However, it can be argued the US’s actions were due to its concern over the trade deficit and protectionist measures, while for the latter it has largely been subjected to economies critical of Beijing. This is evident by China’s action against Australia post-Covid-19. Australia played a leading role in urging the WHO to conduct an enquiry into the origin of the virus. Which irked China, and hence it leveraged Australia’s economic dependence on them. They imposed various restrictions on major Australian exports, including barley, grain, beef, coal, wine, and sugar. These measures also involved raisin tariffs, imposing import bans on items like grain and beef, initiating anti-dumping investigations, and advising local businesses to postpone coal purchases. Additionally, Chinese tourists were discouraged from visiting Australia, while Chinese students were encouraged to consider alternative destinations for their higher education.
Other instances include, China blocking the rare earth minerals exports to Japan in 2010 during a dispute over Senkaku islands in the East China Sea. It also includes trade coercive measures against the Philippines in 2012, Taiwan in 2016, South Korea in 2017 and Australia in 2020.
Such actions have made it imperative to rethink our supply chains, hence businesses today are aligning with geopolitics. Moreover, strategic blocks and groups have stated and restated their position on making the supply chain resilient, making its importance evident. For instance, QUAD members have actively boosted their commitment to work together to form resilient supply chains. The first commitment came at Tokyo foreign ministers meet in October 2020, and was further restated by heads of state in March and September 2021 meetings. They stated:
“We are mapping the supply chain of critical technologies and materials, including semiconductors, and affirm our positive commitment to resilient, diverse, and secure supply chains of critical technologies, recognising the importance of government support measures and policies that are transparent and market-oriented.”
Moreover, the same was expressed by the trilateral agreement between India, Japan and Australia called Supply Chain Resilience Initiative (SCRI). It was proposed in September 2020 and amplified in April 2021. Similarly, G7 countries too, emphasized increasing supply chain resilience of particularly critical technologies and materials. Hence, these agreements and positions make
changing global supply chains evident. A coalition of like-minded economies can be seen with partnerships such as in QUAD, Indo-Pacific Economic Framework, G20, G7 and SCRI. Which are focusing on and expanding their scope to include the security of supply chains.