Where Will Global Supply Chains Go?

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Nearly five years after it was launched by Donald Trump, the U.S.-China Trade War shows no sign of abating. U.S. President Joe Biden, Trump’s successor, has kept tariffs in place and introduced wide-ranging bans in October 2022 on semiconductor exports to China that are aimed at slowing its military modernisation and development of high-tech industries. The dispute exemplifies a growing trend in the reconstruction of supply chains towards institutionalised policymaking and government-led reform of targeted industries.

We have conducted three studies that demonstrate this trend and its effects, which are not always intended by policy-makers. The first, Trade and Foreign Economic Policy Uncertainty in Supply Chain Networks: Who Comes Home?, looked at how American companies restructure their global supply chains in response to uncertainty over U.S. government trade policy (TPU), and economic policy uncertainty (EPU) in supplier countries. The study was innovative in its focus on policy uncertainty – for example, during 9/11 attacks, tight presidential elections, onsets of trade wars – rather than actual policy shocks, as a source of supply chain risk. It examined the restructuring of supply chains both in terms of whether firms use foreign or domestic suppliers and the specific countries from which supplies are sourced.

We found that when U.S. TPU rises, companies that have most of their customers in the domestic market will reduce the number of foreign suppliers they use, while firms with a majority of customers abroad will increase their foreign supplier base. In sum, firms will reallocate their supply chains closer to their primary market. When a particular foreign country’s EPU increases, U.S. companies will shift their supplier base to other foreign countries with less uncertainty – and are more likely to exit the original country altogether.

The results suggest that supply chains can change ahead of specific trade policies being enacted in response to government pledges and that supply chain risk should be viewed through the lens of whether a company’s revenues are mainly generated abroad or at home. Firms that mainly serve foreign markets tend to increase offshoring activity when TPU arises, despite policymakers’ aims of “bringing manufacturing back home”.

The Reshoring of Strategic Products by Creating Factories at Home

The second study, The Impact of the COVID-19 Pandemic on Global Sourcing of Medical Supplies, found that the pandemic led U.S. firms to rebalance their perceptions of the relative importance of cost efficiency and supply chain resilience in sourcing decisions. Under pandemic conditions, governments around the world directed the production of medical supplies within their borders to meet domestic demands.

When COVID-19 broke out, factory shutdowns disrupted medical supply chains from mainland China, which also introduced some export controls. U.S. firms were hit by an adverse credit shock, increased policy uncertainty, and limited access to cross-border financing. However, strict lockdowns brought the outbreak under control within three months and China’s exports to the U.S. dramatically rebounded. Nevertheless, all countries including the U.S. continued to seek to ensure supply chain resilience by building domestic production capacity for medical supplies.

Supply chain risk should be viewed through the lens of whether a company’s revenues are mainly generated abroad or at home.

Prof. Wu Jing

In August 2020, then-U.S. President Donald Trump signed an executive order to boost the production of medical supplies, which included a provision mandating the government to purchase essential medicines and medical equipment. Medical device manufacturers such as Johnson & Johnson and ApiJect Systems also invested substantial sums in expanding domestic manufacturing, while automotive firms switched their factories over to the production of personal protective equipment (PPE). Import figures for masks, respiratory devices and other medical supplies from China peaked in the summer of 2020 and then gradually declined to pre-pandemic levels.

Overall, the pandemic revealed the vulnerability of offshoring strategies under a global crisis and emphasised the significance of domestic production capacity. We believe that governments around the world will continue to support locally sourced manufacturing capacity and integrated manufacturing through policies such as subsidies and trade tariffs. Such policies are also likely to affect companies’ decisions about where to locate factories. In particular, we expect that the manufacture and supply of medical products will follow the trend of localisation and regionalisation.

The Onset of Friend-shoring and Keeping Your Friends Close

“Friend-shoring” is a new term that was coined by U.S. treasury secretary Janet Yellen to refer to forging economic ties with countries that have common norms and values about the global economic system. This approach emphasises the importance of supporting supply chain resilience for critical industries such as semiconductors, pharmaceuticals, and automobiles, by bringing manufacturing closer to home, whether through re-shoring or near-shoring. The primary tool for implementing these policies is reformulating trade agreements to include stronger regional value content requirements.

But how effective are such measures in encouraging the friend-shoring of supply chains? In Keeping your Friends Closer: Friend-shoring in Response to Regional Value Content Requirements, we examined this question by looking at how the supply chains of U.S. automobile manufacturers changed after the United States, Mexico and Canada Agreement (USMCA) took effect in July 2020.

“Friend-shoring” is a new term, which refers to forging economic ties with countries that have common norms and values about the global economic system.

The agreement, which replaced the North American Free Trade Agreement (NAFTA), required U.S. companies to import a higher proportion of components for a vehicle from Mexico or Canada to gain tariff-free status. For cars, light trucks and “core parts”, USMCA required 75 percent of the total value to be sourced in a signatory country – up from 62.5 per cent; while for “principal parts” and “complementary parts” the requirement was 70 percent – up from 65 percent. The terminology for such trade vehicle is “regional content requirement”.

The study found that US automobile manufacturers significantly increased the proportion of imported vehicles and parts that originated from Mexico and Canada under USMCA, showing that the agreement was effective in promoting near-shoring. Companies also reduced their total imports of relevant products, indicating that they were re-shoring some operations. Interestingly, imports of information and communications technology (ICT) products increased under USMCA compared to non-ICT products, but firms chose to near-shore the latter, while leaving their ICT supply chains largely intact. This is due to the fact that East Asia is the global hub for ICT manufacturing, and it would be difficult to move this industry cluster close to the U.S. We believe this concern may be resolved in the subsequent policy acts such as Biden’s CHIPS act. Finally, we found that companies that near-shored in response to USMCA increased the number of suppliers they have links with, suggesting that the new rules improved supply chain diversity.

To find out more about a specific topic, click on the links below to navigate to the relevant chapter:

INTRODUCTION – Managing Supply Chains in the Post-pandemic New Normal

PART I – How Does Risk Propagate along Supply Chains?

PART II – Where Will Global Supply Chains Go?

PART III – How is Political Economy Intertwined with the Global Supply Chain?

CONCLUSION – The Future of Supply Chains